Please turn on JavaScript

Brooks Wilson's Economics Blog: November 2011

Tuesday, November 22, 2011

France and Social Welfare Programs

Voters in democratic societies like benefits and don’t like taxes.  The French confront a growing national debt caused by large social programs, the financial crisis, and the European debt crisis.  Voters have protested at the suggestion of cuts in benefits and taxes are high.  Proposals for tax increases are modest and are probably regressive (“Analysis: France needs tough reforms to halt debt spike”).  Like other countries in Europe that we call social welfare states, France has a tax structure that is less progressive than the United State’s tax structure (Piketty and Saez “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective,” Journal of Economic Perspectives, Volume 21, Number 1, Winter 2007).  Piketty and Saez write      

During most of the postwar period, income tax progressivity has been substantially greater in Anglo-Saxon countries than in France and most other continental European less in France than in the United Kingdom or the United States. For example, the top .01 percent of the distribution paid 75 percent of income in taxes in the United States in 1970 and over 90 percent of income in taxes in the United Kingdom; but only 49 percent of this group’s total income went to taxes in France. During most of the postwar period, income tax progressivity has been substantially greater in Anglo-Saxon countries than in France and most other continental European countries. For example, Dell (2006) presents an analysis of Germany, which appears fairly close to France.

This pattern illustrates a general point made by Lindert (2004): countries in which government spending is a fairly high share of GDP have always relied on a mix of taxes that create relatively low distortion, with less progressivity, large exemptions for capital income, and so on. Meanwhile, Anglo-Saxon countries in which government spending is a relatively low share of GDP have historically relied on more progressive taxes.

Read more!

Thursday, November 17, 2011

NBPA and Kevin Murphy

Steve Aschburner does an excellent job interviewing Kevin Murphy, an economist from the University of Chicago who has been hired to advise the National Basketball Players Association (“Renowned economist Murphy lends smarts to NBPA's cause”).  I wonder how many hours he prepared for the interview and if in part that preparation was motivated by the fear of sounding foolish by asking a world class economist bad questions.

How good is Murphy?  Aschburner quotes Steve Levitt, a John Bates Clark Award winner and the author of Freakonomics who said

Kevin is far and away the smartest guy in the field.  Not only is he widely regarded as the smartest economist on Earth, but he can also fix your refrigerator.

If you are a fan of the NBA and economics you should read the entire article but I have included an answer to one question as a teaser. Where do you see this landing?

KM: Ultimately what it comes down to is, you get what you can negotiate. It's not what you deserve, what's "right," that ends up carrying the day. But then they ought to be straight up. They ought to say, "We've got the ability to negotiate. We'll hold your feet to the fire and get what we can."

The one thing I don't want to see happen: I don't want to see any lingering bad blood between the two sides. That's not good either. You run the risk that, if it gets too personal, that creates its own set of frictions going forward. I think people on both sides are cognizant of that.

Read more!

Thursday, November 10, 2011

The Obama Administration’s Pipeline Punt

The Obama administration is scheduled to announce a decision to approve or deny the $7 billion Keystone XL project, a oil pipeline that would ship oil from Canada’s tar sands to refineries in Texas.  Environmentalists, a key Obama constituency, oppose the pipeline in general because it ships oil and specifically because oil from tar sands which generate more carbon in production and refining than other oil.  Labor unions that would build the pipeline, another key Obama constituency, favor that project. 

Reuters and the AP report that rather than fish or cut bait, the administration has decided to punt by exploring a new route for the pipeline.  The review process would push the pipeline decision past next year’s presidential election.  Many view the delay as a win for environmentalists (“Exclusive: U.S. to seek new Keystone route, delaying approval” or “State Department Delays Oil Pipeline From Canada, Orders Developer to Reroute”).

Read more!

Friday, November 4, 2011

Cuba’s Long Road to Capitalism

A few communist era jokes from behind the Iron Curtain touch on the nature of communism.  A polish worker observes, “We pretend to work and the communist pretend to pay us.”  A Soviet economist opines that “communism is the slowest, most painful road to capitalism. 

Mankiw’s sixth principle of economics reads, “Markets are usually a good way to organize economic activity.”

According to an AP article (Cuba legalizes sale, purchase of private property) written by Paul Haven.  The economy has not thrived under communist rule.  Eighty percent of workers are employed by the government.  The workers are paid $20 per month and receive free but bad medical care, transportation, and education. 

The housing sector provides an example how bad property rights destroy wealth. Shortly after the revolution in 1959, Castro gave title to those living in an apartment or house but not the right to sell it.  People are mobile but buildings are not.  Without the right to sell, and with few incentives to improve property, the quality of buildings deteriorated.  Complex barter transactions and black markets based on extralegal property rights developed that returned some degree of mobility. 

Those interested in the Cuban economy should read Arch Ritter’s blog, “The Cuban Economy La Economia Cubana.”

Read more!

Thursday, November 3, 2011

Sowell on Greed

Economics teaches that self-interest is a great motivator and, within a market setting, is good for society.  Thomas Sowell provides good argument on the insignificance of greed within markets (Democracy Versus Mob Rule).  The mob he refers to are the occupiers but the sloppy use of “greed” is pervasive.

Among the favorite sloppy words used by the shrill mobs in the streets is "Wall Street greed." But even if you think people in Wall Street, or anywhere else, are making more money than they deserve, "greed" is no explanation whatever.

"Greed" says how much you want. But you can become the greediest person on earth and that will not increase your pay in the slightest. It is what other people pay you that increases your income.

Read more!

Tuesday, November 1, 2011

Bankruptcy and Home Loan Defaults

Balance that must exist between households and firms if markets are to function well.  I often use the market for consumer loans to demonstrate what many students initially find counterintuitive.  Consumers allow banks to take collateral to facilitate lending and banks support bankruptcy to facilitate borrowing.

This does not mean that laws support the correct balance between consumers and banks. In an American Economic Journal, Economic Policy article,  Li, White, and Zhu offer evidence supporting the hypothesis that 2005 bankruptcy reform that made it more difficult to write off debt through bankruptcy increased defaults on home loans after the housing bubble burst.  Their abstract reads

Homeowners in financial distress can use bankruptcy to avoid defaulting on their mortgages, since filing loosens their budget constraints.  But the 2005 bankruptcy reform made bankruptcy less favorable to homeowners and therefore caused mortgage defaults to rise. We test this relationship and find that the reform caused prime and subprime mortgage default rates to rise by 23% and 14%, respectively. Default rates rose even more for homeowners who were particularly negatively affected by the reform. We calculate that bankruptcy reform caused mortgage default rates to rise by one percentage point even before the start of the financial crisis.

It is interesting to note that banks were supporting laws making it harder to declare bankruptcy as they were lowering lending standards. 

Read more!

Epstein on Inequality

(HT Cafe Hayek) Paul Sloman of PBS interviews Richard Epstein on the benefits of income inequality. Epstein, who studies the effects of law on economic outcomes gives a remarkable libertarian defense of inequality.
Read more!