A slipperly slope argument for more taxes

I have to admit that this whole debt ceiling debate makes me want to tear my hair out. If I had my druthers, I’d sit down every member of Congress. pry their eyelids open and make them read a few economic history books. Because, you know, cutting spending in a deep recession worked so well the last time, *cough* *cough* (Great Depression!) *cough*. But the politics of it all, it’s just maddening is what it is. A bunch of idiots who don’t even know what their constituents want holding this country’s–and possibly the world’s–economy hostage. I honestly (and naively) expected to come back from my Green River rafting trip and the thing would be solved, over, done with. But no, it’s like no time passed at all.

Twitter brought me two great pieces over the last few days that sent my writing juices flowing again after a few days off. The first, which I believe came from @ezraklein (correct me if I’m wrong), said something to the effect of “The US is the only country in the world with the luxury to create an economic crisis where there is none.”

Just dwell on that one for a minute.

The second was a question retweeted by the official White House twitter account (@whitehouse for the #WHChat) asking why those who are already paying the most taxes should be asked to pay more, invoking the  “it’s not fair” argument. The question of who pays more and how much is a sticky one, one that made heavy press a few months (weeks? I don’t know what’s happening to time right now) when it was announced that only 50% of Americans paid any taxes (really, federal income tax in one year with record-high unemployment; you’d be hard pressed to find someone who actually pays zero taxes). I don’t know what segment of the population the question-asker was referring to, but it got me thinking about who pays taxes and why.

From an practical standpoint, we have many different types of taxes; income taxes, use taxes, sales taxes, estate taxes, property taxes, etc. From an economic standpoint, we split taxes into bigger groups. One of those distinguishing factors of how we group comes down to who pays. From the simplest, principles of economics perspective, we have taxes that are based on use and those based on ability to pay. Use taxes are designed with the idea that the people using the service should be the ones taxed. Use taxes are often sales taxes, they’re associated with things that we use. Take a simplistic example like gasoline, which we tax, and much of the taxes go to repaving roads. If you buy gasoline, you pay tax on it based on how much you buy. If you don’t buy gasoline, you don’t pay tax on it, simple enough. Consequently, you also don’t contribute much to upkeep of roads. If you’re not buying gasoline, you’re probably not using the roads much (or your form of using them is much less destructive or limited than if you went by car), so, you don’t pay for roads.

The ability to pay principle says that those with the greatest ability to pay should pay more taxes. By this logic, a person who makes $200,000/year should pay more in gasoline taxes than a person who makes $20,000/year. Of course, creating a taxation system like that creates all sorts of incentives to lie and cheat and would be incredibly difficult to manage, but it is interesting to think about how use and ability to pay are actually interconnected, particularly at a federal level. Without any numbers to back me up, I’m certain that those with more money not only have a greater ability to pay, but also use more services. I’m going to distinguish here between services and transfers. There’s no doubt that people who make no money receive more transfers–e.g. food stamps, welfare payments, unemployment assistance–than wealthy people. But even though wealthy people may not be applying for food stamps or welfare, their money is being protected by banking laws, their consumer interests are greater because they buy more, they use the courts more for lawsuits (if not perhaps criminal defense), they’re greater users of health care (even more so if they have insurance). I of course have nothing to back this up, and realize fully that the argument could be made in precisely the opposite direction for public assistance. But then, the ability to pay part kicks in; if you’re requesting TANF funds, you have very low ability to pay.

The other reason I don’t like this argument, of course, is that it creates a slippery slope in terms of demanding to pay taxes only on the things we use. If a poor person keeps all their money stuffed in their mattress, they’re not ‘using’ the SEC or the FDIC or other federal banking institutions, and we might find dissenters trying to discount such expenditures from their taxes ala Maggie Gyllenhaal in Stranger Than Fiction. Talk about a nightmare. I think our tax code is complicated enough as it is.

With that rant being done, and regardless of whether paying taxes is fair or not, I’ll share another gem adapted from twitter. Just because you want to order a hamburger next time doesn’t mean you don’t have to pay for the filet mignon you already ate. It does appear that something is going to happen tonight, though, so we’ll see.

Quiet

I’m so excited that this blog is finding a voice and an audience. My apologies to all as I’ve been quiet and will likely continue to be for the next two weeks or so. I am racing to finish my dissertation, then will be on a rafting trip down the beautiful Green River for just under a week. I’m told I’m not allowed to bring work. Though I know it’s a physical impossibility to bring my computer on the river for five days, it will be much more difficult to emotionally distance myself from economics, gender, children, violence, etc, or at least the constant turning of my brain on such things. Back in August, I promise!

The Westerns

I’ve just returned from San Diego, where I took part in the annual conference of the Western Economic Association and spent a little time with some very good friends I don’t get to see nearly often enough.

I’m a bit embarrassed to say that I didn’t spend perhaps as much time at the conference as I have spent at others, but I did chair a session and present and even caught a few oher papers. My experience last year with the Westerns was that the quality of papers was exceptionally disheartening. The conference is traditionally grad student friendly, and due to its size, the call for papers ends just short of seven months before the conference. I’m not sure whether these things contribute to average quality, or the fact that it’s always in a fun, beautiful, outdoorsy place during the summer, but not many people seemed to put much thought into what they were presenting last year. I could have also just been extremely unfortunate in my choice of sessions.

In my session, I presented my job market paper, “Match Quality and Maternal Investments”, in which I tease out the association between subjective quality of a romantic relationship and investments in children’s cognitive skills. The session was well-attended and my paper well-received. I had fun presenting it (even though my heart was still beating a million miles a minute from having lost and magically found my flash drive only moments before). I’ve presented the paper so many times now that I can feel it calling at me to get out. Go forth and publish! Or at least go forth and submit (and wait, and submit, and wait, sorry, this wasn’t supposed to be commentary on publishing lags in economics).

I thought my session particularly interesting because we had four papers dealing with divorce and union dissolution in four very different ways. I discussed a paper by Risa Kumazawa of Duquense University on the effects of divorce on children’s educational attainment. A fellow CU grad student discussed her paper on spillover effects of divorce laws on marriage markets using LMAs and divorce law changes. And Claudia Smith of Grand Valley State discussed the effects of immigration policy on divorce and marriage. I was really impressed with all the papers and I’m excited to see them develop.

I also fully survived my first chair experience, keeping everyone within the time limit and being sufficiently organized. I’m sure someone is dying to make a joke about the diversity of my participants, but we had a great international group and I got to see a lot of papers about migration and labor market participation that I might have otherwise never seen. All in all, I was really pleased with the conference.

The Westerns are great because they give access to everyone. Their paper acceptance rate is high and while it increases the variability in quality, it definitely allows for a broad spectrum of ideas to come from lots of places, which is really fun. Next year, it’s in San Francisco and will hit my own hometown of Denver before going to Hawaii in 2016. I think I can get behind all of those stops.

Happy Fourth of July!

More trouble for asylum seekers?

The former IMF head Dominique Strauss-Kahn has been released from house arrest following revelations that his alleged victim may not be the most credible. I’ve seen several posts from friends, namely those associated witH Duke in some way, hearkening back to the Duke lacrosse case.
There are similarities, it seems, but a looming concern is how this might affect asylum seekers. Last week, journalist Jose Antonio Vargas published an inspired piece on his struggle to remain in the US, but likely fueled a lot of the “immigrants are all criminals” set with his tales of fudging papers ad skirting laws to retain some status. Now, with DSK’s accuser accused of lying on her own asylum application and possibly exaggerating the danger she faced in her home country, it’s hard to know what the impact will be. I fear that women who come seeking asylum with similar stories of repression will find it even harder to find relief in a system in which the odds are already stacked against them.

How Markets Work

A conversation with a coauthor on the financial knowledge of Americans recently incited some deep thinking about market efficiency, one of the holy grails of economics. While discussing our results on investors in English stocks from 1690-1720 or so, she brought up a recent paper in which the authors gave a random sample of (contemporary) Americans a financial literacy test. The test consisted of only three simple questions on interest returns, inflation and volatility of stocks versus mutual funds. The vast majority of respondents failed the test, unable to answer any of the multiple choice questions correctly. It is disturbing in and of itself, but also begs the question of how models incorporate investors’ knowledge. The information may be out there, but if investors aren’t using it, or aware of it, how can we conclude that individuals are savvy enough to choose the right investments? To create optimal portfolios for their individual situations? To save adequately for retirement? To choose an affordable mortgage? All this without even adding in the risk of shocks like a financial crisis or a recession or a bubble.

It’s a good reminder, my coauthor noted, that markets may do what they are supposed to, but people in markets rarely do. Without the information we assume they have, without the forward-thinking savvy we assume they have, our models are profoundly lacking.

The Promise of a Baby

I’m currently reading an ethnography called Promises I Can Keep by Edin and Kefalas. It’s about marriage and childbearing in poor communities in and around Philadelphia, PA and relates the findings from interviews with women of all races.

I’m finding myself blown away again and again by the content and the revelations of the authors, but as an economist, I’m particularly interested in this extent to which fathers are said to encourage pregnancy early in the relationship. Many mothers report their boyfriends saying “I wanna have a baby by you”, with seemingly little regard for the costs and responsibilities that come along with childbearing. I think having a child in general flies in the face of a rational agent that can plan forever regardless of class, but the discount rate seems particularly uncoupled from reality in these respondents.

One of my thesis chapters is on promises of financial support and how that affects investments in children. My original thought was that a promise of support would be just as effective as additional income in motivating mothers to invest in their children, particularly in financially-constrained decisions. In my data work, I came across the problem that controlling for race (and essentially class in this data set as most of the well-off mothers are white), strips away most of the variation. That is to say, that black mothers who receive a promise of support are not much different than the very few black mothers who don’t receive a promise of support. Edin and Kefalas’ work indicates that the promise of support is almost a prerequisite for childbearing, even when all circumstances–availability of drugs, lack of good jobs, the father’s tendency to “run and rip” with his friends, etc–point to the statement having no credibility whatsoever.

It’s puzzling that women, ultimately knowing that they won’t get financial support, through a legal arrangement or otherwise, would choose to have children with men in the hopes that he might turn around for the baby. It certainly flies in the face of models we use where we can assign realistic probabilities to future events and make our decisions based on our expected utility. The number of reform stories is stiflingly small, but apparently enough to encourage the dreams of so many.

Irrational Tonics

My name is Erin, and I’m a professor at a small liberal arts college in Pennsylvania. Or, rather, that’s what I’ll be come August. Right now, I’m just a grad student trying desperately to get some projects out the door. And frankly, a grad student who’s looking for more projects. I like projects. I intend this to be my new one, but first, a little background.

A few months ago, a friend making a documentary in Africa sent me the link to a blog post on how relationships between prostitutes and their clients affect tips. She was aghast, not because of the topic, but rather because it got so much attention. Is it possible, she asked incredulously, that economists could be just now figuring out that human relationships have bearing on how we make decisions?

My response was well, yeah, and in fact, you should be ecstatic that they’re even starting to examine it. Economists like models. They like simplified versions of reality and to be honest, life is not all that simple. For as much as the dismal science has grown and evolved and gone back and forth on monetary policy, we’re still not very good at figuring out how individuals make decisions. We impose rules on them and hope that our models give good results, but in truth, our models are only as good as the assumptions we put into them. The assumptions we tend to put on people is that they are rational agents, and generally time-invariant rational agents. In simple terms, that means that if I asked you to choose among several scenarios–say, what you would buy, where you would get food, etc, in a given month–, you could tell me which one of those scenarios would make you the happiest, the second happiest and the third happiest. That’s the rational part, you know exactly what is good for you. The time-invariant part is that, likely, your ranking of these scenarios wouldn’t change from day to day unless something big happened to shift your worldview or change your preferences for, say, pizza (like you saw a rat at your favorite restaurant).

For the past five years, or at least the past three, I’ve been writing a dissertation in which I try to illuminate, to some small degree, how human relationships affect our decision making. We’re not very good at measuring these types of relationships, primarily because of what economist call “unobservables.” For instance, I can see that you, as a mother, decide to put your child in private school. From your private school application, I might know your level of education, your income, your occupation and all of these things about your husband, as well. These are “observables” and with this limited information, I can make a pretty good prediction about how many years your child will go to school and what kind of money he will make. Or at least, averaging among all the children who have parents like you, I can predict an average value for these characteristics. However, there are lots of things I don’t know about you. I don’t know how impatient your child is, or how motivated you are to make him study. I don’t know whether you’re a hands-on parent or if your marriage is in trouble. As emotionally intelligent people, we know that these characteristics probably have an effect on the child’s well-being, but as economists, we don’t have a good way to incorporate them into our models.

So, I aim to incorporate them into our models. I’m not the only one doing it, and my plan for this space is to highlight people who are doing work in the same vein as mine–how do our relationships affect our decisions?–but also people who are doing other work that seeks to shed light on decision making as influenced by other aspects of life that we don’t normally incorporate into our models. That won’t be all, of course. I’ll also use this space to talk about research on gender and children. Occasionally, I might throw in some water stuff; water is pretty cool, and pretty important.

In any introductory economics course, your professor is sure to tell you that economics is the study of allocation of scarce resources. It’s true, but it’s also just the beginning, that’s why we call it introductory. My hope is that this blog will make economics, as it is studied beyond the introductory level, more accessible and remind people that it’s not all about money. I can’t tell you which stocks to pick or tell you whether unemployment is going to fall (though, actually, at this point, I’m inclined to say no as it seems that money is cheap and companies are investing in capital instead of hiring workers, but that’s a post for another day and another blog). But I can talk to you about love and friendship and how it makes us totally irrational.