Monday, May 29, 2017

Do Taxes deter innovation?

Superstar inventors, those in the top 1% of patent production (weighted by patent citations), leave higher-tax countries in favor of lower-tax countries.

For instance, if the average country decreased the top tax rates by 10 percentage points, it would be able to keep 1 percent more of its domestic superstar inventors and attract 26 percent more foreign superstar inventors.

Friday, May 26, 2017

Housing Codes Cause Homelessness - Dallas Edition

A heart-wrenching drama is being played out in West Dallas. The neighborhood is mostly full of 70+ year old homes rented to mostly poor folks. These were built before the neighborhood was even annexed by Dallas. For decades, the structures had been 'grandfathered in' from keeping up with the ever-improving building code. The area had been isolated from the city by the Trinity River until a landmark bridge opened a few years ago. That brought developers and new enforcement of housing codes. The houses are so out of code, that the owner, HMK Ltd., would rather shutter them:
“Not just impractical but it’s impossible. No matter how much money, you cannot throw enough money into these houses and make them compliant.” 

Some of the tenets have been living in these homes for three or four decades and pay a paltry $300-$400 a month in rent. HMK has offered to sell them the houses they currently rent for $65,000, their next best offer. Fine if these poor folks could find the $65,000. The idea originally was that vertical integration by the occupant into ownership would evade the housing codes. But no, the city will require the new owners to bring them up to code.

Previously, the renters and landlord had been content exchanging low rent for poor quality homes. Everyone knew these were poor quality homes and were fine with that. But nanny-state enforcement of the housing code will soon keep this value creating transaction from being consummated.

Wednesday, May 24, 2017

What caused the Great Depression?

Marginal Revolution University has another good short video, documenting its various causes, including some of the self-defeating efforts to fix it.

Monday, May 22, 2017

Of course not, sunk costs don't matter

The headline in this New York NBC affiliate news story is "Large Milk Spill Closes Roadway; No Crying Reported." The truck driver must have read our favorite textbook.












Hat tip: Alex

Advice for debating NIMBY's

Anti-development forces (Not In My Back Yard) are waking up to the evidence that zoning restrictions reduce income, increase inequality, and reduce mobility.  Here is a post from Ground Zero in the NIMBY wars (San Francisco) that offers advice on debating NIMBY's:
1. Econ 101 supply-and-demand theory is helpful in discussing these issues, but don't rely on it exclusively. Instead, use a mix of data, simple theory, thought experiments, and references to more complex theories. 
2. Always remind people that the price of an apartment is not fixed, and doesn't come built into its walls and floors. 
3. Remind NIMBYs to think about the effect of new housing on whole regions, states, and the country itself, instead of just on one city or one neighborhood. If NIMBYs say they only care about one city or neighborhood, ask them why. 
4. Ask NIMBYs what they think would be the result of destroying rich people's current residences. 
5. Acknowledge that induced demand is a real thing, and think seriously about how new housing supply within a city changes the location decisions of people not currently living in that city. 
6. NIMBYs care about the character of a city, so it's good to be able to paint a positive, enticing picture of what a city would look and feel like with more development.
I especially like suggestion #4:
...Imagine destroying a bunch of luxury apartments in SF. Just find the most expensive apartment buildings you can and demolish them.  
What would happen to rents in SF if you did this? Would rents fall? Would rich people decide that SF hates them, and head for Seattle or the East Bay or Austin? Maybe. But maybe they would stay in SF, and go bid high prices for apartments currently occupied by the beleaguered working class. The landlords of those apartments, smelling profit, would find a way around anti-eviction laws, kick out the working-class people, and rent to the recently displaced rich. Those newly-displaced working-class people, having nowhere to live in SF, would move out of the city themselves, incurring all the costs and disruptions and stress of doing so.  
If you think that demolishing luxury apartments would have this latter result, then you should also think that building more luxury apartments would do the opposite. Price should think long and hard about what would happen if SF started demolishing luxury apartments. 

HT:  Marginal Revolution

Tuesday, May 9, 2017

Missing from the advice

Motley Fool recently provided "3 Tips for Investing in Apple Inc. Supplier Stocks." Essentialy, they are:

  • Look for companies with rare, differentiated technologies
  • Look for high barriers to entry
  • Look for technologies that clearly affect the user experience
Would they same advice hold for Apple investing in these suppliers? That is, should they vertically integrate by purchasing a supplier with these characteristics? After all, these are the characteristics that tend to make a firm profitable. I see two problems.

1. EMH: An invester does not want a profitable firm; he wants a more profitable firm. That is, the purchase price already reflects the present value of the expected future profits. In order for the purchase to be profitable, the present value of the expected future profits must be made to be more than the purchase price. Your average Joe investor usually will typically not know if this can happen nor can he make it happen.
2. Synergies: Apple could possibly make it happen. It could possibly do this if it sees that the current arrangement prevents some efficiencies and that vertical integration would solve them.

But do not purchase a company merely because it is profitable.

Wednesday, May 3, 2017

Why don't restaurants give rejected food to hungry servers?

When you order a meal and what you receive isn't what you expected, you can either suffer through it or send it back. If food gets returned, many restaurants have rules to prevent the cooks and servers from eating it.  On its face, this seems inefficient, as good food is discarded.

QUESTION: Why do restaurants have these rules? (Hint:  incentives, Chapter 1)

ANSWER:  To answer the question we consider all the benefits and costs that vary with the consequence of the rule (Chapter 3).
  • The obvious benefit of giving food to hungry servers and cooks is that you increase the attractiveness of working at the restaurant, which allows you to reduce their wages (the "compensating differentials" of Chapter 9).  
  • However, the hidden cost of giving rejected food to the staff is that you create incentives for hungry staff members to deliberately mess up orders so they can get free food.  
If a restaurant has rules preventing staff from eating rejected food, one could infer that the costs are bigger than the benefits, and that the agency cost (Chapter 21) of trying to control this kind of perverse behavior are large.

HT:  Jake

Copyright 2017, Froeb (if the publishers let me, I will stick this question into the fifth edition)

Friday, April 28, 2017

Origin based vs. destination based taxes

Follow up to Greg Mankiw article on taxes:

ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. If we change to a destination based taxation (where it is consumed instead of produced), this would encourage US exports and discourage imports. But then the exchange rates would adjust:
...Americans would supply fewer dollars in foreign-exchange markets, and foreigners would demand more dollars. As a result, the dollar would appreciate, making foreign goods cheaper for Americans, and American goods more expensive for foreigners. The movement in the exchange rate would offset the initial impact on imports and exports.

If the exchange rate adjusted completely, the so called "border tax" would become equivalent to a Value-added tax, with all the attendant benefits:  low rates over a broad base (non distortionary, i.e., people would not spend lots of effort trying to avoid it), and shifts taxes to consumption rather than income (encourages production/income).

Wednesday, April 26, 2017

Should we be worried about discrimination based on party affiliation?

Via MarginalRevolution:
In the marketplace, consumers are much more likely—almost two times as likely—to engage in a transaction when their partisanship matches that of the seller. In our survey experiment, three quarters of all subjects forego a higher monetary payment to avoid helping the other party.

Original paper suggests that partisan affiliation is a strong potential source of discrimination:
To date, few social norms are in place to constrain it, as they are with respect to unequal treatment along other social divides (e.g., race and gender). Our analysis suggests that partisan-based discrimination may occur even in the most basic economic settings, and as such should be the subject of more systematic scrutiny.