solve for equilibrium

Chicago’s land tax and how the city survives being such a fiscal mess

But wait, isn’t Chicago a fiscal mess? How about the state of Illinois?  It remains the case that living in Chicago is still remarkably affordable, and many of the neighborhoods have wonderful food, buildings, and offer a relatively safe (not always) and walkable environment.  You may even hope to find a parking spot.

I would put it this way: there are many ways to impose a Georgist land tax, fiscal insolvency being one of them.  Very wealthy people and institutions know that if they relocate to Chicago, they will be required to ante up for the final bill.  And so they stay away.  For a city of its size and import, Chicago just doesn’t have that many billionaires, nor do I think a rational billionaire should consider moving there.

In other words, there is a pending wealth tax.  Either directly or indirectly, this will place fiscal burdens on Chicago land, the immobile factor.  And this keeps down rents in Chicago now.

Overall, I do not recommend this fiscal course of action, and Chicago may well become a worse city due to eventual insolvency at the local and state levels.  Still, if you are wondering how it is that Chicago is so affordable — and wonderful — right now, this is part of the answer.

I also should note that not every neighborhood in Chicago benefits from this equilibrium, as in some parts gentrification is difficult to come by.

Monday assorted links

Does easy divorce lead to more assortative mating?

Maybe so, there is a new paper (pdf) on that question:

This paper investigates how the adoption of unilateral divorce affects the gains from marriage and who marries whom. Exploiting variation in the timing of adoption across the US states, I first show that unilateral divorce increases assortative matching among newlyweds. To explain the link between divorce laws and matching patterns, I specify an equilibrium model of household formation, labor supply, private and public consumption, and divorce over the life cycle. Matching decisions depend on the anticipated welfare from marriage and divorce. The model has two key features (consistent with the data). First, working spouses whose partners do not work accumulate relatively more human capital during their lifetime, a fact that improves their outside value of divorce. Second, divorcees cannot sustain cooperation in public goods expenditures (interpreted as children’s welfare), leading to inefficiencies that are mostly harmful to the top educated. Under unilateral divorce, the value of divorce becomes a credible threat that shifts the bargaining power in marriage, making both household production and marriage less attractive. This pushes the marriage market equilibrium towards more positive sorting in education and lower welfare, particularly for the highest educated. I estimate the model using data from households that form and live under the pre-reform mutual consent divorce regime. Using the estimates, I then introduce unilateral divorce and solve for the new equilibrium. I find sizable equilibrium effects. First, the correlation in spousal education increases and people, particularly educated females, become more likely to remain single. Second, the gains from marriage decrease for the least and the most educated. Lastly, the marital gains from acquiring a college or higher degree decreases for women and men under unilateral divorce. These results reflect previously overlooked consequences of reducing barriers to divorce.

That is from Ana Reynoso, a job candidate from Yale University.  These are my words, not hers, but I think of this as yet another way that elites selfishly have pushed for looser social and sexual and romantic norms, without much worrying about the resulting broader impact on inequality and lower earners and the less educated.

What it would take to change my mind on net neutrality

Keep in mind, I’ve favored net neutrality for most of my history as a blogger.  You really could change my mind back to that stance.  Here is what you should do:

1. Cite event study analysis showing changes in net neutrality will have significant and possibly significantly negative effects.

2. Discuss models of natural monopoly, and how those market structures may or may not distort product choice under a variety of institutional settings.

3. Start with a framework or analysis such as that of Joshua Gans and Michael Katz, and improve upon it or otherwise modify it.  Here is their abstract:

We correct and extend the results of Gans (2015) regarding the effects of net neutrality regulation on equilibrium outcomes in settings where a content provider sells its services to consumers for a fee. We examine both pricing and investment effects. We extend the earlier paper’s result that weak forms of net neutrality are ineffective and also show that even a strong form of net neutrality may be ineffective. In addition, we demonstrate that, when strong net neutrality does affect the equilibrium outcome, it may harm efficiency by distorting both ISP and content provider investment and service-quality choices.

Tell me, using something like their framework, why you think the relative preponderance of costs and benefits lies in one direction rather than another.

Consider Litan and Singer from the Progressive Policy Institute, they favor case-by-case adjudication, tell me why they are wrong.

Or read this piece by Nobel Laureate Vernon Smith, regulatory experts Bob Crandall, Alfred Kahn, and Bob Hahn, numerous internet experts, etc.:

In the authors’ shared opinion, the economic evidence does not support the regulations proposed in the Commission’s Notice of Proposed Rulemaking Regarding Preserving the Open Internet and Broadband Industry Practices (the “NPRM”). To the contrary, the economic evidence provides no support for the existence of market failure sufficient to warrant ex ante regulation of the type proposed by the Commission, and strongly suggests that the regulations, if adopted, would reduce consumer welfare in both the short and long run. To the extent the types of conduct addressed in the NPRM may, in isolated circumstances, have the potential to harm competition or consumers, the Commission and other regulatory bodies have the ability to deter or prohibit such conduct on a case-by-case basis, through the application of existing doctrines and procedures.

4. Consider and evaluate other forms of empirical evidence, preferably not just the anecdotal.

5. Don’t let emotionally laden words do the work of the argument for you.

6. Offer a rational, non-emotive discussion of why pre-2015 was such a bad starting point for the future, and why so few users seemed to mind or notice as the regulations switched several times.

7. Don’t let politics make you afraid to use your best argument, namely that anti-NN types typically develop more faith in an assortment of government regulators in this setting than they might express in a number of other contexts.  That said, don’t just use this point to attack them, live with and consistently apply whatever judgment of the regulators you decide is appropriate.

If you are wondering why I have changed my mind, it is a mix of new evidence coming in, experience over the 2014-present period, relative assessment of the arguments on each side moving against NN proponets, and the natural logic of the embedded trade-offs, whereby net neutrality typically works in a short enough short run but over enough time more pricing is needed.  Of course it is a judgment call as to when the extra pricing should kick in.

Here is what will make your arguments less persuasive to me:

1. Respond to discussions of other natural monopoly sectors and their properties by saying “the internet isn’t like that, you don’t understand the internet.”  If someone uses the water sector to make a general point about tying and natural monopoly, commit internet error #7 by responding: “the internet isn’t like water!  You don’t understand the internet!”

2. Lodge moral complaints against the cable companies or against commercial incentives more generally, or complain about the “ideology” of others.  Mention the word “Trump” or criticize the Trump administration for its failings.  Call the recent decision “anti-democratic.”

3. Cite nightmare or dystopian scenarios that are clearly illegal under other current laws and regulations.  Cite dystopian scenarios that would contradict profit-maximizing behavior on the part of the involved companies.  Assume that no future evolution of regulation could solve or address any of the problems that might arise from the recent switch.  Mention Portugal as a scare scenario, without explaining that full internet packages still are for sale there, albeit without the discounts for the partial packages.

Are you up to the challenge?

If I read say this Tim Wu Op-Ed, I think it is underwhelming, even given its newspaper setting, and the last two paragraphs are content-less, poorly done emotive manipulation.  Senpai 3:16 is himself too polemic and exaggerated, but he does make some good points against this piece, see his Twitter stream.

Net neutrality defenders, as of now you have lost this battle.  I’d like to hear more.

Let them sell the Norman Rockwells

The Berkshire Museum, yes.  They were going to sell 40 paintings at Sotheby’s, including two very special Norman Rockwells, but at the last minute a court decision halted the sale, claiming (with only thin justification) that the sale would violate the museum’s trusts.  That is the setting of my latest Bloomberg column, here is one bit:

The sad truth is that the people running the Berkshire Museum just don’t care that much about American art any more, at least not from an institutional point of view. Given that reality, it’s actually better if they are not entrusted with important artworks.

The court’s decision now means it will be hard to pull off the sale with fully clear rights to the titles, although the court’s judgment will be re-examined in December. Both the uncertainty and the surrounding negative publicity will scare off buyers and may spoil the market for a long time to come.

There is much more at the link.  The argument against selling, of course, is that in a world of frequent sales all museums will find it hard to make credibly binding commitments to their donors, who often do not want their donated works recycled in the marketplace.  But the equilibrium of zero selling is one that will destroy a great deal of value in the art world.  Note that this problem will become increasingly relevant as the clock ticks and the number and inappropriateness of past museum commitments piles up.  If nothing else, sooner or later insolvency sets in.  Rust never sleeps.  And so on.

Should churches really own all that land in the downturns of major American cities?

Could the Republican tax plan lead to bipartisan results?

That is the topic of my latest Bloomberg column, here is one bit:

If the bill succeeds in limiting these deductions, a logic is set in motion for future tax reforms. Let’s say the Republicans eliminate tax deductions for new mortgages above $500,000. That would become a sign that the homeowner and real-estate lobbies are not as strong as we might have thought. The next time tax reform comes around, legislators will consider lowering the value of the deduction further yet. After all, the anti-deduction forces won before and, in the new battle, those who expect to have future mortgages above $500,000 don’t have a stake anymore.

In other words, any squeezed deduction will remain a vulnerable target for more squeezing, or even elimination, over successive reforms.

And then:

The exact treatment in the House plan seems to be in flux, but the top rates from President Barack Obama’s tax reform are likely to stick in some manner. There even seems to be a rateof 45.6 percent on some earners, in the range of $1.2 million to $1.6 million a year. That is a far cry from Jeb Bush’s call in the Republican presidential primaries for a 28 percent top marginal rate, in the tradition of President Ronald Reagan. Some well-off Californians could possibly face a total marginal rate, all taxes considered, of over 62 percent.

You will recall that the Republican Party had in the past pressed strongly for reductions in the capital-gains rates, but that isn’t on the agenda now. Take that as a sign that Obama’s boost to those rates will stick.

If you solve for the equilibrium over time, maybe maybe you will get:

If we look at the Republican plan as a whole, it appears to be a recipe for a future tax code with many fewer deductions, lower corporate rates, higher income tax rates for the wealthy and a continuing inheritance tax. I’m not saying that the exact mix will or should make everyone perfectly happy, but is this not what a bipartisan tax reform compromise might look like?

My fear, of course, is that those deductions will not survive the next stage of the process.  Stay tuned…

Does the President have authority to grant clemency for a state conviction?

Here is the government’s own answer:

No.  The President’s clemency power is conferred by Article II, Section 2, Clause 1 of the Constitution of the United States, which provides:  “The President . . . shall have Power to grant Reprieves and Pardons for Offenses against the United States, except in Cases of Impeachment.”  Thus, the President’s authority to grant clemency is limited to federal offenses and offenses prosecuted by the United States Attorney for the District of Columbia in the name of the United States in the D.C. Superior Court.  An offense that violates a state law is not an offense against the United States.  A person who wishes to seek a pardon or a commutation of sentence for a state offense should contact the authorities of the state in which the conviction occurred.  Such state authorities are typically the Governor or a state board of pardons and/or paroles, if the state government has created such a board.

Solve for the equilibrium!

I thank J. for a relevant pointer.

The fiscal future of the West, the culture that is inheritance

Heaven forbid that people of means should pay for their own health care, what a sensible idea this was:

Last week, she [Theresa May] came up with a flawed but constructive answer to the crisis of funding in social care. The elderly would finance their care out of their own estate upon death. The upper limit on their contribution would go but they could keep £100,000 for their children. In the mixed metaphors that proliferate in politics, a floor would replace a cap.

The idea turned old age into a high-stakes game of chance — die suddenly and your estate would go untouched, contract dementia and it would shrivel over time — but it confronted voters with the principle that things must be paid for and challenged the Conservative cult of inheritance. Mrs May made it central to her election manifesto. Her self-image as a firm leader hinged on her fidelity to this brave, contentious idea.

A few days of popular disquiet and the cap is back.

That is from Janan Ganesh at the FT.  Solve for the fiscal equilibrium!

What if they can clone your voice?

It’s a Canadian company that specializes in speech synthesis software. They’ve developed software they claim can copy anyone’s voice and make it say anything.

The founders tell me if they can get a high-quality recording of you speaking for just one minute, their software can replicate your voice with very high accuracy.

If they get a recording of you speaking for five minutes, they say it would be difficult to tell the difference between your voice and their computer-generated mimic. That’s where the name Lyrebird comes from: a lyrebird is an Australian bird that’s noted for its mimicry.

Here is the story, as they say solve for the equilibrium…

Confidential business conversations over the telephone might dwindle, and perhaps we will have Peter Cushing and Humphrey Bogart movies for a long time to come.  What else?

For the pointer I thank Michelle Dawson.

The State Department plays “Telefon”

Senior state department officials who would normally be called to the White House for their views on key policy issues, are not being asked their opinion. They have resorted to asking foreign diplomats, who now have better access to President Trump’s immediate circle of advisers, what new decisions are imminent.

…“My nagging suspicion is that the White House is very happy to have a vacuum in the under-secretary and assistant secretary levels, not only at state but across government agencies, because it relieves them of even feeling an obligation to consult with experts before they take a new direction.”

Here is the article, solve for the equilibrium…

Why is there dynamic surge pricing *for rides*?

“Surge Pricing Solves the Wild Goose Chase” is the title of the new paper by Juan Camillo Castillo and E. Glen Weyl, here is the abstract:

Why is dynamic pricing more prevalent in ride-hailing apps than movies and restaurants? Arnott (1996) observed that an over-burdened taxi dispatch system may be forced to send cars on a wild goose chase to pick up distant customers when few taxis are free. These chases occupy taxis and reduce earnings, effectively removing cars from the road and exacerbating the problem. While Arnott dismissed this outcome as a Pareto-dominated equilibrium, we show that when prices are too low relative to demand it is the unique equilibrium of a system that uses a first-dispatch protocol (as many ride-hailing services have committed to). This effect dominates more traditional price theoretic considerations and implies that welfare and profits fall dramatically as price falls below a certain threshold and then decline only gradually move in price above this point. A platform forced to charge uniform prices over time will therefore have to set very high prices to avoid catastrophic chases. Dynamic “surge pricing” can avoid these high prices while maintaining system functioning when demand is high. We show that pooling can complicate and exacerbate these problems.

Perhaps it is an analogy to suggest movie theaters might use more surge pricing if a low valuation buyer took up the seat for several showings of the movie rather than just one.