"When $250,000 Equals $315,000"

Good post by David Leonhardt which I've been meaning to link to since it came out (the thing I'll miss most about the holidays is the excuse for procrastination):

There are two aspects of the high-end cuts that often get lost in the public discussion. The first is households with more than $250,000 a year in adjusted gross income would still get a tax cut — on their first $250,000 of such income. On average, this tax cut would equal about $6,500 a year, regardless of whether a household had $250,000 in adjusted gross income or $1 million (or much more) in adjusted gross income. If all the Bush tax cuts are extended, by contrast, households making at least $1 million a year would receive an average annual tax cut of $104,000.

The second issue is that earning $250,000 in adjustable gross income is different from earning $250,000 in total income. High-income households tend to take a significant number of deductions. At our request, Roberton Williams at the Tax Policy Center analyzed the total income of households with $240,000 to $260,000 a year in adjusted gross income. On average, they made $315,000 in adjusted gross income, including $32,000 in capital gains and dividends.

So when you hear talk about taxes on people makes at least $250,000 a year, it really tends to means taxes on income above $315,000 a year.

We have seen numerous pieces telling us how difficult it is to make ends meet on a quarter mil (see Brad DeLong for the latest amusing example). Perhaps when you get closer to a third of a million, life is a bit easier.

"Fixing the economy the scientific way"

Recommended with reservations, this op-ed from the LA Times is worth a read.

Articles that talk about the huge economic pay-offs of scientific research often make me nervous, not because I disagree with the fundamental thesis but because I'm afraid we might make the war-on-cancer mistake, promising an overly specific result in an unrealistic time frame. I also worry about encouraging commentators who argue that we shouldn't bother taking even small steps to address looming problems because some new technology invariably pop up and solve everything.

Take this passage:

Health economists and demographers, surveying the steady aging of the U.S. population, are predicting a dramatic rise in the cost of dealing with neurodegenerative diseases such as Alzheimer's, which already accounts for $172 billion in total spending annually. That number is projected to climb to more than $1 trillion by 2050 as legions of baby boomers reach the age of onset and the population generally ages. Meanwhile, our annual federal Medicare expenditure on Alzheimer's is projected to increase from $88 billion today to $627 billion, far exceeding the current total Medicare budget (about $468 billion this year).

There's just one hope here: scientific advances that will slow the progression of Alzheimer's disease and ultimately uncover a cure. But, ironically, the prospects for scientists who seek federal dollars to study the disease are among the worst in the entire government science infrastructure. The National Institute on Aging, which supports most of this work, is now turning down more than 90% of scientifically meritorious research grant proposals due to an inability to finance them.

Is Alzheimer's research a good use of our money? Almost certainly, but that doesn't mean that these advances will come through or that, if they do, they will arrive in the time to help with the budget problems associated with baby boomers.

Of course, the expected value of this kind of research is very good, particularly when you add in the possibility of an advance in a field that has nothing to do with Alzheimer's. Remember that one of the most profitable drugs in recent memory (Viagra) was originally developed to treat hypertension rather than erectile dysfunction.

Complex Constructs

Andrew Gelman has a very interesting discussion about whether happiness is a U-shaped curve in relation to age. What I found most interesting is how people focused on the "interesting conclusion" (the U-shape) even when there was a broad selection of curves to consider:

At the very least, the pattern does not seem to be as clear as implied from some media reports. (Even a glance at the paper by Stone, Schwartz, Broderick, and Deaton, which is the source of the top graph above, reveals a bunch of graphs, only some of which are U-shaped.)

But what I found the most interesting is that the sub-graphs are on different elements of "well being" (stress, worry,enjoyment happiness, sadness, anger). I wonder if the higher well being among older adults is, in some sense, very different than that of younger adults. Less stress and worry may contribute to increased (overall well being) but it might be a very different positive state than one created by the limitless potential of youth.

So I suppose I wonder if representing a complex vector (as well being has many factors that contribute to it) as a scalar (singl question) might not be eliminating the most useful sources of variability? Even if this approach is the standard in the field, it does not mean that we can't benefit from seeking a more complicated understanding of the phenomenon. I think that Andrew Gelman is on the right track in trying to really understand this complicated (and interesting) relation.

A Quick Christmas Wish

I am hoping that all of you have a prosperous new year, filled with good health and some form of improvement in all aspects of your life.

Merry Christmas

A short letter to James B. Patterson

Dear Mr. Patterson,

I refuse to pick up any book that promotes itself using the word 'unputdownable.'

Sincerely,
M. Palko

If you only read one really long economics lecture this holiday...

Delong, again:

Alexander Hamilton and the Origins of the National Debt: Back in the early 1790s, the national debt was close to 40% of annual GDP. It was close to 40% because the first Treasury Secretary, Alexander Hamilton, thought it was a good idea to make it close to 40%. He convinced congress to let him go to the states and say:

You know all that money you spent winning us our independence from Britain by raising armies during the Revolutionary War? The federal government is going to pay you back for all of that. We in the federal government are going to assume your Revolutionary War debts, and pay off all the bonds you issued at full face value.

Alexander Hamilton did this for three reasons. One was he had a bunch of friends who were financiers in New York. Once they got wind of how he was thinking they had the opportunity to buy up pieces of the debt from the merchants, the soldiers, and the others to whom the government owed money--to say:

You don't think New Jersey will ever pay off that piece of paper, do you? I'm willing to gamble that they will eventually pay something--how about you trade it to me for 40 cents? You get the cash, I take the risk, it is a good deal for both of us.

Then Alexander Hamilton announces his debt assumption plan. New York financiers who understand how Hamilton thinks make an awful lot of money. And they are grateful.

That, however, was only a minor reason.

One major reason was that Alexander Hamilton saw that the United States was then a relatively small country in a world dominated by two super powers, Britain and France. Both Britain and France had ocean-spanning ambitions and blue water navies. Hamilton thought it likely that we would at some time in the future get into a big war with either Britain or France. And he wanted to make sure that if we did get into a big war that the federal government would be able to borrow money in order to fight it effectively. Moreover, even if we did not get into a big war a U.S. federal government that could not borrow--that had no debt capacity--would be weak. Both France and Britain would both notice that we were weak, and they would steal our stuff, press our sailors and make them man their navies, et cetera et cetera. Thus Hamilton thought it was important for the federal government to start its existence by building up its debt capacity. And what better way to convince investors that the federal government would pay off its debts in the future than for it to pay off the debts of the United States incurred during the Revolutionary War--even or perhaps especially if those debts had not been incurred by the current federal government?

The most important reason, however, was that Alexander Hamilton was Secretary of the Treasury in a country where the rich were at best uneasy about the revolution and independence. Of America's upper class as it stood in 1775, full half of them were gone: had fled to Britain or Canada during the Revolutionary War. Those who remained remembered that back before 1775 the British monarch had protected property, that the British army and navy had protected them against deprivations of all kinds, that it was quite clear who the police worked for. Now you have a republic with a much broader electorate. Might politicians run on a platform of soaking the rich and redistributing wealth to the poor? Thus the rich people were nervous--and at least thinking about how maybe it would be good if the British came back and ruled again.

This was where Alexander Hamilton had his good idea. Suppose, he thought, he could set things up so that the rich owned a lot of U.S. government bonds. Then if the British returned--well, the British were not going to pay off the Revolutionary War debt of the United States of America under any circumstances. Having a national debt was a way to bind the United States rich to the country--giving them a stake in the new republic's survival. And by large it worked: the national debt was a national blessing.

Definitely worth reading the whole thing.

The Peacock's Tail -- Analogy of the week from Brad DeLong

From an excellent post on the growth of financial services:

The obverse of that fall is the rise of a peculiar piece of the service sector: the growth of finance, insurance, and real estate transactions (i.e., the paper shuffling and the exchanging, not the construction). It was supposed to be the high-productivity sector of the future. It has turned out to be the equivalent of a peacock's tail--damnably awkward and reducing your mobility and survival characteristics, but fascinating to the peahen, for a while at least.

"Some of us are illegal, and some are not wanted"

There's a tendency to treat certain ideas and attitudes (particularly liberal ones) as modern inventions, usually going back no further than forty or fifty years, but if you do a little digging, you will inevitably find someone (albeit, in this case, someone on the far left) who was expressing these ideas decades (in this case, 1948) or even centuries ago (thanks to Brad DeLong for the Jefferson letter)



Plane Wreck At Los Gatos by Woody Guthrie

The crops are all in and the peaches are rott'ning,
The oranges piled in their creosote dumps;
They're flying 'em back to the Mexican border
To pay all their money to wade back again

Goodbye to my Juan, goodbye, Rosalita,
Adios mis amigos, Jesus y Maria;
You won't have your names when you ride the big airplane,
All they will call you will be "deportees"

My father's own father, he waded that river,
They took all the money he made in his life;
My brothers and sisters come working the fruit trees,
And they rode the truck till they took down and died.

Some of us are illegal, and some are not wanted,
Our work contract's out and we have to move on;
Six hundred miles to that Mexican border,
They chase us like outlaws, like rustlers, like thieves.

We died in your hills, we died in your deserts,
We died in your valleys and died on your plains.
We died 'neath your trees and we died in your bushes,
Both sides of the river, we died just the same.

The sky plane caught fire over Los Gatos Canyon,
A fireball of lightning, and shook all our hills,
Who are all these friends, all scattered like dry leaves?
The radio says, "They are just deportees"

Is this the best way we can grow our big orchards?
Is this the best way we can grow our good fruit?
To fall like dry leaves to rot on my topsoil
And be called by no name except "deportees"?

And bonus stat-nerd points for the title

This New Republic article by Ed Kilgore is a good (if troubling) read and it's an excellent complement to Joseph's earlier post on government services in Washington (the state, not the district).

More on Jump$tart

From an email from Frances Woolley:

Mark: "There are no questions that refer to charts or tables though the ability to read both is an essential part of financial literacy." This is a really good point. I also very much like your point about question 24, with its highly dubious generalization from the general to the particular.

In many ways, teaching people what they don't know, and the types of systematic mistakes they are likely to know, is probably as valuable for financial literacy as anything. For example, when dieting, knowing about standard psychological biases, e.g. that people eat less when they eat from a small plate, more from a large one, helps a person trick herself into eating less - and that's more help than being told that celery is less fattening than cookies.

It's unfortunate in many ways that the Jump$tart has so many flaws of this kind, because it could be really valuable.

If we actually care about financial literacy, we ought to commission a decent test.

Washington Ferries

There was a recent article in the Seattle Times that was quite interesting. It was discussing the consequences of anti-tax initiatives in the state of Washington on government services. In particular, the recent Initiative 1053 means that the state can no longer implement a planned increase in ferry fees. Of course, the alternative (at this point) is cancelling ferry runs.

The reaction of the local representatives of one of the hardest hit communities was instructive:

Yet the first people to squawk about the route cuts and fare hikes were a couple of no-tax Republicans, from Whidbey Island, state Reps. Barbara Bailey and Norma Smith. They pronounced the cuts unfair and "devastating."

What is odd about this case is that there really is a disconnect with reality here. Could we easily imagine telling a private business that it was no longer permitted to raise fares to meet expenses? Or at least consider a business that we wanted to keep around. Now, there is some government subsidy here (clearly to make sure that there is reliable service) – this is not normally considered to be an issue given that transportation networks make commerce possible (imagine not having roads or only privately owned roads). But here the people of the state have decided to cut both the government subsidy (via a previous initiative) and the ability to charge users market rates (via the current initiative).

At some point the result looks awful silly . . .

Toys for Tots

A good Christmas can do a lot to take the edge off of a bad year both for children and their parents (and a lot of families are having a bad year). It's not too late to pick up a few toys, drop them by the fire station and make some people feel good about themselves during what can be one of the toughest times of the year.

If you're new to the Toys-for-Tots concept, here are the rules I normally use when shopping:

The gifts should be nice enough to sit alone under a tree. The child who gets nothing else should still feel that he or she had a special Christmas. A large stuffed animal, a big metal truck, a large can of Legos with enough pieces to keep up with an active imagination. You can get any of these for around twenty or twenty-five bucks at Target;

Shop smart. The better the deals the more toys can go in your cart;

No batteries. (I'm a strong believer in kid power);

Speaking of kid power, it's impossible to be sedentary while playing with a basketball;

No toys that need lots of accessories;

For games, you're generally better off going with a classic;

No movie or TV show tie-ins. (This one's kind of a personal quirk and I will make some exceptions like Sesame Street);

Look for something durable. These will have to last;

For smaller children, you really can't beat Fisher Price and PlaySkool. Both companies have mastered the art of coming up with cleverly designed toys that children love and that will stand up to generations of energetic and creative play;

'Confidence' and 'Rationality'

This post by Andrew Gelman suggests replacing "confidence interval" with "uncertainty interval" based in part on the "awkwardness of explaining that confidence intervals are big in noisy situations where you have less confidence, and confidence intervals are small when you have more confidence."

At the risk of putting words into Dr. Gelman's mouth, his concern is partly about the confusion that often comes from assigning common words specific technical meanings that are subtly different than their common usage. 'Confidence' here doesn't quite mean what people think it means.

One way of addressing that concern is finding new terms that don't have the same potential for confusion. Another is finding better ways of explaining the distinction. But the very fact that this is a concern illustrates an important difference between statisticians and economists.

Both statisticians and economists take common words and assign them specialized meanings. Of course, this is a reasonable, even necessary, process. As thinking in a field becomes more precise, language has to follow suit, which is why you can find a similar process in many other disciplines, but the difference in attitudes toward refined words seems particularly marked in these two.

Based on anecdotal but extensive evidence, statisticians (and I'm definitely guilty of this) constantly, almost compulsively, stop to point out that what we said isn't what you think we said. This is especially true for 'significance,' which often comes with a brief (and unwelcome) lecture on p-value and types of error. This is part of the culture of statistics. We are taught early and repeatedly that the distinctions we are making are important and need to be spelled out explicitly.

Compare this to the way economists (particularly a freshwater economists) tend to use terms like 'rational.' When economists say an actor is rational, they mean that this actor's behavior can be modeled using a simple but highly restrictive set of assumptions. Many behaviors that qualify as rational in the common sense of the term fail to meet these assumptions while more than a few behaviors that do qualify would strike most people as irrational.

But unlike statisticians, economists generally don't feel compelled to spell out these distinctions. You will often see economists using phrases like "Are people rational?" These phrases are occasionally followed by 'in the economics sense,' but they are seldom accompanied by an explanation of just how narrow this sense is.

When an economist says "people are rational" or (Steven Levitt's preferred variation) "people respond to incentives," most listeners tend to take away the impression that they mean "people act in ways that are generally considered rational" or "incentives can change the way people behave." These latter statements are completely reasonable. Most of us would agree with them. They are not, however, what the economist meant.

Wall Street Bonuses and Motivation

Felix Salmon links to a Washington Post article about large “wall street” bonuses:

Fortunately, there were many happy students - and the happiest were by no means the best paid. The most important factor behind job satisfaction was how supervisors handled performance appraisals. Bosses who took the time to give real feedback had happy employees. Those who blew it off had resentful and confused workers.

"Given that junior employees were spending 90 hours per week at work," one student wrote, "we all wanted to be recognized for our efforts."

For many executives, the myth that a big bonus is enough to ensure motivated employees persists. But at least for this next generation of business leaders, it's simply not true. When the public is already infuriated by outsize bonuses for chief executives, clinging to this model is a bad idea. Management matters. Good management pays off. Bad management - including ignoring management altogether - will cost us.

I think that this is an insightful point. It can be taken too far (high levels of compensation do make up for a lot of frustrating moments) but I think that the idea of "fairness" and "predictability" are key items. It's worth a lot to know that you will make $80K this year. Replacing that with a 50% chance of $40K and a 50% chance of $200K is not the same (even if the expected value is higher). Now, if you remove robust feedback and clear expectations than it is only reasonable that workers will not feel like they can predict what the outcome of their year end review. That will be highly demoralizing (and take even higher levels of compensation to correct for).

This principle actually goes back to Adam Smith (if not before). He (paraphrasing the original passage) pointed out that, for a worker paid by the piece, that you not only have to compensate the worker for all of the time spent between jobs but also for the anxiety that the worker suffers.

Is it really efficient to import this type of model to areas like education?