Tax Reform

I am normally not the biggest fan of Greg Mankiw as I am concerned that his anti-tax stance reduces the focus on how we can use a strong taxation system to build a strong economy.  But this post is one that I found myself agreeing with more than I disagreed with.  In particular, note:

Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.

And this:

Consider the deduction for mortgage interest . . . Subsidies to homeowners are, in effect, penalties on renters — after all, someone has to pick up the tab. But there is nothing wrong with renting. And once one acknowledges that renters are poorer, on average, than homeowners, the mortgage interest deduction becomes even harder to justify.

These are the sorts of places that tax reform might make a significant difference in building a better system.  It is true that tax reform in these areas would be politically unpopular.  But, in the long run, it might make for a much better and more transparent tax system.

Why I believe in safety nets

Megan McArdle argues:

Who among the parents fighting so hard to get their kids into a good school is going to volunteer to have their kid give up the slot in the upper middle class? People are willing to accept a certain amount of slippage, but only as long as it comes with added job security (government) or special fulfillment (the ministry, the arts)--and even in the latter cases, Mom and Dad will often be strenuously arguing against following your calling. But how many doctors and lawyers would simply glumly accept it if you told them that sorry, junior's going to be an intermittently employed long-haul trucker, and your darling daughter is going to work the supermarket checkout, because all the more lucrative and interesting slots went to smarter and more talented people?

The lack of a safety net makes falling in social status a serious problem.  When basic medical care is linked to being a productive member of the middle class, people are willing to make enormous sacrifices to protect themselves from falling in social class.  If we mitigate the problems and torments of extreme poverty then maybe it won't be seen as terrible to have people shift around in social class.

Now it is true that my focus is on absolute levels of deprivation.  But if the you can be poor with dignity and have basic needs met then maybe that will make us a little more willing to address inequality in general.

Copyrights and patents are intrusive government regulations

They are monopolies that restrict the rights of businesses to make and sell certain products. What's more, they're built around non-rival goods with origins that are often difficult to trace (since virtually all 'creative' works are derived from other earlier ones).

This doesn't mean intellectual property laws are bad. They aren't. Society could not function well without them. What this does mean is that these laws have a cost. They distort markets, raise prices, divert resources from productive areas to legal departments and inhibit creative destruction and the founding of new businesses. We have to balance these costs against the social benefits of encouraging creation and dissemination.

Recently, though, we've lost sight of that need for balance, in no small part because those costs are born by consumers and small companies that lack the wherewithal for PR and lobbying. In the area of copyrights (patents are a subject for another day), we've allowed ludicrous extensions, let lawyers grab works from the public domain, retroactively granted copyrights to works whose creators have been dead for decades, and tried to greatly restrict the concept of fair use.

It's important to remember that the very notion of owning an idea is a useful absurdity. Ideas are intangible and indistinct with no real demarcation from other ideas. It is tremendously useful for a society to encourage creativity and give creators a protected period to disseminate their works, but if we start thinking of protecting intellectual property as an end to itself, all we have left is the absurdity.

Works moved out of the public domain?

Seriously?

The Supreme Court on Wednesday upheld a federal law that restored copyright protection to works that had entered the public domain. By a 6-to-2 vote, the justices rejected arguments based on the First Amendment and the Constitution’s copyright clause, saying that the public domain was not “a category of constitutional significance” and that copyright protections might be expanded even if they did not create incentives for new works to be created. The case, Golan v. Holder, No. 10-545, considered a 1994 law enacted to carry out an international convention. The law applied mainly to works first published abroad from 1923 to 1989 that had earlier not been eligible for copyright protection under American law, including films by Alfred Hitchcock, books by C. S. Lewis and Virginia Woolf, symphonies by Prokofiev and Stravinsky and paintings by Picasso.

 How exactly does this act to promote the creation of new works?  Any possible incentive to the creaters is long past.  Notice that this period ends in 1989 -- how many people would have created more works jsut in case they could get copyright protective in a foreign market 23 years later? 

I am not against intellectual property rights (rather the converse) but I question is need for such long term protection for pieces that are decades old.  At some point the public domain is the right place for these older works, as it gives them a chance to be rediscovered by people looking for inexpensive content.  That is probably a better legacy for the creators than any minimal stream of royalties could be at this late date.

Another post on Unions

Erik Loomis is distressed by a piece in the Atlantic asking about the plastic surgery benefit for teachers in Buffalo, New York. Erik focuses on the fact that the teachers union is willing to give up the benefit if a new contract settlement can be reached and that there are many legitimate reasons to have reconstructive surgery available (e.g. a child who had serious facial damage after a car accident).

Jordan Weissmann, the author of the Atlantic article, focuses on the salaries of the teachers (mean of $52K) and the deadlock on contract negotiations. In some ways, I think everyone is missing the big picture. Teachers are professionals who work for a contract. We do not micromanage the compensation packages of hedge fund managers, either. It is true that teachers are paid directly by the government. But the carried interest exemption (which sets tax rates at 15%) is just as much of a decision to spend money.

After all, selectively taxing one group less is the same as a subsidy.

Put this another way, we could pay teachers less if we made their salaries exempt from income tax. Now this does not mean that specific benefits can't be renegotiated. Nor do I want to deny the reality of increasing health care costs (which are a problem everywhere in the United States right now) which can make benefits that were once reasonable seem excessive. But is it really constructive to focus on whether the teacher's health care plan is correctly designed as a matter of public policy. Or should be be looking at the long term drivers of malaise in our society.

Of course, looking at the long term drivers of malaise means facing up to our low tax rates (guarenteed to be a painful discussion) and dealing with the rate of growth in medical costs.

Reading assignments

Busy week but I wanted at least to throw out a few links to things I'd like to be writing about:

Felix Salmon's take on a subject is always appreciated, particularly when he's focusing on a topic we try to keep an eye on (like for-profit schools).

And staying on the education beat, Dana Goldstein collects almost two centuries worth of teacher-bashing.

The last few news cycles have brought lots of pieces about Bain. A few of them have been really interesting.

I've come across a site for the truly hardcore pop culture nerds, particularly those obsessed with stand-up comedy. There's even an intellectual property angle.

And I have got to make time for this.

Worthwhile Canadian Post

Go and read. The implications for long term care in Canada and the United States is a scary prospect given the retiring baby boom and the need to find ways to care for older adults.

Frontiers in Car development

Some interesting legal questions:

All told, the changes may not best the leap from horses to cars, but they are big enough to undermine many of the legal systems we rely on for things like insurance, not to mention criminal law. If a car doesn't require a driver, can a 12-year-old "drive" to his friend's house? Can a drunk person drive home from a bar? How will insurance work if people share driverless cars? Courts and legislators will be sorting those out for years to come.

Actually, I kind of like the idea of cars that can take home intoxicated people safely. Living in a community with a lot of college students, sub-urban road planning, and a lot of bars, I see a lot of accidents. I worry that some of them might have been prevented with better transportation options. Now, obviously, my preference would be improvements in public transit. But driverless cars might well be a good alternative for people who would like to go out but have limited options for coming home.

Tyler Cowen on Health Care

Tyler Cowen points out a potentially serious issue with health care costs.

The U.S. median wage for 2010 was $26,363. The average health care insurance premium today is over $15,000 and by 2021 it may be headed to $32,000 or so (admittedly that estimate is based on extrapolation). Therein lies the problem

Of course, to me this number just argues for single payer health care (which can bend the curve) and innovation to try and bring cost controls to the medical profession.  Now is it not contradictory to argue for both innovation and greater government  control?  In a sense it is, except that the market has formidable barriers to entry that cannot be easily be navigated.

So, for example, a team of nurses and a pharmacist could not form a company to treat twenty and thirty years for their minor health issues.  Nor do we have a clear distinction between major medical insurance (what if I end up in the ER) versus standard health care insurance (which removes the cost from the patient and is subsidized by the government).

On the other hand, maybe I am discounting the possible benefits of the exchanges?

Health Care on Nights and Weekends

Aaron Carroll has a smart point about the limitations of the current office visit model of health care.  He looks at the percentage of people who have trouble getting care on nights and weekends. It seems that we don't do especially well, even on international standards:

Yeah, we beat Canada. But we lose to almost every other country. Almost two thirds of Americans have trouble getting care on nights, weekends, and holidays. You know what? A significant amount of the week is filled with nights, weekends, and holidays. Especially if you don’t want to miss work. It’s fine to believe that people should try and see the doctor in the office. But if you want that to happen, then you need the office to be available. If retail clinics do a much better job in that respect, you can’t complain when people make use of them

I think that there are two points of interest here.  One, while Canada has a laudable health care system, it has flaws too and so a straight out effort to clone it might overlook opportunities to do better.

The second is that these visits don't even have to be expensive.  Nurses in small retail clinics (you do not even have to have a medical doctor) could diagnose a lot of minor conditions, refer patients to emergency rooms in a crisis, and give instructions for minor care.  Now consider that Pharmacies are open 24 hours in a lot of places.  They have a medical professional with a doctorate behind the counter who is an expert on medications.  Why could pharmacists not prescribe based on the Nurse's diagnosis.  Both pharmacists and nurses are cheaper than medical doctors, used to shift work, and highly trained professionals.

Why could they not do a lot more to simultaneously reduce costs (as clinics are inexpensive, provide an alternative to hyper-expensive emergency rooms, and could get patients seen faster) and improve service (would you spend $75 to get easy treatment for an infection at 11 pm on a Saturday night?).

Why aren't me trying out these sorts of innovations?

Thinking about past and future

while listening to an Austrian techno-musician do dance mixes of the great Lil Hardin Armstrong.

I thought I was done with IP stories for a while

But I can't let this one pass unnoted. From Propublica (via Felix Salmon):

Right now, if you want to read the published results of the biomedical research that your own tax dollars paid for, all you have to do is visit the digital archive [1] of the National Institutes of Health. There you’ll find thousands of articles on the latest discoveries in medicine and disease, all free of charge.

A new bill in Congress wants to make you pay for that, thank you very much. The Research Works Act [2] would prohibit the NIH from requiring scientists to submit their articles to the online database. Taxpayers would have to shell out $15 to $35 [3] to get behind a publisher’s paid site to read the full research results. A Scientific American blog said it amounts to paying twice.

Things I wish I had time to write about -- the growth fetish

Felix Salmon has an excellent post that uses Bain as a jumping off point to raise points like this:

Private equity is by no means unique in this respect: it happens at pretty much every public company, too. John Gapper, today, has a column about the way it destroys values at struggling technology companies:

Most public companies are run by people who hate folding ’em, and instead keep returning to the shareholders and bondholders for more chips…

Few senior executives, when debating options for a technology company in decline, admit defeat and run it modestly. Instead, they cast around for businesses to buy, or try to hurdle the chasm with what they have got. Sometimes they succeed but often they don’t, wasting a lot of money along the way.

It goes against their instincts to concede that the odds are so stacked against them that it is not worth the gamble. Mr Perez would have faced a hostile audience if he’d admitted it to the citizens of Rochester, Kodak’s company town in New York, but its investors would have benefited.

At many companies, then, both public and private, the optimal course of action is a modest one — run the business so that it makes a reasonable profit, and can continue to operate indefinitely. If you chase after growth, you often end up in bankruptcy: that’s one reason why the oldest companies in the world are all family-run. Families, unlike public companies or private-equity shops, don’t need growth: they’re more interested in looking after their business over the very, very long run.

If I had time, I'd really like to explore the connection between this and an earlier OE post on the growth fetish:

It's obvious that our economy is suffering from a lack of growth but for a while now I've come to suspect that in a more limited but still dangerous sense we also overvalue growth and that this bias has distorted the market and sometimes encouraged executives to pursue suboptimal strategies (such as Border's attempt to expand into the British market).

Think of it this way, if we ignore all those questions about stakeholders and the larger impact of a company, you can boil the value of a business down to a single scalar: just take the profits over the lifetime of a company and apply an appropriate discount function (not trivial but certainly doable). The goal of a company's management is to maximize this number and the goal of the market is to assign a price to the company that accurately reflects that number.

The first part of the hypothesis is that there are different possible growth curves associated with a business and, ignoring the unlikely possibility of a tie, there is a particular curve that optimizes profits for a particular business. In other words, some companies are better off growing rapidly; some are better off with slow or deferred growth; some are better off simply staying at the same level; and some are better off being allowed to slowly contract.

It's not difficult to come up with examples of ill-conceived expansions. Growth almost always entails numerous risks for an established company. Costs increase and generally debt does as well. Scalability is usually a concern. And perhaps most importantly, growth usually entails moving into an area where you probably don't know what the hell you're doing. I recall Peter Lynch (certainly a fan of growth stocks) warning investors to put off buying into chains until the businesses had demonstrated the ability to set up successful operations in other cities.

But the idea of getting in on a fast-growing company is still tremendously attractive, appealing enough to unduly influence people's judgement (and no, I don't see any reason to mangle a sentence just to keep an infinitive in one piece). For reasons that merit a post of their own (GE will be mentioned), that natural bias toward growth companies has metastasised into a pervasive fetish.

This bias does more than inflate the prices of certain stocks; it pressures people running companies to make all sorts of bad decisions from moving into markets where you don't belong (Borders) to pumping up market share with unprofitable customers (Groupon) to overpaying for acquisitions (too many examples to mention).

As mentioned before we need to speed up the growth of our economy, but those pro-growth policies have to start with a realistic vision of how business works and a reasonable expectation of what we can expect growth to do (not, for example, to alleviate the need for more saving and a good social safety net). Fantasies of easy and unlimited wealth are part of what got us into this mess. They certainly aren't going to help us get out of it.

Things I wish I had time to write about -- the future that was

Check out this fascinating series of predictions from the Saturday Evening Post circa 1900:

Photographs will reproduce all of nature’s colors… [They will be transmitted] from any distance. If there be a battle in China a hundred years hence, snapshots of its most striking events will be published in the newspapers an hour later.

Wireless telephone and telegraph circuits will span the world. A husband in the middle of the Atlantic will be able to converse with his wife sitting in her boudoir in Chicago. We will be able to telephone to China quite as readily as we now talk from New York to Brooklyn.

Man will see around the world. Persons and things of all kinds will be brought within focus of cameras connected electrically with screens at opposite ends of circuits, thousands of miles at a span.

Rising early to build the furnace fire will be a task of the olden times. Homes will have no chimneys, because no smoke will be created within their walls.

Refrigerators will keep great quantities of food fresh for long intervals.

Fast-flying refrigerators on land and sea will bring delicious fruits from the tropics and southern temperate zone within a few days. The farmers of South America… whose seasons are directly opposite to ours, will thus supply us in winter with fresh summer foods which cannot be grown here.

Once again a knowledge of obscure pop culture saves the day

Impressionist Will Jordan used to do a routine built around the idea of a threat, an actor kept under contract because of a resemblance to one of the studio's stars. The point of a threat was two-fold: to give the studios a ready replacement if a star dropped out and to let the stars know that they could be replaced.

I was reminded of threats when I came across this section of Felix Salmon's latest instalment of the adventures of Ben Stein:

But my favorite bit of the complaint is where he complains that the ad which did end up running, featuring Peter Morici, is “an explicit misappropriation of Ben Stein’s likeness and persona, which is an explicit violation of Ben Stein’s rights of privacy and of publicity, barred by California law”.

In other words, this ad, while it might look to all the world as though it features a real economist who’s much more qualified on such matters than Ben Stein, is in fact an illegal violation of Ben Stein’s privacy, which uses the likeness of Ben Stein. Maybe Stein thinks that Morici should wear a long blonde wig, or something, to make him look less Stein-esque?