Economics

One Hundred Years of U.S. State Taxation

Jeremy Horpedahl1 Comment

From a paper recently published in the Journal of Public Economics by Sarah Robinson & Alisa Tazhitdinova, here is the history of federal and state taxation in the past century in the US in one picture:

The paper primarily focuses on US state taxes, thus mostly ignoring local taxes, but in the Appendix the authors do show us similar charts for local taxes:

In broad terms, the history of taxation in the US in the 20th century is a history of the decline of the property tax, and the rise of the income and sales taxes. In 1900, there were barely any federal taxes (other than those on alcohol and tobacco), 50% of state taxes were property tax, and almost 90% of local taxes were property taxes. Property taxes were essentially the only form of taxation most Americans would directly recognize (excise taxes and tariffs were baked into the price of the goods).

John Wallis (2000) provided a similar, and simpler picture of these changes: considering all taxes in the US, property taxes were over 40% of the total in 1900, but today are under 10%. Income taxes come out of nowhere and are now about half of all government revenues in the US:

Is the Great Grocery Inflation Over?

Jeremy HorpedahlLeave a comment

The average price of a dozen eggs is back up over $4, about the same as it was 2 years ago during the last avian flu outbreak. Egg prices are up 65% in the past year. But does that mean the grocery inflation we experienced in 2021-22 is roaring back?

No really. Spending on eggs is around 0.1% of all consumer spending, and just about 2% of consumer spending on groceries. Symbolically, it may be important, since consumers pick up a dozen eggs on most shopping trips. But to know what’s going on with groceries overall, we have to look at the other 98% of grocery spending.

It’s been a wild 4 years for grocery prices in the US. In the first two years of the Biden administration, grocery prices soared over 19%. But in the second two years, they are up just 3% — pretty close to the decade average before the pandemic (even including a few years with grocery deflation!).

As any consumer will tell you, just because the rate of inflation has fallen doesn’t mean prices on average have fallen. Prices are almost universally higher than 4 years ago, but you can find plenty of grocery items that are cheaper (in nominal terms!) than 1 or 2 years ago: spaghetti, white bread, cookies, pork chops, chicken legs, milk, cheddar cheese, bananas, and strawberries, just to name a few (using BLS average price data).

There is no way to know the future trajectory of grocery prices, and we have certainly seen recent periods with large spikes in prices: in addition to 2021-22, the US had high grocery inflation in 2007-2009, 1988-1990, and almost all of the period from 1972-1982 (two-year grocery inflation was 37% in 1973-74!). Undoubtedly grocery prices will rise again. But the welcome long-run trend is that wages, on average, have increased much faster than grocery prices:

Housing Quality Has Improved Dramatically Since the 1980s — For the Poorest Households

Jeremy HorpedahlLeave a comment

A few weeks ago I wrote a post comparing housing costs in 1971 to today. I noted that while houses had gotten bigger, the major quality improvement for the median new home was the presence of air conditioning: a semi-luxury in 1971 (about 1/3 of new homes), to a standard feature in 2023. Even accounting for the presence of central air-conditioning and more square footage, I concluded that housing was about 17 percent more expensive in 2023 than 1971 (relative to wages).

However, if we consider the housing quality of the poorest Americans, the improvements go beyond air-conditioning and more square feet. A recent paper in the Journal of Public Economics titled “A Rising Tide Lifts All Homes? Housing Consumption Trends for Low-Income Households Since the 1980s” has important details on these improvements (ungated WP version). In addition to larger homes, there was “a marked improvement in housing quality, such as fewer sagging roofs, broken appliances, rodents, and peeling paint. The housing quality for low-income households improved across all 35 indicators we can measure.”

Overall, the number of poor American households living in “poor quality” housing was roughly cut in half from 1985 to 2021, from 39% to 16% among social safety net recipients, or from 30% to 12% for the bottom quintile. The 12-16% of poor households that still have poor quality housing is much more than we would like, but these are dramatic improvements over a period when many claim there was stagnation in the standard of living for poor Americans.

This figure from the paper shows the improvements for the different features:

For example, the number of households with no hot water was just 20% of what it was in the late 1980s. Some of the other major improvements are also related to plumbing and water, such as the number having no kitchen sink or no private bathtub/shower, but there was also a big decline in the presence of rodents in the house. All of the 35 indicators they looked at showed improvements, on average a 50% reduction in the number of households with these poor-quality components. This paper only uses data back to 1985, but almost certainly there would be even larger improvements if we used 1971 as the starting point.

While the median new home in 1971 had complete indoor plumbing, this was clearly not true for many poor households even through the 1980s. When we talk about the increasing cost of housing for the poorest Americans, much of that improvement does represent essential quality improvements — and not merely more square feet and air conditioning (though they did get these improvements too).

A Wartime Natural Experiment About Copyright

Joy Buchanan2 Comments

One of the hardest questions in copyright policy is: “What would have happened otherwise?” When Disney lobbies for longer copyright terms or academic publishers defend high subscription fees, we struggle to evaluate their claims because we can’t observe the counterfactual. What would happen to creativity and innovation if we shortened copyright terms or lowered prices?

This is what makes Biasi and Moser’s 2021 study in the American Economic Journal: Microeconomics valuable. They examine a rare “natural experiment” from World War II – the Book Republication Program (BRP) – which provides insights into how copyright affects the spread and use of knowledge.

In 1942, the U.S. government allowed American publishers to reprint German scientific books without seeking permission from German copyright holders (though royalties were still paid to the U.S. government). This created a test case: German books suddenly became cheaper, while similar Swiss scientific books (Switzerland being neutral in the war) maintained their original copyright protection and prices.

This setup lets us answer the counterfactual question. What happens when you maintain basic royalty payments but prevent monopoly pricing? The researchers compared the same book before and after the policy change, German books versus Swiss books, areas near libraries with these books versus those without, and usage by English-speaking scientists versus others. Such comprehensive comparison groups are rarely available in copyright research.

The authors report that when book prices fell by 10%, new research citing these books increased by 40%. The benefits spread beyond elite institutions, with new research clusters emerging wherever scientists gained access to these books. This does not appear to just be shifting citations from one source to another – there was genuine new knowledge creation, evidenced by increased patents and PhD production.

Such clean natural experiments in copyright policy are rare (there are a few laboratory experiments). Most changes come from lobbying (like the “Mickey Mouse Protection Act”) or technological disruption (like music streaming), making it hard to isolate the effects of copyright itself. The BRP provides uniquely clear evidence that moderate copyright protection – rather than maximum protection – might better serve innovation.

As we debate copyright terms and academic paywalls today, this historical accident of war gives us something valuable: empirical evidence about what happens when you find a middle ground between total copyright protection and unrestricted access.

Biasi, Barbara and Petra Moser. 2021. “Effects of Copyrights on Science: Evidence from the WWII Book Republication Program.” American Economic Journal: Microeconomics, 13 (4): 218–60.

¡Hedonic Frijoles! …And Televisions!

Zachary Bartsch1 Comment

You may have seen on your social media recently that the price of TVs has fallen 98% since 2020. That’s certainly what the data from the BLS says. This would seem to imply that a one-thousand dollar TV in the year 2000 would now be priced at $20. While we have seen amazing things in the market for TVs, we’re not seeing $20 TVs.  One take away might be that the data is just wrong. But that data is always wrong. The question is how the data is wrong and whether it’s a problem.

The reason for the disagreement between the data and the price on the shelves is due to something called ‘Hedonic Adjustment’. The idea is that some goods have quality features that change over time, even if the price doesn’t change so much. In the case of TVs, we might see higher resolution, flatter screens, larger screen sizes, smart features, etc. TVs are not a stable set of qualities. They are a bundle of characteristics, and those characteristics have some wiggle room while still satisfying some sensible criteria for being a TV. In theory, every single good is a bundle of services that we value. The reason that the some CPI categories have fallen so much is not only because the price has fallen necessarily. Rather, the amount of services that we get from a TV has increased so that each dollar that we spend can purchase more of those TV features.

Continue reading for the gif.

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2024 in Books

James BaileyLeave a comment

Quick thoughts on what I read in 2024- though note that none of these were published in 2024, since almost all the best stuff is older. First some econ books I reviewed here this year:

Rockonomics– “Alan Kreuger’s 2019 book on the economics of popular music…. a well-written mix of economic theory, data, and interviews with well-known musicians, by an author who clearly loves music.”

We’ve Got You Covered– “Liran Einav and Amy Finkelstein are easily two of the best health economists of their generation.… while I don’t agree with all of their policy proposals, the book makes for an engaging, accurate, and easily readable introduction to the current US health care system.”

The Psychology of Money– “Morgan Housel’s Psychology of Money is not much like other personal finance books…. The book is not only pleasant to read, but at least for me exerts a calming effect I definitely do not normally associate with the finance genre, as if the subtext of ‘just be chill, be patient, follow the plan and everything will be alright’ is continually seeping into my brain.”

One Up on Wall Street– “Peter Lynch was one of the most successful investors of the 1970’s and 1980’s as the head of the Fidelity Magellan Fund. In 1989 he explained how he did it and why he thought retail investors could succeed with the same strategies”

Leave Me Alone and I’ll Make You Rich– “a 2020 book by Dierdre McCloskey and Art Carden…. attempts to sum up McCloskey’s trilogy of huge books on the ‘Bourgeois Virtues‘ in one short, relatively easy to read book”

Non-fiction I didn’t previously mention here:

The Simple Path to Wealth (JL Collins, 2016): the book is indeed simple, and its advice is indeed likely to leave you fairly wealthy in terms of money. One sentence summarizes it well: save a large portion of your income and invest it in VTSAX, and perhaps VBTLX. Easy to read, a bit like reading a series of blog posts, which is how much of the material originated. Good introduction to the lean-FIRE type mentality. But the book, like that mentality, is too frugal and debt-averse for my taste, and I say that as someone much more frugal and debt-averse than the average American.

The Great Reversal: How America Gave Up on Free Markets: Thomas Philippon argues that markets have been growing less competitive in America because of weakening antitrust enforcement, and that this has harmed consumers and productivity. He acknowledges that over-regulation can also harm competition, but clearly thinks antitrust is much more important; I think otherwise and didn’t find the book convincing. He sets European markets as an example for what America should aspire to, which means the book has aged poorly since its 2019 publication. It still of course has some value, and I may do a full review at some point.

The Storm Before the Storm: The Beginning of the End of the Roman Republic (Mike Duncan, 2017): Non-fiction but more exciting than most novels. A story of obvious importance to those who worry about modern republics teetering, but fresh compared to the much more famous events around Julius and Augustus Caesar and the ‘official’ fall of the Republic. Though arguably the Republic fell in the 80s BC, not the 40s- the book explains that Rome was taken over three times in this era by armies seeking political change.

Self-Help Is Like a Vaccine: Essays on Living Better: Nice collection of Brian Caplan blog posts on the subject.

Fiction:

Ivanhoe (Walter Scott, 1819): A particularly medieval telling of the Robin Hood tale, with a focus on the nobility and knights of England at that time. Chivalric romance, trial by combat, storming a castle. Highs are high but it needed an editor, could be cut by at least 1/3 without losing anything.

Kim (Rudyard Kipling, 1901): Three books in one, all excellent: a coming of age story, a spy thriller, and a portrait of the many different types of people and religions to be found in India around 1900. All wrapped together with beautiful English prose that makes heavy use of Indian loan words.

Final Thoughts:

Obviously I’m not Tyler Cowen reading a book a day, unless you count the kids books I read to my 1-year-old. But overall 2024 was a good year, better than I realized before I put this post together. Partly I credit the 1-year-old who wants to take my phone and computer but doesn’t mind when I have a book in my hands.

Red Lobster Out of Bankruptcy Proceedings, Set Up to Be Plundered Again by Private Equity

Scott Buchanan1 Comment

Red Lobster is a large, historic seafood restaurant chain operating in the U.S. and Canada. Last summer I wrote on how it got driven into bankruptcy: How an All-U-Can-Eat Special Driven by a Controlling Investor Pushed Red Lobster Over the Edge

Red Lobster used to be a pretty profitable business. Then in 2014 its owners sold it to a private equity firm called Golden Gate Capital. This private equity firm promptly plundered Red Lobster by selling its real estate out from under it, with those funds going to the PE firm. Instead of owning their own land and buildings, now the restaurants had to pay rent to landlords.  This put a permanent hurt on the restaurant chain’s profits. I don’t know this as fact, but because it is part of the usual PE playbook, I assume that the PE firm also made Red Lobster issue debt (bonds) so the PE firm could further plunder Red Lobster by having it pay “dividends” to its PE firm owners, using the money raised by issuing the bonds. After this glorious financial engineering, the private equity firm in 2019 sold a 49% stake to a company called Thai Union. Thai Union bought out the rest of Red Lobster ownership from Golden Gate in 2020.

Thai Union did a poor job managing the U.S. based restaurant chain, forcing cost-cutting measures that were counterproductive, and finally forcing a continual all-you-can-eat shrimp special, against the better judgment of on-the-ground Red Lobster management. That shrimp special made Red Lobster buy a lot of Thai Union’s shrimp, but led to large losses last year. The business had been suffering for a couple of years, with Covid shutdowns and competition from nimbler eateries, but the losses from the shrimp special sent it scurrying for bankruptcy protection back in May.

There are two main flavors of business bankruptcy. The direst form is Chapter 7, where the assets of the firm are sold off to meet obligations to creditors, and the firm goes out of business.

The more common form is Chapter 11, where the intent is to keep the business going (see Appendix). Somebody gets stiffed in the process, of course. Usually, common shareholders get almost nothing except maybe a reduced number of shares in the reorganized company. Preferred shareholders often get a few more shares. Unsecured bondholders may get 30-40 cents on the dollar as a settlement, or a reduced amount of bonds in the new company, or maybe stock shares. Sometimes the company will issue a new set of bonds which are “senior” to the old bonds, which reduces the value of old bonds. Other unsecured creditors like vendors may get something like 50 cents on the dollar.  

Secured creditors are higher up in the pecking order, and so often get higher recoveries. (The “covenant” for a bond or loan would specify if the loan is secured by, say, the value of the equipment in the restaurant).

Red Lobster restaurants have kept operating this year (2024), while creditors were kept at bay via the protection offered by the bankruptcy filing. As of September, Red Lobster emerged from the chapter 11 bankruptcy. A private equity group has taken over operations. They have injected some $60 million cash, which is actually not very much for this situation.

I was curious about what happened to Red Lobster’s creditors, such as vendors and bond holders. A first-level internet search, even with AI help, did not tell me how they fared as part of the settlement. I had read earlier this year that Red Lobster had something like $ 1 billion in debt, so I assume that a lot of bondholders got stiffed in this process.

In May the company announced that it had “ voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida. The Company intends to use the proceedings to drive operational improvements, simplify the business through a reduction in locations, and pursue a sale of substantially all of its assets as a going concern…Red Lobster’s restaurants will remain open and operating as usual during the Chapter 11 process, continuing to be the world’s largest and most-loved seafood restaurant company. The Company has been working with vendors to ensure that operations are unaffected and has received a $100 million debtor-in-possession (“DIP”) financing commitment from its existing lenders.”

The “working with vendors” is an important piece here. When I peered at the official Red Lobster court bankruptcy website to try to glean more intel on the fate of the creditors, there was a list of leading “Unsecured Creditors”. These included Pepsico (supplying beverages) and Gordon Food Services, a major Canadian food supplier, as well as the owner of the store properties (Realty Income Corporation), which was presumably owed a lot of unpaid back rent.

Ironically, after one private equity firm plundered Red Lobster, then sold it to the hapless Thai Union (which ended up taking a $540 million write-down on their investment), the restaurant chain is now in the hands of yet another PE firm. I could not find definite information on the deal, but again we may assume that the PE firm got the creditors (bondholders, vendors, etc.) to accept “haircuts” on what they were owed, as opposed to getting almost nothing if Red Lobster went Chapter 7 and shut down. Thus, the new PE firm will start off with a relatively virgin company to plunder again.

My Brave AI search agrees with that assessment:

The company’s restructuring efforts may prioritize the interests of new investors and creditors over those of existing bondholders, potentially resulting in a less favorable outcome for bondholders… It is likely that the bondholders will be subject to a restructuring plan that may involve debt forgiveness, debt-for-equity swaps, or other arrangements that could result in a loss of principal or interest for the bondholders.

Side comment: If you, too, want to feed at the trough of private equity, there are a number of PE firms you can buy stock shares in so you can join in their profits. See 50% Endowment Returns Driven by Private Equity Investments: How Rich Universities Get Richer (But You Can, Too) .

APPENDIX: EXPLANATION OF CHAPTER 11 BANKRUPTCY

The text below is from the North Carolina bankruptcy law firm Stubbs Perdue:

Chapter 11 bankruptcy is a legal process that allows businesses to reorganize their debts and operations while continuing to operate. Unlike Chapter 7, which involves liquidating assets to pay off creditors, Chapter 11 aims to restructure a company’s obligations to improve financial stability and pave the way for future growth. Chapter 13, on the other hand, is typically reserved for individuals with a regular income, focusing on debt repayment plans.

Typical Chapter 11 Process

Chapter 11 process typically involves several key steps:

  • Filing the Petition: The process begins with the company filing a petition in bankruptcy court.
  • Developing a Reorganization Plan: The company works with its creditors to create a plan that outlines how it will restructure its debts and operations.
  • Negotiating with Creditors: The plan is subject to approval by the court and the creditors, who may negotiate the terms to protect their interests.

Throughout this process, the court plays a supervisory role to ensure fair treatment of all parties involved.

Tariffs: Bad for Revenue

Zachary Bartsch3 Comments

Economists are pretty united against tariffs. There are lots of complicated arguments. Keeping things simple, one reason is that they are bad for welfare. President-elect Trump seems to imply that tariffs can raise a lot of government revenue. But in lieu of what? The Tax Foundation estimates that there is absolutely no way that tariffs can replace all revenue from income taxes. The primary reason that they cite is that imports compose a tiny portion of the potential tax base. There are plenty of goods and services produced domestically that wouldn’t be subject to the tariffs. Any time we add a tax exemption, we’re adding complication, higher compliance costs, and distorting consumption patterns, etc.

For this post I singularly focus on the tax revenue.  In fact, let’s demonstrate what *maximizing* tax revenue looks like under three cases: 1) Closed economy with a tax, 2) Open economy with a tax, & 3) Open economy with a tariff. I’ll use some simple math to demonstrate my point. None of the particulars affect the logic. You’ll reach the same general results with different intercepts, slopes, etc. Let’s start with a domestic demand and domestic supply.

Closed Economy with a Tax

Whenever tax revenue is raised, there is a difference between the price paid by demanders and the price received by suppliers. In a closed economy a tax might be imposed on all goods. In these examples, I treat the tax as some dollar per-unit of output tax. But it’s a short jump to percent of spending taxes, and then another short jump to percent of income taxes. With this in mind, demanders pay more than the suppliers receive by the amount of the tax. Tax revenue is the tax rate times the number of units of output that are subject to the tax. That’s the thing we want to maximize.

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What I Learned from Erwin Blackstone

James Bailey4 Comments

I’m told that Professor Erwin Blackstone died earlier this year, but I haven’t been able to find anything like an obituary online; consider this a personal memorial.

I knew Dr. Blackstone first as the professor of my Industrial Organization class at Temple University, where he taught since 1976. He was a model of how to take students seriously and treat them respectfully; he always called on us as “Mr./Ms. Last Name” and thought carefully about our questions.

Of course I learned all sorts of particular things about IO, especially US antitrust law and history- from Judge Learned Hand and baseball’s antitrust exemption to current merger guidelines and cases. I would later ask Dr. Blackstone to join my thesis committee, where he would heavily mark up my papers with comments and critiques.

He was a key part of how I was able to become a health economist despite the fact that Temple lacked a true health economist on the tenure-track economics faculty while I was there (as opposed to IO or labor economists who did some health). Blackstone’s coauthor Joseph Fuhr– a true health economist who also had Blackstone on the committee of his 1980 dissertation- came part-time to teach graduate health economics. Blackstone and Fuhr worked together to write the health economics field exam I took.

Finally, I learned from Blackstone by reading his papers. While he wrote many on health economics, my personal favorite was his work with Andrew Buck and Simon Hakim on foster care and adoption. It convincingly demonstrated the problems of having one fixed price in an area that most people don’t think about as a “price” at all- adoption fees. Having one fairly high fee for all children means the few seen as most desirable by adopting parents (typically younger, whiter, healthier) get adopted quickly, while those seen as less desirable by would-be adoptive parents linger in foster care for years. Like much of his work, it pairs a simple economic insight with a rich explanation of the relevant institutional details.

Academics hope to live on through our work- through our writing and the people we taught. Having taught many thousands of students at Cornell, Dartmouth, and Temple over 55 years, served on dozens of dissertation committees, and published over 50 papers and several books, I expect that it will be a long, long time before Erwin Blackstone is forgotten.

Source: Academic Tree. Charles Franklin Dunbar founded the Quarterly Journal of Economics in 1886.

Nintendo vs Nintendo: Time Prices of Video Games in 1986 and 2024

Jeremy HorpedahlLeave a comment

For decades one of the most popular Christmas gifts for kids (and often adults) has been video game systems. And Nintendo has long been a dominant player in this market: the original NES arguably launched the modern gaming market in 1986 (even though it wasn’t the first, it was the first blockbuster) and Nintendo’s latest offering, the Switch, is now the best-selling console ever in the US.

As we often ask on this blog: has it become more or less affordable for an average worker to buy this iconic Christmas gift (or even buy one for yourself)?

When it comes to the consoles themselves, the Switch and NES are, perhaps surprisingly, equally affordable. The original NES cost $90 in 1986, while the Switch costs $300 today. Average wages in late 1986 were $9/hour and they are about $30/hour today. So in both years, it took about 10 hours of work to buy the console (alternatively, it’s about 25% of median weekly earnings in both years).

But as any serious gamer will tell you, the individual game cartridges can cost as much or more than the console if you want to play a lot of games. For example, the games available in the 1986 Sears catalog ranged from $25-$30. To buy just the 10 games in that catalog would cost $275 — over 30 hours of labor at the average wage, or about 3 hours of labor per game.

Today there is a wider range of prices for games, but the most expensive Switch games are around $60, or just 2 hours of labor at the average wage. There are also plenty of games around $30, or just 1 hour of labor.

The challenge with the comparison is that video games today are much higher quality, challenging, and advanced in so many ways. Is there any way to make a more direct comparison?

Yes. Nintendo offers an annual subscription for $20 to Nintendo Switch Online. Included in the subscription is access to nearly every NES game, plus Super Nintendo and Gameboy games. Not only do you get the 10 games from the 1986 Sears catalog, but many dozens more. All for less than $1 hour of labor at the average wage.

In other words, for 30 hours of labor today (the time to purchase those 10 original NES games), you could buy about 46 years worth of subscriptions to Nintendo online. That’s almost a lifetime of video game play, with many more advanced games.