Portland taxes excessive CEO pay: what could go wrong?

Portland placed an extra 10% tax on excessive CEO pay:

"When I first read about the idea of applying a higher tax rate to companies with extreme ratios of CEO pay to typical worker pay, I thought it was a fascinating idea," said Commissioner Steve Novick, who championed the bill after seeing similar efforts in Arizona and California. "[It was] the closest thing I'd seen to a tax on inequality itself."

Price Discrimination in Internet Usage

Former Chief Economist at the US DOJ has estimated demand for Internet usage by looking at how much consumers cut back when they are near their monthly limits. Here are the intuitive findings:

• We find that subscribers’ willingness-to-pay for speed is heterogeneous, which is intuitive given the different ways in which people use the internet.  

• marginal content has relatively low value. 

• On the other hand, the infra-marginal value of content is high.  ["inframarginal" is econ speak for other uses]

These conditions suggest that price discrimination would be a good way for providers (like Google Fiber) to make sure that low value uses do not crowd out higher valued uses, and to earn enough to build capacity where demand is high:

• We find that usage-based pricing is effective at lowering usage without reducing subscriber welfare significantly, relative to a world with just unlimited plans. This is driven directly by our finding that marginal content is not very valuable and that subscriber welfare is mainly driven by infra-marginal usage.

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.

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.

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.

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

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.

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)

What should we do about low growth and rising inequality?

HT: Quinn