Feeds:
Posts
Comments

Archive for the ‘Economics’ Category

In the U.S., states have full authority over local government. Some states strictly centralize power and leave local government little to do. For instance, Hawaii has a single school district for the entire state, so that different localities cannot choose to spend different amounts on the government schools. Michigan effectively has a similar system, because it requires every school district to spend the same amount of money per student and redistributes tax funds across districts to make that possible. Vermont has also centralized school funding.

At the other end of the spectrum, states like New Hampshire let local governments pretty much decide their own level of funding for schools and other programs (about half of all local spending in the U.S. goes toward schools), and towns differ widely. If you want to live in a low-tax, low-spending town or a high-tax, high-spending town, it isn’t terribly difficult to find one. In the middle are states like Texas, where local governments are responsible for their own tax and spending decisions, but the most important level of local government is the county, much larger than the town, and it is therefore difficult to choose where to live based on local taxes and services.

Can we measure how decentralized each state is? I’ve tried to do so. The first measure of decentralization looks at how important local taxes are compared to state taxes. It divides local taxes by state and local taxes put together. This is a familiar variable to scholars of “fiscal federalism,” and it is typically called “tax decentralization.” Here is how the states rank on tax decentralization, as of fiscal year 2011-12, the most recent year for which data on local taxes are available from the U.S. Census Bureau:

New Hampshire 0.62475539
Alaska 0.584999114
Texas 0.555497037
Colorado 0.5420195
New York 0.540915308
Louisiana 0.520062304
South Dakota 0.514664958
Florida 0.508526077
New Jersey 0.503867865
Georgia 0.502739018
Missouri 0.490816162
Nebraska 0.486587041
Rhode Island 0.483462474
Ohio 0.47233672
Virginia 0.468452418
Illinois 0.466955731
Wyoming 0.465238453
South Carolina 0.459566438
Maryland 0.451067476
Pennsylvania 0.449406333
Arizona 0.440699694
Iowa 0.437082825
Oregon 0.434834984
Kansas 0.434319401
Washington 0.431347838
Wisconsin 0.423486277
Tennessee 0.421965652
Utah 0.420621904
Maine 0.411333699
Massachusetts 0.398031363
Connecticut 0.397670719
Montana 0.389680799
California 0.387518844
Nevada 0.383740954
Oklahoma 0.383081024
New Mexico 0.382245601
Alabama 0.382121115
North Carolina 0.366066432
Michigan 0.361458412
Indiana 0.352963108
Kentucky 0.33512693
Idaho 0.325219717
North Dakota 0.312465478
Mississippi 0.306727915
West Virginia 0.29895431
Minnesota 0.282530032
Hawaii 0.258739008
Arkansas 0.220173834
Delaware 0.215201394
Vermont 0.152464302

This isn’t the only way we can measure decentralization, though. After all, some states have more “competing jurisdictions” from which a prospective homeowner can choose than others do. To get at this concept was a little more complicated. I first counted the number of county, municipal, and township governments for each state from the U.S. Census Bureau. Then I looked at what proportion of local taxes came from each level of government and created a weighted average of number of local governments for each state. So if a state had 100 towns, 10 counties, 0 townships, and towns raised 20% of local taxes, while counties raised 80% of local taxes, the formula for the weighted average would be 10*0.8+100*0.2. The formula “rewards” states for letting lower-level, more numerous governments raise more taxes.

Then I thought about the decision of a homeowner in choosing a government to live under. Typically, your general location is set by where you have a job, say, a metropolitan area. But there may be several jurisdictions in that metro area to choose from. So I divided the “effective number of competing jurisdictions” described in the last paragraph by the state’s privately owned land area in square miles and multiplied by 100. So the resulting variable is the effective number of competing jurisdictions per 100 square miles of privately owned land. Higher values mean there is a lot of choice among governments.

Here is how the states come out on this variable measuring choice among governments:


New Jersey 5.619216533
Massachusetts 4.644661232
Pennsylvania 4.458726121
Rhode Island 4.016477858
Connecticut 3.634408602
Vermont 3.315789474
New York 2.934484963
New Hampshire 2.529344945
Wisconsin 2.189851779
Illinois 1.823655675
North Dakota 1.699505873
Delaware 1.586429725
Ohio 1.522032431
Maine 1.515194346
South Dakota 1.21988394
Missouri 1.105963152
Iowa 1.092652689
Indiana 0.972491305
Michigan 0.968708835
Kentucky 0.818674996
Minnesota 0.789141489
Arkansas 0.724807709
West Virginia 0.709066369
Oklahoma 0.693505752
Alabama 0.684705931
Georgia 0.551970462
North Carolina 0.535369811
Tennessee 0.506450581
Maryland 0.49052107
Kansas 0.479065166
Virginia 0.475682594
Florida 0.453352937
Nebraska 0.444783283
South Carolina 0.431428983
Louisiana 0.427531008
Utah 0.382243912
Mississippi 0.375744252
Washington 0.373979057
Texas 0.326573652
California 0.301273953
Colorado 0.284535146
Idaho 0.275746556
Oregon 0.273392409
Arizona 0.094351369
New Mexico 0.087975845
Montana 0.077669113
Hawaii 0.070909413
Wyoming 0.058851844
Alaska 0.042298043
Nevada 0.036335668

In general, the northeastern states score highly, largely because of a historical legacy of strong town government.

We can multiply both variables, tax decentralization and effective number of competing jurisdictions per 100 sq mi, together to get a single measure of how decentralized each state is.


New Jersey 2.831342639
Pennsylvania 2.003779755
Rhode Island 1.941816321
Massachusetts 1.848720839
New York 1.587307839
New Hampshire 1.580221888
Connecticut 1.44529788
Wisconsin 0.927372178
Illinois 0.851566468
Ohio 0.718911807
South Dakota 0.627831517
Maine 0.623250495
Missouri 0.54282459
North Dakota 0.531036915
Vermont 0.505539528
Iowa 0.477579724
Michigan 0.350147957
Indiana 0.343253553
Delaware 0.341401889
Georgia 0.277497088
Kentucky 0.274360038
Oklahoma 0.265668894
Alabama 0.261640594
Florida 0.23054179
Minnesota 0.22295617
Virginia 0.222834661
Louisiana 0.222342761
Maryland 0.221258101
Nebraska 0.216425781
Tennessee 0.21370475
West Virginia 0.211978447
Kansas 0.208067296
South Carolina 0.198270281
North Carolina 0.195980916
Texas 0.181410696
Washington 0.161315058
Utah 0.160780162
Arkansas 0.159583693
Colorado 0.154223598
Oregon 0.118880584
California 0.116749334
Mississippi 0.115251251
Idaho 0.089678217
Arizona 0.041580619
New Mexico 0.03362838
Montana 0.030266162
Wyoming 0.027380141
Alaska 0.024744317
Hawaii 0.018347031
Nevada 0.013943484

New Jersey is the state where the taxpayer has the most choice of government. While local property taxes are generally high there, that may simply reflect the preferences of local homeowners who want to spend money on services. It would be unsurprising if there are also some local jurisdictions in New Jersey where taxes are especially low.

In general, northeastern states, which are mostly left of center and high-tax, have a heretofore unseen advantage in their fiscal systems, letting competing local governments do much or even most of the taxation, making them responsive to local property owners. Perhaps it is precisely because of that responsiveness that overall tax burdens are allowed to be high in some of these states (New Hampshire aside): homeowner voters are more content with the way government uses their tax money there.

Read Full Post »

At e3ne.org, I have posted some reflections on my last discussion with the Ethics & Economics Challenge students, on the topic of private property rights. The work of Acemoglu, Johnson, and Robinson on how property rights support high levels of development plays a prominent role. Here’s a scatter plot from their famous 2001 paper:

property rights and development

Source: Acemoglu, Johnson, and Robinson (2001)

Economies with greater protection from expropriation have higher per capita incomes. There are plausible reasons to think the relationship is causal. As I note in the post,

If I have a stock of lumber in a warehouse in Oregon, and I hear that a hurricane in New Jersey is causing prices to spike there, I have an incentive to ship lumber there only if I can enjoy the profits of doing so. If the government taxes my profits at 100%, I have no incentive to ship the lumber where it’s needed most. Even if the tax is only 70% or 60%, it reduces my incentives enough that I’m not going to incur a lot of time, effort, and cost to ship the lumber. Similarly, if the government owns the lumber, or no one does, then no one earns the profit from shipping the lumber where it’s needed, and so no one wants to ship the lumber where it’s needed.

Still, private property rights are not sufficient for development:

If private property rights are so great for the economy, why didn’t the economy grow tremendously during the age of classic feudalism, when aristocrats held absolute property rights in their land, and serfs had to work on their estates for low pay? It should be clear that just as prices without property rights do little good, so do property rights without real markets. When a small group of people own vast quantities of land and use their ownership of land to oppress everyone else, you won’t get economic progress. We need private property rights, but they need to be dispersed enough to prevent the biggest property owners from converting their wealth into effectively absolute political power.

For that reason, I’m willing to consider comprehensive redistribution of land in former conquistador states, where owners of the great latifundias work the land inefficiently with hired laborers and convert their market power in the rental market into political power.

The other benefit of private property rights I talked about with the students was environmental. Private property rights can solve the “tragedy of the commons,” whereby people tend to overuse and deplete open-access resources. In that vein, I shared with them this very interesting article on different property regimes in the Maine lobster fishery. Where (communal) property rights are strictly defined and enforced, lobster are not overfished: lobster caught are larger and more mature, and lobstermen earn higher wages.

Read Full Post »

This week’s post at e3ne.org is about the miracle of the price system:

Natural disasters harm people’s standard of living by destroying resources, but in a free marketplace, rising prices and profits in scarce goods give both buyers and sellers an incentive to heal the economic wound. Drawn by the possibility of making good profits at high prices, sellers bring the scarce goods to market from afar. Facing high prices, buyers demand less of the scarce goods than they would if prices were not allowed to rise.

For this reason, George Mason University economist Alex Tabarrok calls a price a “signal wrapped up in an incentive”…

Read more.

As it happens, I’ve also assigned this week F.A. Hayek’s article, “The Use of Knowledge in Society,” in my Dartmouth course this term, American Political Economy. Hayek’s article is itself a kind of minor miracle, in that it was published in the world’s top economic journal, The American Economic Review, despite having no equations in it and a grand total of one cited reference.

Hayek’s point is that the free market’s price system aggregates and condenses distributed, particular information unknown to most market actors. No one has to know where all the stocks of a scarce resources are located, and what the relative valuations of that resource are to all possible consumers, for the market to allocate the resource to the highest-valuing users from the lowest-cost producers. A price is a signal wrapped up in an incentive.

At the end of Hayek’s article there is a wee bit of gloating about how he and Mises had persuaded the rest of the profession that economic calculation is impossible without prices. The state of the debate ended as a sort of compromise between the two original positions. The socialists had conceded that economic calculation was impossible without market prices, and the free-marketeers had conceded that, in principle, a decentralized socialist economy could generate market prices.

The problem for even a decentralized socialism is that while it can have price signals, it lacks the virtue of the “incentive” feature of prices. I might know that the price of lumber is high in New Jersey after a hurricane, but if I’m sitting on a warehouse full of lumber in Oregon, I won’t necessarily ship that lumber to New Jersey unless I can reap the extra-normal profits afforded by those high prices. If I’m not the “residual claimant” on the value of the lumber, I might as well send it to my political cronies, or not do anything with it at all, which might be the easiest course of action. Even decentralized socialism with price signals, for instance as attempted in Yugoslavia in the 1970s and 1980s, fails on account of its poor incentives.

Read Full Post »

The theory of comparative advantage shows how voluntary exchange benefits both parties and encourages specialization. You don’t need to possess an absolute advantage in any particular productive activity to enjoy a comparative advantage. Your comparative advantage is whatever you can do relatively cheaply compared to everything else and everyone else. For instance, Haiti still trades with the U.S. even though it’s a much poorer economy. The reason is that the U.S. worker focuses on her/his comparative advantage – making stuff like microchips, software, financial services, houses, retail, design, engineering services, accounting services, higher education services, wheat, corn, soybeans, apricots, and airplanes – and leaves other stuff for workers in other countries, like making t-shirts, steel, rubber, bananas, coconuts, furniture, and toys. Haiti, in particular, specializes in making t-shirts. An American worker could probably make more t-shirts than a Haitian one – we have better tools (more capital) – but it doesn’t pay for us to spend our time on that when we could be doing on the things aforementioned. So we buy t-shirts from Haiti instead.

At e3ne.org I have a new post up explaining the theory and offering a short quiz. I’ve copied it below. Feel free to take your shot at the answers in the comments!

1. Imagine you’re the chief executive of a successful information technology business. You rose through the ranks as a graphic designer and are very good at that, but you’re also a good manager and fundraiser. Your task now is to write up an annual report for the shareholders. Should you use your graphic design skills to format an excellent annual report, or should you simply type up the information and delegate the formatting of the report to one of your employees?

2. Imagine the U.S. opens up to imports of clothing from China. What happens to the price of clothing in the U.S. and in China?

3. Does opening up to Chinese clothing affect the quantity of U.S. exports, say, of microchips?

4. Does opening up to Chinese clothing affect the price of microchips in the U.S. and in China?

Read Full Post »

The economic thinking behind “buy local” campaigns is typically terrible. One such example is the claim that a dollar “circulates more” when you spend it locally. The rate of circulation of a dollar doesn’t create any wealth. Try it out: circulate a dollar among a group of friends and feel your standard of living stay the same. In general, “buy local” activism commits the broken-window fallacy: ignoring opportunity costs. Spending more on the same product because it’s local means you can’t spend on other things that make you happy. And you are part of the local economy!

At e3ne.org, I have a longer critique of the fallacies behind “buy local” and “buy American” campaigns. An excerpt:

[I]magine that everyone bought local, all the time. Cars, airplanes, software, clothing, food… everything would have to be made and exchanged in the town where you live. What would happen to everyone’s standard of living? It would fall dramatically. (How many skilled airplane manufacturers does your town have?) The same principle applies at the national level, or any other geographic level you choose. If you buy everything within that circumscribed area and exclude everything outside it, your community will be worse off than it would be if it bought from any willing seller.

Now, that’s an extreme example, but it illustrates the principle. Some things are impossible to make locally (airplanes). Other things are difficult and costly to make locally (shipping and retailing of plastic bins). A few things will be most efficiently and affordably made locally, and you will want to buy them locally without having to be goaded into doing so – they’ll simply be the best products for the price. Goading your community into buying shoddier or more costly products just because they’re local or American or whatever just makes your community poorer.

Read more.

Read Full Post »

Critics of the President’s State of the Union address noted it did little to promote bipartisanship. Yet, it has already stimulated bipartisan agreement on one of the President’s education proposals.

In the State of the Union, President Obama proposed free community college:

“I am sending this Congress a bold new plan to lower the cost of community college—to zero.

…Whoever you are, this plan is your chance to graduate ready for the new economy, without a load of debt. Understand, you’ve got to earn it—you’ve got to keep your grades up and graduate on time. Tennessee, a state with Republican leadership, and Chicago, a city with Democratic leadership, are showing that free community college is possible. I want to spread that idea all across America, so that two years of college becomes as free and universal in America as high school is today.”

One detail that failed to make it into the State of the Union address: The funding for the program would come by effectively killing the 529 college savings accounts, that exempt earnings from taxation if used for educational expenses.

This fact stimulated bipartisanship, albeit not the kind the President anticipated. As Jonathan Weisman (New York Times) explains:

President Obama, facing angry reprisals from parents and from lawmakers of both parties, will drop his proposal to effectively end the popular college savings accounts known as 529s, but will keep an expanded tuition tax credit at the center of his college access plan, White House officials said Tuesday.

The decision came just hours after Speaker John A. Boehner of Ohio demanded that the proposal be withdrawn from the president’s budget, due out Monday, “for the sake of middle-class families.” But the call for the White House to relent also came from top Democrats, including Representatives Nancy Pelosi of California, the minority leader, and Chris Van Hollen of Maryland, the ranking member of the Budget Committee.

Although this means of funding the community college proposal seemed particularly tone deaf, it does illustrate that bipartisanship is possible when protecting tax expenditures. Imagine if reformers focused on even larger tax expenditures (e.g. the $212 billion exclusion of employer-provided health insurance, the $176 billion expenditures for pensions and 401(k)s, or the $101 billion deduction of mortgage interest)? A new era of bipartisanship might bloom.

Related: See Josh Kraushaar in National Journal for an interesting piece on the SOTU and the implications for Hillary Clinton 2016.

Read Full Post »

The Hagedorn, Manovskii, and Mitman working paper on the effect of unemployment insurance (UI) on employment has been getting a lot of press lately. In brief, they find that the end of the federal unemployment insurance extension accounts for about 1.8 million new jobs in 2014.

Mike Konczal does a useful deep dive on the paper here and is very skeptical of the result. In particular, he criticizes as implausible and empirically inaccurate labor market search models that imply employer monopsony power, which are essential to the plausibility of the result. These models are also essential to the revisionist literature on the minimum wage, holding that minimum wage increases do not reduce low-productivity workers’ employment. Curiously, Mike Konczal has defended search models in this aspect. He’s a smart guy and clearly thinks that applications of search theory to macroeconomic variables have problems that the application to the minimum wage doesn’t – but if search theory badly explains one phenomenon, it’s unlikely to do well explaining another. There’s a clear tension between claiming simultaneously that employer monopsony power explains why raising the minimum wage doesn’t reduce employment and that ending UI can’t have increased employment so much because employers don’t have that much monopsony power, even if the latter claim is limited to slack periods in the business cycle. (Why wouldn’t employer monopsony power be greater during slack periods in the business cycle? The Marxist concept of the “reserve army of the unemployed” comes to mind here.)

Another interesting parallel between the UI and minimum wage research is that the famous Dube et al. paper in Review of Economics and Statistics relied heavily on matched-border-county estimates, as does the Hagedorn et al. paper. Having looked at these data, I actually agree with Konczal that these models are inappropriate. The logic behind using matched border counties is that contiguous counties are alike in every relevant way other than the policy discontinuity associated with the state border (say, one county has a high minimum wage and the other does not). But border counties are actually usually quite dissimilar. Take Camden, N.J. and Philadelphia, Penn. These two counties are vastly different in size, so if Camden creates jobs at a higher rate than Philadelphia, Camden’s new jobs might still be a tiny percentage of Philadelphia’s. Yet the Dube/Hagedorn approach considers these counties to be equivalent, and takes the larger percentage increase in jobs for Camden as an indication of superior New Jersey employment policy. (See also David Neumark on empirical evidence that border counties are not appropriate control groups.)

In summary, if you are skeptical of the empirical strategy and theoretical justification of the literature saying the minimum wage has no negative employment effects, you should also be skeptical of the empirical strategy and theoretical justification of the new paper showing that unemployment insurance has big disemployment effects. If you like the Dube et al. minimum wage work, you should like the Hagedorn et al. UI paper. How many wonks are intellectually honest enough to adopt one of these two, ideologically inconvenient pairs of positions?

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 1,057 other followers

%d bloggers like this: