The Taxman Comes for Homer

Jeremy Horpedahl1 Comment

Last week I wrote about the Simpsons’ mortgage payment. In short, I found that using a reasonable assumption of Homer’s income, the median housing price, and the rate of interest, the Simpsons are likely paying less of their household budget on housing today than in the 1990s.

But what about the family’s taxes? Are they getting squeezed by the taxman? Taxes are referenced throughout The Simpsons series. Here’s an article that collects a lot of the references. And that makes sense: the Simpsons are a normal American family, and normal American families love to complain about taxes.

Using the same reasonable assumption about Homer’s income from last week’s post (that Homer earns a constant percentage of a single-earner family, rather than merely adjusting for inflation), we can calculate the family’s average tax rate and how it has changed over the year. Conveniently, “average tax rate” is just economist speak for “how much of your family’s budget goes to the government.”

First, let’s just look at the federal income tax, since this is where most of the changes happen. Don’t worry, I’ll add in payroll taxes below, though this is a constant percent of the family’s budget since it is a flat tax on income!

The chart below shows the average tax rate the Simpsons paid for their federal income taxes. I didn’t go through every year, because: a) it’s a lot of work (I’m doing each year manually); and b) it’s more interesting to look at years right after or before major changes in the tax code. So no cherry picking here — the years selected are picked to tell a mostly complete story.

I’ll now briefly explain each of the years chosen, and what changes in the tax code impacted the Simpsons. But as you can see, just like their mortgage payment, the Simpsons are now spending less of their household income on federal income taxes (don’t worry, the trend is similar with payroll taxes included). In fact, they are now getting a net rebate from the federal government, and have been since the late 1990s!

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How Volodymyr Zelenskyy Went from Playing the Ukrainian President in A Sitcom to Actually Being the Ukrainian President

Scott BuchananLeave a comment

The man of the hour is Volodymyr Zelenskyy. Russia underestimated the amount of resistance they would face in their invasion of Ukraine, and Zelensky is the heart and face of that resistance. The usual pattern in countries like Ukraine with a history of corrupt leadership is that when hostile armies close in on the capital, the leaders stuff money and jewels into suitcases and disappear to some safe haven (think: Afghanistan). Zelensky has chosen to stay and fight against Vladimir Putin, a man with a fearsome reputation for brutal military tactics (see: Chechnya and Syria) and for political assassinations.

Where did Zelenskyy come from? American politicians are nearly all lawyers or businessmen. Zelenskyy was a professional comedian. He did get a law degree, but then went into stage and film comedy. He starred in a number of lightweight films such as Love in the Big City,  Office Romance, and the zany Rzhevsky Versus Napoleon:

In 2015 the actor created, produced and starred in a comedic television series, Servant of the People:

In this political satire, a young high school teacher happens to let loose with a rant about corruption in Ukraine. One of his students captures this rant on his phone and puts it out on the internet. That YouTube video goes viral, and (to his complete surprise) the teacher gets elected president of Ukraine. He then proceeds to govern honorably, amidst various comedic situations.

In a case of life-mimics-art, the real Zelenskyy ran for the presidency of the country in 2019. Fueled by the popularity of the TV series, Zelenskyy’s campaign was almost entirely virtual. It succeeded in unseating the incumbent candidate, with Zelenskyy receiving a landslide 73% of the vote.

Although his Ukrainian presidency began on a whimsical note, it has turned into a global epic. However, it is difficult to envisage an ending to this epic that is not tragic. Drawing on his acting skills, Zelenskyy has been a master of internet communications in the present crisis, but there is only so much that can be done in the face of hard military realities. While the images of Ukrainian resistance are inspiring, the Russians have far greater military might and have the will to employ it as needed. And as long as Europe continues to fund Russia by guzzling Russian natural gas, sanctions can only bite moderately hard.

Putin vs. the Cost Disease of Better Lives

mdmakowsky2 Comments

The Ukraine is as of this writing holding its ground and cities against the invading Russian army. There are a host of reasons, from incredible Ukrainian bravery, unmatched global sanctions clamping down on the Russian economy, to tactical and military failure on the part of Russia. There is nothing I can contribute beyond the linked sources or the constant flow of information coming out in real time. What I would like to add is one bit of broad economic context.

Baumol’s famous “cost disease” idea works like this: as a society gets richer the opportunity cost of everyone’s time increases. This makes certain services, like getting a haircut, more expensive because there is no substitute for a person’s time, no technology to increase labor efficiency, when it comes to cutting hair. Economists never stop speaking of the opportunity cost of time, but I sometimes think we undersell the importance of the concept. Lives are finite, time is the only thing that matters. To say that the opportunity cost of time has increased is to say that lives have been made better. Baumol’s cost disease restated: Anything that improves a person’s life makes claims on their time more dear.

The same logic applies to risk and to armies. Military technology continues to advance, but there as yet remains no substitute for soldiers, particularly if you want to occupy territory (there are plenty of superior substitutes if you just want to take lives and scorch the earth, but thats a different story). While the “labor productivity” of soldiers as occupying forces has remained relatively stagnant, the lives of the soldiers themselves has improved with everyone else’s. As their lives improve, the bar for what they are willing to risk their lives (and their conscience) for gets higher. For Ukrainians defending their homes and families from invaders, the risk is more than worth it and they are awing the world with their bravery everyday. Russian soldiers, on the other hand, are surrendering, scrolling Tinder, and abandoning tanks.

When historians point to generals making the mistake of fighting the “previous war”, they are usually referring to the obsolescence of tactics by new military technology. What I would like to consider is the possibility of Putin trying to fight a war with the previous soldiers. The last time the Russian army marched into a country prepared to offer significant resistance was the Soviet invasion of Afghanistan (Crimea, to my understanding, was never in a position to offer significant miltary resistance). Russian soldiers and their families today have very different lives. Only a quarter are conscripts, and none are facing a life without options outside of the army. The state is not the sole means of earning a living. The Russian market may be fractured and corrupted by a kleptocratic regime, but it’s still a market, one which has led to tremendous improvements in the quality of life enjoyed by citizens. These aren’t men and women enlisted into a religious or philosophical crusade, let alone ordinary men and women fighting to keep their homeland. Soldiers have lives they don’t just hold dear for the sake of survival – they have lives in the modern world they actively enjoy.

There have been no shortage of pundits who, in the form of cliched memes and cosplay masculinity, have speculated that nations of the developed world would not sufficiently come to the aid the Ukraine, or any country invaded by a foreign power, for the simple reason that we have, in our modern decadence, grown soft. What they consistently fail to appreciate is that this is a great outcome. People holding their lives with greater value is the very definition of progress. What is most perplexing, however, is why this idea of softness born of wealth is not applicable to Russians. (As for the theory that the Ukraine would fold overnight because it doesn’t make enough babies, that theory looks less viable, even if Russia achieves any of their goals.)

Working down the supply chain

Now, let’s be clear: soldiers are soldiers, and they are still more likely than not to obey orders and carry out their duties, if nothing else then out of a sense of obligation to one another. The opportunity cost effects of improved private lives are no doubt dampened. But armies depend on a lot more than just soldiers.

Russia remains, relative to the West, a poorer country in terms of GDP per capita, but nonetheless a modern economy where individuals enjoy the luxuries of a developed economy: mobile phones, heat in the winter, food security, transportation, etc. History is filled with stories of wars won and lost because of lack for boots, gasoline, and coats. In the Soviet Union, the army may have been underprovisioned relative to their counterparts from wealthier market economies, but they weren’t beholden to the rules of a market economy. Exclusion from a global system of payments wouldn’t be able to immediately choke off resources. Even if the soldiers marching are entirely severed from their lives in the private market, the supply chains they depend on are not, and the civilians in that supply chain expect to get paid.

Did Putin expect that supplies would arrive while the Ruble plummeted? Did he expect middlemen to incur losses as the entire economy was frozen by global sanctions? Did he expect reliable logistical support from soldiers and civilians while their spouses lined up at ATMs during bank runs? You know what? Maybe he did. Or at least, maybe he thought that the Ukraine would capitulate before sanctions could become salient to the supplying of his army. I have no idea. What I want us to consider is that modern armies depend on more than soldiers to function. Without a monopoly on means for supporting a family or an omnipresent threat of the Gulag, armies depend on citizens who can look at the physical and economic risk they are taking on, and coming to the conclusion that “this is worth it.” I have a hard time believing any Russian citizen, wage earner or oligarch, is looking at what is already an economy-enveloping sinkhole borne of greed for historical infamy, and thinking this is worth it for anyone but Putin himself.

This context of war in a time of better lives places economic sanctions as a geopolitical tool in a new light. Most countries cannot hope to put together an irresistible military force without the resources of a modern developed economy. A modern developed economy will invariably lead to wealthier citizens with a greater opportunity cost of time and risking their lives. The military will, in turn, become more dependent on private citizens to provision their armies. Sanctions in this new world don’t just punish citizens and encourage some form of open revolt, they actually choke off the military from the economies they remain entirely coupled to and dependent on.

If Putin is repelled, it will more than anything be because of the bravery of 44 million Ukrainians who stood their ground and protected their homes. But the military lesson, the historical lesson, may very well be that men and women with good lives make for poor invaders. The best, most peaceful future might just be one where we all have too much too lose.

Brief Addenum: How this “cost disease” effect would impact the probability of a nuclear strike is complex and in no way clear to me. On the one hand, if Putin believes that he has no possibility of victory without a credible threat of a strike, then it raises the possibility of war, if only through greater chance of error admidst readiness. On the other hand, it’s not like there are no middlemen between Putin and “the button.” Each link in that chain may be more likely to be insubordinate if they view their modern life as too great a sacrifice. I just don’t know.

“Using word analysis to track the evolution of emotional well-being in nineteenth-century industrializing Britain”

Vincent Geloso1 Comment

This is the title to a paper in Historical Methods that I believe should convince you of two things. The first, and this applies to scholars in economic history, is that the journal Historical Methods is a highly interesting one. It tends to publish new and original work by economists, historians, sociologists and anthropologists who are well-versed in statistical analysis and data construction. The articles that get published there often offer a chance to discover solutions to longstanding problems through both interactions of different fields and the creation of new data.

The second is that it is becoming increasingly harder to hold the view that the industrial revolution was “a wash”. I described elsewhere this view of the industrial revolution as a wash as believing one or more of the following claims: “living standards did not increase for the poor; only the rich got richer; the cities were dirty and the poor suffered from ill-health; the artisans were crowded out; the infernal machines of the Revolution dumbed down workers”. Since the 1960s, many articles and books have confirmed that the industrial revolution was marked by rising wages and incomes as well as long-run improvements in terms of nutrition, mortality and education. The debates that persist focus on the pace of these improvements and the timing of the sustained rise that is commonly observed (i.e. when did it start)

The new paper in Historical Methods that I am mentioning here suggests that these many articles and books are correct. The author, Pierre Lack, takes all the 19th century pamphlets published in Britain and available online to analyze the vocabulary contained within them. Lack’s idea is to use the fact that books became immensely cheap (books were becoming more affordable through both falling prices and rising incomes — see table above) to evaluate emotional well-being by the words contained in them. What Lack finds is that there were no improvements in emotional well-being as proxied by the types of words in those pamphlets.

But how could this be positively tied to the industrial revolution as not being a wash? This is because, if you believe that there is such a thing as a hedonic treadmill (i.e. more income only allows us to actualize upward our preferences so that the income has no impact on happiness), you cannot hold many of the beliefs associated with the industrial revolution being a wash. For example, if you think that living standards for the poor did not rise while other dimensions of their well-being (e.g., health, environment of the city, working conditions) fell, then there the graph produced by Lack should have exhibited a downward trend!

This is not the only belief associated with the “industrial revolution was a wash” view that cannot withstand Lack’s new paper. One frequently advanced factor that purportedly affects emotional wellbeing is inequality. Because we care about our relative position (e.g., I am happier if my neighbor have a worse car than me), rising inequality should be associated with falling emotional well-being (that was for example the case that the Spirit Level of Wilkinson and Pickett tried to advance). However, if you believe that Britain enjoyed rising inequality (it did at first and it then fell according to Jeffrey Williamson who shows that inequality rose to 1860 and fell to 1913), then Lack’s data should show falling emotional well-being. It does not which means that it is quite hard to hold the view that the revolution was a wash.

This is probably my favorite paper at Historical Methods and I hope you will like it too. I also hope that you will add it to your list of articles to inform your own research.

How to Set Working Directory in R for Replication Packages

Joy BuchananLeave a comment

The AEA Data Editor kicked it all off with this tweet:

“Please stop using “cd” (in Stata) or “setwd()” (in R) all over the place. Once (maybe, not really), that’s enough.”

Replies proliferated on #EconTwitter this week. In this blog post I am collecting solutions for R.   These days you might share the code used to generate your results for an empirical paper. That code would ideally be easy for other people to run on their own computers. File paths are hard (as I blogged previously).

A project for a single paper might have multiple code files. The code interacts with data stored somewhere. Part of the task of the code is to point the statistical program to the data set. It is frustrating if an outsider is trying to replicate a result and must alter the code in multiple places to point to their own location of the data.

Here is a concise summary of good practice, for any code language: “cd and setwd() specify the directory. When you share code and run on a different computer, they don’t work. Therefore, good practice to only specify once, at the beginning”

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Inflation Empirics

Zachary Bartsch2 Comments

Way back in the late 1970s and early 80s, Kydland and Prescott proposed rational expectations theory. This line of research arose, in part, because the Phillips curve ceased to describe reality well. Amid increasing inflation, people began to anticipate higher prices to a relatively correct degree when making labor, supply chain, and pricing decisions. Kydland and Prescott argued that individuals understand the rules of the game or how the world works – at least on average.

An increase in the money supply would increase total national spending, and increase demand for goods. However, firms also experienced increasing revenues and demanded more inputs such as commodities, capital, and intermediate goods. Because there were no greater productivity earlier in the supply chain, price roses. Firms began to understand that greater demand would eventually find its way to causing greater costs. Therefore, firms began raising prices before the cost of resources rose, increasing their willingness to pay for inputs and, ironically, hastening the increase in input prices. As a result, increases in the money supply began having substantial short-run price effects and negligible output effects.

However, assuming that people understand the rules of our economic system and ‘how the world works’ is hard to swallow. It is not at all clear that the typical economist understands monetary theory, much less clear that the typical person has a good understanding. Fortunately, another theory of expectations can help carry some of the load and achieve similar results.

Adaptive Expectations

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Economics of the Russia-Ukraine Conflict

James Bailey4 Comments

Russia launched a full invasion of Ukraine last night. Most of the discussion I’ve seen has naturally focused on the fighting itself- what is happening, what is likely to happen, how did it come to this.

Since there are plenty of better sources to follow about that, I’ll simply offer a few observations on the economics of the conflict:

  1. Russia is not only more than 3 times as populous as Ukraine, it also more than twice as well off on a per-capita basis. This means its overall economy is more than 6 times the size of Ukraine’s. This gap has been growing since the fall of the Soviet Union, as Russia’s per-capita GDP growth has been much stronger, while its population has shrunk much less than Ukraine’s. Putting this together, Ukraine’s measured real GDP is actually smaller than it was in 1990, while Russia’s is larger.

2. Russia’s much larger economy allows it to spend much more on its military. Russia spends $60 billion per year, the 4th most of any country (after the US, China and India). Ukraine spends only $6 billion per year on its military. So Russia is starting with a big economic advantage here, though Ukraine has some of its own advantages, like fighting on their own ground and receiving more foreign support.

3. War is bad for business. Russian stocks are down 33% in a day, their biggest-ever loss; Ukraine shut down trading entirely, and their bonds are being hit even worse than Russia’s. Regardless of which side “wins” the fight for territory, both countries will be economically worse off for years as a result of the war.

4. Russia, though, expected that the war would lead to sanctions from the West that would harm their economy, and prepared for this by building up hundreds of billions of dollars worth of foreign reserves over many years.

5. US markets are down only slightly, much less than they would be if traders thought the US would get involved directly in the fighting. But this slight overall decline conceals huge swings. Companies that do business in Ukraine or Russia are big losers. But those that compete with Russian exports see their value rising given the expected sanctions. Because Russia’s biggest exports are oil and natural gas, the value of US-based oil & gas companies is rising, while alternatives like solar are also up substantially.

6. There is still some hope for Ukraine to expel Russian troops, but its not looking good, and even a victory would involve huge costs. This leaves people all over the world wondering, how did it come to this? How might future conflicts like this be avoided? There is of course a lot to say about military preparedness, nuclear umbrellas, and ways the West can impose costs on Russia as a deterrent. But what stands out to me is that a stagnant economy and shrinking population make a country weak and vulnerable. Ukraine has a worse economic freedom score than Russia; this combined with its relative lack of natural resources explains much of the stagnation. Political elites often focus on grabbing a large share of the pie, rather than growing the pie and risk empowering domestic opponents. But we’re now seeing how stagnation carries its own risks. A growing economy, and especially growing energy sources that don’t depend on hostile nations, is the path to independence and survival.

Home(r) Economics

Jeremy Horpedahl5 Comments

Is it harder to buy a home today than in the past? Many seem to think so. Lately, some people have used the example of the fictional Simpsons family to make this claim. A recent Tweet with around 100,000 likes expressed the sentiment:

The unspoken implication is that today a “single salary from a husband who didn’t go to college” couldn’t buy a typical home in the US. Or at least, it would stretch your budget so thin that you would have to give up something else or need two incomes to support that lifestyle (famously dubbed “the two-income trap” by Elizabeth Warren).

And it’s not just a Tweet that caught fire. A December 2020 article in the Atlantic claimed “The Life in The Simpsons Is No Longer Attainable” and used housing as a prime example. And while a 2016 Vox article on Homer’s many jobs doesn’t mention the cost of housing, they draw a similar conclusion and implication: “Homer Simpson has gone nowhere in the past 27 years — and the same could be said of actual middle-class Americans.”

But is this an accurate picture of the Simpsons family over time? And does that picture accurately represent a typical family in the US? Let’s investigate. And let’s start by pointing out that as measured by the availability of consumption goods, the Simpsons do see rising prosperity over time. They have flat screen TVs now, instead of consoles with rabbit ears, as the late Steve Horwitz and Stewart Dompe point out in their contribution to the edited volume Homer Economicus. But with all due respect to my friends Steve and Stewart, I don’t think many would deny that TVs, cell phones, and computers are cheaper today than in the 1990s. The familiar refrain is “but what about housing, education, and health care?”

In this post I want to take on the question of housing, partially by using the Simpsons as an example. My main result is this chart, which I will present first and then explain.

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Economics of an Alabama Small Farm Homestead

Scott BuchananLeave a comment

When I took a trip to Alabama a couple of months ago, I visited a small farm about an hour’s drive south of Birmingham. The proprietor of Rora Valley Farms, Noah Sanders, makes a living for his family mainly by selling vegetables from a garden plot, plus raising chickens for selling eggs and meat. I was curious as to how he manages to do this, since the usual model of agriculture is to operate at large scale, with big machines efficiently  plowing and harvesting hundreds and thousands of acres.

I had read online about a low tech, compost-intensive method of farming developed in Zimbabwe called Foundations for Farming. This method  has proven extremely successful in southern Africa at mitigating food insecurity; I posted a longish description of it at   “Pfumvudza” Planting Technique Revolutionizes Crop Yields in Zimbabwe.   Noah is listed as the U.S. representative for Foundations for Farming, which led me to contact him.

The Modern Homesteading Movement

The most fundamental aspect of his operation is not the specific crops he grows. Rather, it is the overall vision than he and his wife have for their lives and their family. Trying to start up a small farm is not something folks do just for the money. There are much, much easier ways to make a buck.

The Sanders are part of a small but growing homesteading movement. It is hard to pin down precisely what that means these days, but in general it denotes a lifestyle aimed at self-sufficiency. Thus, homesteaders grow a large portion of the food they eat, and often install solar panels and rain catchment systems to reduce dependence on the electrical and water grids. Raising chickens for eggs and meat is common. All this can be done in a suburban or even an urban back yard; nearly anyone can put in a garden, and some cities allow a few egg-laying hens to be kept (but no roosters, because of the noise nuisance). More typically, homesteading is done in a rural setting, on maybe 3-10 acres. Most of that acreage would be pasture, to support some larger animals, such as goats, sheep, and pigs, all the way up to cows.

Besides producing more of what you consume, part of the homesteading ethos is to consume less. Instead of buying yet more made-in-China stuff and watching hours of contrived mass media and movies, homesteaders are found making cheese or canning vegetables, or maybe just sitting on the back porch watching the ever-entertaining chickens. To keep overall investment down, a homestead dwelling itself is typically no-frills. You are more likely to see pine boards than designer ceramic tile when you look down at a homestead kitchen floor. Hopefully all this producing more/consuming less allows the adults to spend less time working away from home, and more time with their families. Most homesteaders still need to drive off to work “in town” to make ends meet. Holding down an outside job plus running a farm operation plus doing home-schooling can lead to stress and burnout, even for a strong young couple. A homesteading ideal, therefore, is to be able to support oneself entirely from home-based activities.

A big driver for homesteading is to raise children in a situation where they can see their parents daily working productively, and where the children themselves make genuine contributions to the family’s welfare, rather than being merely consumers that cost the family time and money to entertain and occupy them.   This small-scale, subsistence-type agricultural activity runs contrary to the conventional wisdom that economic welfare consists of increasing specialization and then exchange of goods/services that are produced by efficient specialists.    

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Fame makes for poor human capital

mdmakowsky2 Comments

There’s a concept sometimes floated in academia of being “overqualified”. The story usually starts with a PhD in something either extremely narrow in focus or difficult to imagine having an application in the private sector, and ends with the subject either excluding the PhD from their resume or driving a taxi. The idea is simple – this advanced degree that took years of intense study and effort to acquire has negative signal value in the broader marketplace. It’s the most brutal anecdote highlighting the failure of the Labor Theory of Value I know of.

I think something similar happens with reality television stars. They acquire a level of public awareness and notariety a rung below classic celebrities, but still multiple orders of magnitude more than the average citizen. If they become sufficiently famous they can earn rents off this notariety, at least in the short run. In the long run, however, the source of their fame is external to them (i.e. the show they were featured in), but have no immediate means to keep generating the exposure and public interest. The real problem, however, arrives if they try to re-enter the traditional labor force. They have a huge gap in their resume that requires explanation and haven’t been building human capital in any classic trade (and I very much include acting as a classic trade). Fame makes for fleeting human capital. Fame as capital decays rapidly, while the associated notariety serves as a tax that persists long after that fame has dissipated. This tax most often takes the form of casual harassment, but also includes threats to their privacy and safety. They may find themselves presented with opportunities to appear at bars, concerts, or county fairs for small fees, but these financial stop gap solutions only serve to further maintain what is now costly notariety while still failing to invest in any human capital with long run value.

Which brings me, of course, to JD Vance.

https://twitter.com/EggerDC/status/1495391630668578819?s=20&t=MG7JgWlcefO-kxOBr4-gHw

Cards on the table, I suspect Mr. Vance is not particularly brilliant, but I also doubt he is a complete fool. What I do think is that he has trapped himself in a career path not dissimilar to a reality TV star. Much in a way that a lot of bachelors and bachelorettes think they can build a Kardashian-esque career, Vance thought he could be another Trump. He wrote a successful book and that was made into a film. He dabbled in venture capital and, much like Trump, probably failed (though I can’t really say). What he saw, like Trump, was a path from fame to a career being compensated for that fame. There’s a real chance that it’s not going to work, and forwards inducting from a failed political bid that has included consistently foolish proclamations in an effort to pantomime populist-Trumpism, he doesn’t like what he forsees. Being fame-trapped into a red state fairground fear-mongering stooge might be a way to make a living, but it’s not a living he is particularly excited about.

Fame is a zero-sum tournament, and like a lot of such tournaments the top prize is extremely lucrative. Unlike the basketball or golf, however, the losing here isn’t just costly, its potentially scarring. In this way, it’s a bit more like selling cocaine. You can live a very good life for a while, but if you lose you’re going to have a tough time succeeding at anything else down the line. JD is a shooting his shot, but I don’t think he’s making these sort of aggressive attacks on public figures because he’s excited about being a Senator so much as he’s scared of trying set up a quiet law practice in Ohio and spending the rest of his life explaining to folks he knew in high school what went wrong.