The (Employment) Depressing Child Tax Credit

For those who didn’t know, as part of the American Rescue Plan, there were some changes made to the Child Tax Credit (CTC) for the tax year 2021.

  • First, the credit was expanded from $2k to $3,600 per child for children under 6 years of age (to $3k otherwise). It’s also fully refundable.
  • Second, half of the credit is being disbursed to tax-filers early: over the latter 6 months of 2021.

What does this mean?

For context, I have 3 children all under that age of 6. My total 2021 CTC is $10,800. Half of that is being distributed as monthly checks from July through December. For me, that’s a check for $900 per month that I had not anticipated. While it is true that I will see less of a remaining credit when I file my taxes by April of 2022, I strongly suspect that most similar households are somewhat short-sighted about these funds.

Depending on the number of children in a household, the monthly check from the IRS can be quite significant. From the parent point of view, there has been a lump-sum transfer. There is no endogenous response to obtain more children – there’s no time for that. The transfer also occurs regardless of any activities, economic or otherwise. In essence, tax-filers with children have experienced a positive income shock.

The big question is: What is the effect on employment?  

In one sense, the effect is ambiguous and depends on preferences: People can now afford more leisure and more consumption. How they engage in more of each is a matter of preference. But, given that both are goods, both will increase by some amount.

That’s my simple model. I hereby make multiple predictions:

  1. Parents with children will have consumed more in the 3rd and 4th quarters of 2021.  
  2. Parents with children will have lower employment growth for those quarters.
  3. The effects will be stronger for parents with children under 6 years of age.
  4. The employment rebound in the 1st quarter of 2022 will be stronger for these groups (and stronger than forecasted overall).
  5. Finally, while I’m feeling silly enough to make predictions publicly, I predict slower growth in consumer durable expenditures in 2022 Q1.

I looked at the BLS for data to corroborate my predictions. Excitingly, the Current Population Survey (CPS) does slice the data by sex, age, and age of own children (conveniently by younger than 6 and 6-17 years of age). This is where I post the great visual to demonstrate the veracity of my claims, right?

WOMP WOMP.

The relevant data is currently only available annually as recent as 2020

Inflation: Not Merely a Monetary Phenomenon

I’m a big fan of Milton Friedman. I’m also a big fan of easy-to-remember phrases that impart great wisdom. It honestly made me wince the first time I said the following:

Inflation is *not* everywhere and always a monetary phenomenon“.

The reasoning is as plain as day. Consider the quantity equation:

MV=PY

For the uninitiated, M is the money supply, V (velocity) is the average number of times dollars transacts during a period, P is the price level, and finally Y is real output during a period. This equation is often called the “equation of exchange” or “the quantity equation”. Strictly speaking, it is an identity. It is a truism that cannot be violated. All economists agree that the equation is true, though they may disagree on its usefulness.

Inflation is simply the percent change in price. We can rearrange the quantity equation, solving for price, in order to see the relationship between the price level and its determinants.

P= MV/Y

What does this mean? It means that more money results in more inflation, all else held constant. It means that higher velocity results in more inflation, all else held constant. It means that less output results in more inflation, all else held constant.

Why would Milton Friedman say that inflation is always caused by changes in the money supply if it is clear that there are two other causes of the price level? When Milton Friedman said his famous quote, output growth was relatively steady. Velocity growth was relatively steady. For his context, Milton Friedman was right. The majority of price and inflation volatility was found in changes in M. See below.

Strictly speaking however, Milton Friedman knew better and he knew that the statement was not strictly correct. Friedman was a public intellectual and he was a great simplifier. He taught many people many true things. At the time, people were blaming inflation on a great variety of things: taxes, fish catches, and unions, to name a few. Arguably, Friedman got them closer to the truth.

Now, there are economists that are pointing to total spending as the driver of inflation. After all, both sides of the equation of exchange describe NGDP (a.k.a. – Aggregate Demand or Aggregate Expenditure). Replacing M and V in the equation with NGDP yields:

P=NGDP/Y

What does this mean? It means that higher NGDP results in more inflation, all else held constant. It means that less output results in more inflation, all else held constant.

But economists dismissing M in lieu of AD are committing the same oversimplification. Y can also change! Maybe economists figure that our recent history is full of relatively stable Y growth and that we ought not pay attention to it. And indeed, unsurprisingly, RGDP growth has been less than NGDP growth.

But what is driving the current bought of inflation?

Pardon the crude image. The pink lines are eye-balled trend lines on natural logged data for AD, Y, and P. Prices are up. Is it because of exceptionally high NGDP? Nope. Total spending is back on pre-2020 trend. Does Y happen to be down? Yep, it sure is.

Right now, assuming the previous trend was anywhere close to potential output, inflation is not being driven by excess aggregate demand. It’s being driven by inadequate real output. The news tells the story. There have been supply-chain bottle-necks, difficulty employing, lockdowns, and fear of covid. Right now we have an output problem and higher prices are a symptom. We do not have an aggregate spending problem.

PS – In fact, it is my belief that the Fed successfully avoided a debt-deflation aggregate demand tumble that would have been catastrophic. Inflation is expected when supplies of goods decline.

Social Security: Not a Great/Terrible Investment

Upfront: I’m totally replying to a meme.

I sympathize with the sentiment of the meme. But friends of friends were quickly critical of it. Then I wasn’t sure what to believe. So, I crunched the numbers.

First of all, there is an inherent ambiguity in the meme’s claim, seeing as future tax rates, maximum taxable income, benefits, and plausible returns are unknown. But we can address the data so far. The meme is dated in 2019, but current data is even more charitable toward it.

What we know as of 2021:

The maximum annual benefit is currently $46,740. It was previously lower, but this is a charitable post.

We also know the historical tax rates and maximum taxable incomes. Currently, 12.4% and $142,800. YES, we’re about to assume that somebody met the maximum income criteria over their entire working life.

If someone worked for 40 years while making the maximum contribution each year, then they would have contributed $406,255.20. If we plainly calculate the rate of return on this amount, then we’d yield 11.5%, which is not too shabby ($46,740/$406,255.20). Of course, this is entirely unreasonable because the funds could have been earning interest in private hands during the contribution period. If the funds had been earning 5% throughout the entire period, then the 2021 value of the contributed funds would be $968,838.39. The annual benefit implies a return of 4.8% ($46,740/$968,838.39). Investing those funds in a private account that yielded 5% would have provided $48,441.92 per year, which is not a huge difference. In this light, social security appears not to be a terrible deal. Not as good as the private sector – but not far off.

Let’s be more charitable to the spirit of the meme. What about for 50 years of work? Then the total contribution would have been $423,905.38, yielding an implied return of 11%. Considering the time value of money changes the rate of return to 4.2%. Again, not terrible, but now noticeably less than 5%. If the funds had been invested at and paid out 5%, then the private annual benefit would be $55,846.56. In other words, the privately invested funds would have yielded an annual benefit that is 19.5% higher than what is currently paid. That is substantial. The social security investment is definitely not excellent.

How reasonable is the meme? Well, in order to get the $1.9M figure, interest rates would have to be 7.2% (assuming 50 years of work and that we don’t spend the principal). The concomitant annual retirement benefit would be $136,825.51 (Now that’s an exciting number). In order to get the $95k, we only need to assume 6.3% per year. The S&P 500 has yielded an annual return of 7.6% over the same period (not including dividends). The meme is reasonable. Not perfect. But not ridiculous.

One BIG caveat is that this entire analysis assumes that the employee could simply invest equivalent amounts if Social Security were abolished. This is very unreasonable. Currently, part of the contribution comes from employers. While employees would experience an increase in total pay if the taxes were abolished, the employer would also enjoy a lower cost of labor. Not all of the gains would go to the employee.  One could also argue that abolishing Social Security would improve growth and real incomes generally, but that’s a counter-factual beyond the scope of this post.

Here is the sheet where I show my work.

Avoiding Intertemporal Idiosyncratic Risk

Hopefully by this time we all know about index funds. The idea is that by investing in a large, diversified portfolio, one can enjoy the average return across many assets and avoid their individual risk. Because assets are imperfectly correlated, they don’t always go up and down at the same time or in the same magnitude. The result is that one can avoid idiosyncratic risk – the risk that is specific to individual assets. It’s almost like a free lunch. A major caveat is that there is no way to diversify away the systemic risk – the risk that is common across all assets in the portfolio.

We can avoid the idiosyncratic risk among assets. But, we can also avoid idiosyncratic risk among times. Each moment has its own specific risks that are peculiar to it. Many people think of investing as a matter of timing the market. However, people who try to time the market are actively adopting the specific risks that are associated with the instant of their transaction. This idea seems obvious now that I’m writing it down. But I had a real-world investing experience that– though embarrassing in hindsight – taught me a heuristic for avoiding overconfidence and also drilled into my head the idea of diversifying across time.

I invested a lot into my preferred index fund this past year. I’d get a chunk of money, then I’d turn around and plow it into the fund. What with the Covid rebound, it was an exciting time. I started paying more attention to the fund’s performance, identifying patterns in variance and the magnitude of the irregularly timed and larger changes. In short, by paying attention and looking for patterns, I was fooling myself into believing that I understood the behavior of the fund price.

And it’s *so* embarrassing in hindsight. I’d see the value rise by $10 and then subsequently fall to a net increase of $5. I noticed it happening several times. I acted on it. I transferred funds to my broker, then waited for the seemingly regular decline. Cha-ching! Man, those premium returns felt good. Success!

Silly me. I thought that I understood something. I got another chunk of change that was destined for investing. I saw the $10 rise of my favorite fund and I placed a limit order, ensuring that I’d be ready when the $5 fall arrived. And I waited. A couple weeks passed. “NBD, cycles are irregular”, I told myself. A month passed. And like a guy waiting at the wrong bus stop, my bus never arrived. All the while, the fund price was ultimately going up. I was wrong about the behavior of the fund. Not only did I fail to enjoy the premium of the extra $5 per share. I also missed what turned out to be a $10 per share gain that I would have had if I had simply thrown in my money in the first place, inattentive to the fund’s performance.

Reevaluation

I hate making bad decisions. I can live with myself when I make the right decision and it doesn’t pan out. But if I set myself up for failure through my own discretion, then it hurts me at a deep level. What was my error? Overconfidence is the answer. But why did it hurt me?

Continue reading

Purchasing Drinks with Push-ups.

Early in the summer of 2021, I was having fun. The semester was ended and traveling was on the horizon. Due to changes at my wife’s job I began driving to work instead of making the 20 minute trek by foot. And there was plenty of time to be social. And social I was — several days of the week. And, inevitably, drinks would be served. I was doing a lot less walking and a lot more drinking alcohol (responsibly).

I was footloose and fancy free. Until… The bathroom scale reminded me that I had surpassed the age of 30 years old. Being sedentary and drinking were starting to add up.

Right then and there, I made a decision. I would disincentivize my drinking, but I would also make drinking beneficial rather than detrimental to my waist line.

I made a deal with myself. For each drink that I had, I would have to ‘pay’ 25 push-ups. No exceptions. And, no borrowing from myself. Push-ups *had* to come first. None of this “I owe myself push-ups” nonsense (it’s a trap!). I could *save* for the future, however. Knowing that a social event was approaching, I’d build myself a nice little balance. And the exchange rate was constant: 25 push-ups per drink – always.

Who held me accountable? Me, myself, and I… And some incentive compatible approbation.

I wasn’t shy about any of it. At a outdoor beer garden with my wife and her cousin, I had prepared by banking 50 push-ups. But round 3 was impending… and I’m no square. So, over to the side, quite out of the way on the outdoor patio, I knocked out a quick 25. Round 4 came after still another 25.

Now let’s talk incentives. Requiring push-ups of myself increased my physical activity, so I felt better about my body. Further, if I hadn’t banked push-ups ahead of time, paying prior to each drink limited how many push-ups I could comfortably do. Once push-ups became uncomfortable, I stopped drinking.

That’s all great. But the social incentives were pivotal in keeping me dedicated. Upon seeing the push-ups in action, female friends would talk to my wife who quickly developed a well-crafted dialogue for each new observer, complete with convincingly spontaneous gesticulations and eye-rolls. I can’t say that I didn’t enjoy the attention.

Other men provided direct positive approval. I combined 3 activities that were already ‘manly’ when separate: muscle building, drinking, and dispassionate self control. Men would praise me immediately and similarly feel compelled to do there own sets of push-ups in my presence — as if being sedentary in my presence convicted them as guilty of something. At least one wife sent me a text after we had left town that included a picture of her husband knocking out some of his own pre-drink push-ups (Is this what it feels like to be an influencer??).

Aristotle would be proud.

I was very consistent for months. Being the summer and seeing a lot of friends and family, I did a lot of push-ups. But, as time passed, the exercise habit stuck even as the drinking began to pass by the wayside. What began as an arbitrary, self-imposed rule soon became a legit change in behavior. And then, that change in behavior became a practice. Did that practice improve my temperance and fortitude through habituation? Idk. But wouldn’t that be nice?

Redesigning Unemployment Insurance

How does unemployment insurance work?

From the worker’s perspective, unemployment insurance isn’t detectable unless the worker loses their job. Once that’s happened, the person can apply for benefits – a check that you can cash or deposit into your bank account. These benefits vary by state, with the composition of your family, and your income prior to separation. The most generous maximum benefit is provided by Massachusetts at $823 per week for an individual and the least generous is provided by Mississippi at $235 per week. States also vary by the length of time for which a person can collect benefits. Montana is the most generous at 28 weeks and North Carolina ties with Florida for the least generous at 12 weeks. If you find a job and become employed before the maximum benefit duration, then you stop receiving payments.

From the employer’s perspective, unemployment insurance is the premium that you pay per employee each year. The premium is not optional – so it’s a tax. Employers pay it for the privilege employing workers. There are two components of the tax: a state and federal portion. The federal portion is more or less constant per employee. The state portion changes with the incidence of unemployment claims and payments that a state makes in the prior year. When a lot of people get fired, state unemployment taxes rise as a policy response.

Why provide UI benefits?

There are two typical reasons for governments to provide unemployment benefits – and a 3rd not-so-typical reason. The first is as a matter of relief. People often lose a job through no fault of their own, and we don’t want those people to become destitute or to forego the bare essentials that money can afford. The second reason to provide benefits is as a matter of macroeconomic spending stimulus. Contrary to popular belief, this stimulus is not about encouraging greater production through greater sales. The stimulus is meant to encourage total spending in the economy to be higher than it would have been otherwise (See Irving Fisher on debt deflation and Scott Sumner on NGDP targeting). The 3rd and not so typical reason for governments to provide unemployment insurance is to keep people from going to work (See Tyler Cowen for why this might be desirable during a pandemic).

Incentives Matter

The 3rd reason above hints at a problem. People lose benefits when they become employed again. It is exactly because benefits provide relief that they reduce the incentive to find a job. Importantly, this is not a judgment of propriety or moral chastisement. It simply is the case that UI payments make being unemployed a little more tolerable. The tenacity with which people search for a job becomes a little less urgent. Anyone well acquainted with human nature (outside of a textbook) will tell you that it is good for humans to work. There are economic, social, and psychological benefits – not to mention the material benefits enjoyed by society. So, longer periods of unemployment are a problem.

Not only does the receiving UI benefits cause longer unemployment spells, losing benefits when you find a job acts as a penalty to finding a labor market match. It’s not happenstance that people who lose their UI benefits tend to become employed shortly thereafter. In terms of economic activity and gains from trade, society is materially better off when people find jobs more quickly (probably socially better off too). If you can get people to acknowledge the above logic, then there is plenty of room for people to disagree on the propriety of the UI benefits system.

Remove Disincentives – Keep the Relief

As Thomas Sowell is known for saying “There are no solutions – only trade-offs.”  That’s true. It’s also true that there is also no such thing as a free lunch. But some things are a lot more like a free lunch than others.

Wouldn’t it be nice if we could just help unemployed people and not disincentivize them from finding a job? In part it’s impossible. The UI payments do both and there is no separating them. But, the disincentive provided by removing payments when a job is found can be addressed. Why not just permit UI benefits even after someone has found a job?

An Outlay Neutral Prescription

What does the social program designer consider? Simply, the policy maker considers government outlays, government revenues, and economic impact. All else constant, policy makers like small outlays, high revenues, and good economic impacts.

I propose that states adopt the following policy. First, eliminate variables benefits. This part of the policy is not essential, but it clarifies the exposition. Now, it doesn’t matter whether you were an executive at a bank or a janitor at the bank – both receive the same weekly UI payment if they lose their job. What should the benefit be? For the purposes of outlay neutrality, the new benefit is the same as the average benefit was last year. The average benefit and total outlay across all claimants is unchanged.

When a person finds a job under the current system they are paying an implicit tax when their benefits get pulled. Let’s eliminate the employment disqualification. That’s right. When a person finds a job, they just continue to receive benefits. They don’t receive UI benefits indefinitely, however. In order to maintain outlay neutrality, the duration of UI benefit payments will be equal to the average duration last year.

Say what?!

Put yourself in the shoes of the person looking for a job under the current system. Say that your UI benefit is $800 per week and that you job-search for 10 hours each week. Say that you find a job that pays $1,000 per week. If you take the job, then you will go from working 10 hours per week to working 40 hours per week. And, you go from having an income of $800 per week to having an income of $1,000 per week. In other words, you get to work 30 more hours per week for $200 more income. The unemployed person is making the decision to take the job at $25 per hour, or stay home at $80 per hour ($1,000/40 Vs $800/10).

But what’s the perspective under the outlay neutral proposal in which the benefits continue even after employment? The decision is substantially different.  The unemployed person is making the decision to take the job at an average of $45 per hour, or stay home at $80 per hour ($1,800/40 Vs $800/10).

Of course, staying home still might look attractive. But it looks relatively less attractive than it did under the standard system of work-disqualifying benefits. If a person has 4 weeks of remaining benefits when they find the job, then continuing to receive UI benefits would mean that the total income over that month would be $7,200, versus $3,200 from staying home, or $4,000 under the standard system. Again putting yourself in the shoes of the unemployed, doesn’t this decision look different? Might you feel enticed to accept the job?

Under the proposed policy, government outlays are constant – there is no change in expenditures. Revenues increase because more employed workers means more employer-paid UI tax payments (not to mention other tax payments). Economic performance improves because greater employment increases total output. Let’s go ahead and throw in the additional social benefits too.

People Have Feelings

…And they’re complicated. Part of the sympathetic idea of unemployment insurance benefits is to provide relief. As a matter of gut instinct, this is why many people favor the UI transfer program over others. They can imagine themselves in such a circumstance through no wrong-doing of their own. But once we say that benefits will continue – even after someone finds their job – the UI program becomes less obviously a matter of sympathy-inducing relief. There is a political problem.

I say: put your feelings aside. Let’s get people employed again. Let’s increase tax revenues and increase economic activity. Let’s address the problem of unemployment in a better way – and spend not a dime more doing it.

Streaming Content: Scattering Vs Dumping

Like a good millennial, I don’t have cable. Instead I have Netflix, Amazon, Hulu, Disney+, YouTube, and a free trial of Apple TV. And before you say that I’m spending just as much as I would have spent on cable, just – no. First, I am not. Second, I have way more capability and discretion than I ever had with cable. Each of these streaming services now has their own studio(s) and competition is causing them to produce some content of exceptional quality. And, they differ in their decisions scatter vs dump. Amazon and Apple TV scatter their new episodes on a weekly schedule. You can still watch the episodes whenever your heart desires once they’re released. But if you are up-to-date, then you must wait 7 days until new episodes are available. Netflix, on the other hand, dumps out a new series all at once. You can spend the afternoon (or morning, or night) watching an entire season of the newest content from a high-end studio.

If we take a look through the way-way-back machine, then we can observe must-see-TV on NBC in the 1990s. Networks followed the scattering model. Most people didn’t own a DVR and on demand wasn’t really a thing except for pay-per-view. VCR (video cassette recorders) were ubiquitous, but people enjoyed watching their shows as they were released rather than later watching a recording. The 90s and early 00s were a special time for NBC in particular: Friends, Seinfeld, Frasier, 3rd Rock from the Sun, and ER were all a part of the weekly line-up – with Will & Grace and Scrubs soon following the finale of Seinfeld.

New weekly episodes that were released during a literal ‘season’ of the year had been the model for as long as television signals had been broadcasted. Several of today’s streaming services still adhere to the 80-year-old practice.

Why?

I’ve got 3 reasons for why streaming services still scatter new releases. The first is the one I that have the least to say about: Buzz. It’s good marketing for a show to be released over a longer period of time. In a world of social media, the longer the time that a show is salient in your life, the greater the opportunity for you to share the show with your friends or for critics to acclaim (or pan, as the case may be). It’s a marketing tactic. If all of the episodes in a season were released all at once, then a show would be in-and-out of your life like a stray ice cube that goes rogue from the refrigerator ice-dispenser. You care for a bit. But soon, it’ll evaporate and never be a concern again. I’m not an expert in marketing. So I’ll just leave it at that.

The second reason is due to the time value of money. The sooner that we can enjoy revenues and the later that we can push costs, the better. It’s true for multiple reasons. Financially, every day sooner that you receive a dollar is an additional day during which you can earn a return by investing it elsewhere. For ease, let’s hold the schedule of costs constant and just worry about the revenues. If a streaming service releases episodes weekly, then episodes can start dropping before the season finale is even completed. There’s nothing that says that the whole season has to be ready by the time the first episode is released.  And, when episodes are released earlier, would-be viewers are sooner willing to sign-up and become paying customers. Releasing episodes weekly allows a studio to increase revenues before the whole product has finished production.

The 3rd and final reason for streaming services to release on a weekly schedule is due to the subscription structure of marginal revenue. Streaming services earn *no* additional revenue per episode viewed by customers. The marginal revenue earned from paying customers comes from subscriptions. That is, each month of a subscription is revenue for the streaming service provider – no matter how many episodes a subscriber watches. Therefore, if a season is released piecemeal, then it increases the number of weeks during which the streaming service receives revenues from the customer. Of course, people could just wait until all of the episodes are released and then subscribe for a single weekend of lethargic binging. But that can only happen when a viewer is comfortable with forsaking the frontier of new video content. That would mean that a viewer is out of fashion and out of the conversation that their friends and co-workers are having. And if this sounds like small potatoes, then keep in mind that such conversations are often about signaling belonging, comradery, and cultural sophistication. Many people are inclined to stay up-to-date on TV, the news, and sports and therefore have a greater willingness to pay.

There you have it. The 3 reasons for streaming by scattering over weeks rather than dumping all at once are 1) More persistent saliency among viewers and potential viewers, 2) Sooner rather than delayed revenues, and 3) More periods for which streaming service can charge their customers for new content.

I only have one explanation for why some streaming services do in fact dump an entire season at once. Netflix does it on the regular and Amazon started doing it in the past several years too. I suspect that they do it as a means of attracting a particular market segment: binge-watchers. There being two players who compete on this margin may make either provider appear less attractive for consumers who desire new, binge-worthy content. But, luckily for Netflix, streaming content providers aren’t in a perfectly competitive market. That content an imperfect substitute means that it’s monopolistically competitive. And, for the moment, that means higher profits. The keen reader will recognize, however, that zero long run economic profits are also implied.

Inequality VS the Environment

What do we know?

We know that density is good for most environmental measures. With greater density comes less water runoff, less carbon emissions, less burned fossil fuel. With density, fewer people own vehicles, implements of yard curation, and we require fewer roofs per person.

What else do we know?

We know that in a static economy, progressive taxation makes after-tax incomes more equal. There are formal models that say the same thing about dynamic economies. Progressive taxation results in more income equality, and regressive taxation results in less. For clarity, income tax progressivity is determined by percent of income paid in taxes. When the rich pay a higher percent tax rate, that’s more progressive.

Are you ready?

Wealthy people tend to have more valuable land. That is, they improve the land and the things built on it. Do you want to tax land progressively? Then what you want is a property tax with a sliding tax rate. This way, you can make those rich people pay their ‘fair share‘. Even without a sliding scale, rich people will pay more dollars for their improved land.

Uh-oh.

Now that we are taxing property on land proportionally, rich people are seeking alternatives. They’re trying to avoid taxes! What do they do? Well, a smaller and cheaper house is a nonstarter. What is all that wealth for, if not to enjoy it partly through one’s home environment? The rich are going to find a place to live where they can be comfortable and where their property taxes are lower. Maybe a place where the land is not so expensive. Hello rural estate!

Do you want a proportional property tax so that rich people pay for the value of their property? Be ready to say hello to suburbanization and sprawl. All those benefits of urbanization mentioned above? Invert all of them to see the results.

Okay…

I see the attraction of taxing immovable property. Taxing a residence is nice for the government because the tax revenues are nice and stable, given the relatively inelastic demand for real property.

If only there were a real property tax scheme that provided stable revenues and encouraged urbanization… Well, the answer is not to try taxing the value of the land without taxing the value of property. What am I? A Georgist?

A Georgist I am not. But, I do have an affinity for lump sum taxes.

If, as a polity, you want urbanization, then impose lump sum taxes per area of land owned. Doesn’t matter if it’s a house. Doesn’t matter if it’s commercial. Doesn’t matter if it’s unimproved farm land. Just sit back and watch the skyline rise, our environmental footprint shrink, and plenty of land being turned into wildlife preserves and parks.

Oh dear.

People have feelings. Consider a beautiful multi story single-family home on an acre. Now consider a mobile home with a large yard and some trees – also on an acre. With a standard, flat proportional property tax, the owner of the big pricey house pays more. With lump sum taxes per square foot of land, they pay the same dollar figure. In other words, the less wealthy person pays a higher proportion of his properties value in taxes. In case you missed it, this beautiful solution to sprawl and environmental degradation comes hand-in-hand with proportional regressivity.

BTW:

I live in Collier County Florida. If all of the land, excluding surface water, in the county was taxed at the same lump sum per square foot, then we would need to pay about $1,600 per acre in order to replace all revenues currently collected from a variety of sources. If we assume that government property is excluded from the tax and we assume that the government owns a very liberal 10% of all property, then it is more like $1,780.

I haven’t even discussed all of the improved economic performance that an already developed counties might enjoy by eliminating the distortionary excise taxes and ad valorem taxes. I don’t know about you, but $1,600 doesn’t sound too bad in exchange for eliminating all the other nickel and dimes that add up to quite a bit.

(Just as I am not a Georgist, I am also not a revolutionary. We need not jump in head-first. We could ease our way into such a system. We’d just add a fixed lump-sum portion to existing property tax bills that increases over time. Property taxes bills would be calculated slope-intercept style with a portion being constant and a portion being dependent of property value.)

Have you heard about Human Capital?

While writing a paper recently, I was reminded of the importance of economic modelling.

Macroeconomic models are fun to rag on – everybody does it. But all economic models help us to express our understanding of the world clearly and help us to be specific when the temptation to hand-wave is strong. After all, a model is just a fancy way of saying “a system of logic”.

The paper linked above is several revisions in. What you don’t see are the mistakes that my co-author and I made along the way and the vagueness that we had to resolve. An earlier version of the paper simply stated that deaf people were endowed with less human capital than people who could hear. So far so good. But then we said that it was ambiguous who, the deaf or the hearing, would ultimately have more human capital after making additional human capital investments.

But this is not the case!

Continue reading

Penny-Pinchers Gonna Pinch

Text books say that there are two major problems with the Consumer Price Index (CPI). First, accounting for changes in quality is difficult. Second, the CPI is calculated by assuming a fixed basket of goods is consumed over time. For both of these reasons, the rate of inflation that is implied by CPI is typically considered to be about 1% overestimated.

Imperfectly accounting for quality improvements causes higher measured inflation because the stream of services that a product creates for the consumer has increased – even though the product is nominally the same product. For example, the camera on my smart-phone is now good enough to record a high-quality Youtube video, whereas it was of mediocre quality on my previous phone.  My life is better-off with the better camera. But the increase in my quality of life isn’t measured by the CPI. The CPI does, however, make note that I paid a higher price for a phone.

Further, people don’t consume a fixed basket of goods over time. Even if we stopped the introduction of all new products and maintained the quality of all current products, people would still change the composition of their consumption due to price changes among related goods.

When people get hot and bothered by inflation, they often appeal to people who are of less means and who would find higher prices more burdensome. For that reason, below is a graph of some calorically dense and roughly comparable food staple prices (from the PPI).  You can put a protein on top of any one of these and call it a meal: pasta, flour, potatoes, & rice.

Let’s say that a consumer consumed equal parts of these in January of 2020. The CPI assumes that the consumption basket remains constant and plots a weighted average. In such a case, price rose 2.3% through July 2021. But in real life, penny-pinchers gonna pinch. If our consumer is particularly Spartan, then he will always consume the cheapest option – he treats the different foods as perfect substitutes. The Spartan price of consuming *fell* 22.3%. To be clear, the CPI assumes that the consumption composition remains unchanged, while the consumer’s actual basket is responsive to price changes.  Even if a consumer considers these goods to be imperfect substitutes and is willing to cut any particular type of consumption in half in favor of the cheapest alternative, then the price fell by 10%. In fact, a consumer who is at all responsive to prices will always have a cheaper basket than the headline CPI, all else constant.

In conclusion, be careful with your money. Spend it well and seek out alternatives. Your flexibility determines how much money you’ll have at the end of the month. The headline CPI number impacts only the most passive consumer – and even then, budget constraints gonna constrain.