Wednesday, September 26, 2012

Why isn't this State Farm's logo?

Ryan has an interesting post to answer this question, and went through the trouble of modifying the logo.

Ryan's thoughts on the matter are worth reading, and they put some nice context on quotes like this:
So here’s the bottom line: if you currently have decent health insurance, thank the government. It’s true that if you’re young and healthy, with nothing in your medical history that could possibly have raised red flags with corporate accountants, you might have been able to get insurance without government intervention. But time and chance happen to us all, and the only reason you have a reasonable prospect of still having insurance coverage when you need it is the large role the government already plays.
This perspective from Krugman reminds me of a tremendous job market paper from last year.  The lead quote is striking, and it sums up the main finding:
Not everyone can purchase insurance. Across a wide set of non-group insurance markets, companies choose to not sell insurance to potential customers with certain observable, often high-risk characteristics.

The rest of the article is great too, and it relates to some previous work by Amy Finkelstein, the economics profession's most recent John Bates Clark Medal winner.  Here's an accessible paper of hers on the topic.

-----

Note: In Ryan's post, the hat-tipped article by Friedman really is quite good.

Friday, September 21, 2012

Measuring the Entitled: Thoughts on that 47 Percent Figure

One of the things that I teach in my econometrics class is that the way in which economic variables are measured is important to the conclusions you are able to draw from data.  A recent example is Mitt Romney's assertion that 47 percent of American households do not pay federal income tax in the past year, and therefore, the 47-percent will vote for Obama -- the entitlement candidate -- no matter what (my paraphrase of Romney's recent gaffe).

What's wrong with this assertion?  To my knowledge, 47 percent is accurate, but it doesn't mean what Romney wanted it to mean.  That's because the 47 percent of people who pay no federal income tax includes students and elderly, who at other points in the lives may have paid significant federal income taxes.  There are also people who had a bad year this year, but will do just fine next year and did just fine in the past.  So, if your goal is to measure "fraction of entitled/dependent on government," 47 percent likely overstates that true fraction ... by a lot.  This is a point that the media, and commentators have made quite forcefully (Krugman, Thoma, Jon Stewart, Planet Money).

Is all lost with this measure of "entitlement"?  Is it useless?  Not exactly.  If a statistic that you know overstates what you're hoping to measure is consistently reported over time, we can examine how the statistic evolves over time, and learn something about how entitlements have changed.  This is informative as long as the measurement problem was as approximately as bad in the past as it is in the present.  That's why I found this passage  from a recent Market Watch article interesting:
In 1979 only the lowest fifth of households paid no federal individual income tax, according to data published in July by the nonpartisan Congressional Budget Office. By 2009, the lowest 40% not only made no contribution to income tax revenues, they actually received individual income tax transfers. They were net recipients of federal payments because of programs such as the earned income tax credit, the child tax credit, and Making Work Pay credit. 
To be fair, there are still problems with using these changes over time by themselves.  Immediately, two come to mind:
  1. There are composition changes in the population from 1979 to 2009 (more baby boomer elderly) that could help inflate even this "changes" figure.  
  2. So called "Entitlement Spending" is supposed to address problems with the economy, and there are currently more problems with our economy (one figure: in 1979, unemployment was ~6% while in July 2012 it was 8.3%).
Other evidence, presented elsewhere, is needed to address these concerns, but it certainly seems to be the case that the safety net has gotten more generous.  Rather than flame out over whether a candidate is using an inflated measure to make his point, maybe a more appropriate response is to seriously debate the issue to get down to what it really means.  Of the linked posts above, I think Planet Money's post is the best at objectively breaking down the 47%, but it still doesn't answer the tough question.  Is the safety net (as measured this way) a problem, a response to a problem, or both?

----

Pre-post edit: On discussing this post, my friend Ryan suggested this article on the larger issues at play.  I've only taken a quick read, but it strikes me as relevant and (potentially) the right way to start thinking about the issue of entitlements.

Another Edit (9/23/12):  Steve Landsburg has some interesting thoughts on the issue.

Saturday, September 15, 2012

Politics vs Economics (more on higher education)

In my last couple of posts, I wrote about the issue of financial aid and higher education, specifically referring to blog posts by Steve Landsburg and John Cochrane.  Both the content and contrast between the issues highlighted in their two posts was interesting, but there is a sense in which there are other issues (social and economic) at play when it comes to financial aid and higher education.

For some context, here is a sample of political soundbites (some controversial) on higher education and financial aid:
Obama: "Right now Americans owe more in tuition debt than they do in credit card debt. And that means Congress is going to have to stop the interest rates on student loans from going up. They're scheduled to go up in July right now. Colleges and universities are going to have to do their part. I've said to them -- and I've met with university and college presidents -- we're going to keep on helping students afford to go to college. You've got to do your job in terms of keeping tuition down, because taxpayers can't fund this stuff forever. Higher education can't be a luxury; it's an economic necessity, an economic imperative for every family in America. And they should be able to afford it. (Applause.)"
Romney: "It is very tempting as a politician to say, 'You know what, I will just give you some money. The government is just going to give you some money and pay back your loans for you,'” Romney said. "I am not going to tell you something that is not the truth, because you know, that is just taking money from your other pocket and giving it to the other pocket."
Santorum: "President Obama once said he wants everybody in America to go to college. What a snob. There are good, decent men and women who go out and work hard everyday and put their skills to test that aren't taught by some liberal college professor that [tries] to indoctrinate them."
As I see it, the political debate -- as framed by Obama -- is about whether students can afford to go to college.  To a layman, that perspective seems natural, but it's not the only reason to subsidize education.  And, it's not necessarily the primary reason we teach in introductory economics to subsidize things like education.

What's usually taught: A student's education has external benefits that he does not account for when deciding how much (and what type of) education to get.  Because I do not internalize all of the benefits that accrue to my education, there needs to be some way to encourage me to get the "right" amount of education.  A subsidy or making college more affordable through government financial aid assistance is one way to do it, and that's usually how students of economics come to understand the proper role for education subsidies.  That is, education subsidies can be about efficiency (which is usually what economists like to discuss), rather than being a social issue (which is how politicians talk about it).

On the other hand, there is reason to believe that student loan credit markets need some help.  In a post on the issue in May, Gary Becker points out that one reason for the government to intervene in providing loans to students is because it is impossible for students to put up their future earnings as collateral for student loans:
This inability to offer human capital investments- in particular, college education- as collateral for commercial loans on these investment even when the returns are excellent is the fundamental “externality” behind the case for government support of student loans. This externality could justify governmental provision of student loans, although whether the government should guarantee student loans is questionable.
In other words, maybe the government has a role in helping students get loans because loans for human capital are difficult to secure in an standard credit market.  Nevertheless, Becker offers this thought in the conclusion of his post.
Young families with mortgages that exceed $100,000 under normal circumstances are not considered to be in dire economic straits, even though their homes can be taken if they fail to meet their mortgage payments, and they are only investing in more comfortable living arrangements. Young couples that contracted a similar level of debt when they were students have invested in raising their earning power, usually by a lot. So I find it difficult to comprehend why sizable mortgages are accepted while there are political and media outcries over comparable student loans that are based on usually highly productive investments in human capital.
There is definitely some food for thought in the rest of Becker's post as well.

Wednesday, September 12, 2012

A different perspective on financial aid

When I wrote my last post that referenced John Cochrane's description of the incentives of financial aid, I had a nagging feeling that I left something out.  I had thought about financial aid and higher education recently, but it was out of context, so I didn't make the connection.  I made the connection again this afternoon and it is instructive about the debate on financial aid and government's role.  

Last week, I read this interesting perspective on the topic by Steve Landsburg:

Every year, I tell my Principles students with confidence that “You and the student on your right are probably not paying the same tuition rate”. Universities have detailed information on students’ academic records (which tells them where else those students are likely to be admitted) and detailed information on student’s (and their family’s) financial statuses. They exploit this information to tailor individual aid packages.
That’s important here, because, unlike an ordinary monopolist, a good price discriminator doesn’t leave seats in the classroom unfilled just to keep prices high. Instead, the price discriminator fills empty seats at bargain prices while still keeping prices high for those who are willing to pay full fare.
In other words, many of the bad incentives discussed by Cochrane have a purpose: to extract as much consumer surplus from college students as is possible.  In retrospect, what's interesting about the Landsburg post is the hidden assumption that price discrimination is efficient.  Certainly, we learn in first course on microeconomics that perfect (1st degree) price discrimination yields the efficient outcome, but if price discrimination is not perfect, the price discriminating monopolist faces a tradeoff.  On one hand, it wants to enhance efficiency (Landsburg's point) because it can imperfectly gain from more total surplus, but on the other hand, it will still have a tendency to raise price and restrict quantity because it is a monopolist.  

Furthermore, there's another issue called allocative inefficiency that results from firms charging multiple prices for the same product (In short, if multiple prices are charged to different groups, the highest value consumers might not get the product, but that's the topic of another post.).  In the current system, there are other inefficiencies that resemble transaction costs,.  And, this brings us full circle back to Cochrane's post and the fact that there is a section-sized article in the Wall Street Journal teaching people how to "game the system."  Real resources are being used in administering this system of financial aid, both by universities and applicants.  

This doesn't completely undermine Landsburg's argument that more government intervention is bad in the higher education market, but it does suggest that there is more to the issue of financial aid in higher education than the theory of price discriminating monopoly.

Tuesday, September 11, 2012

Financial Aid and Marginal Taxes

John Cochrane makes an observation that crossed my mind when I was reading the Wall Street Journal yesterday.
So, we're looking at 30, 20, and 50 percent additional marginal tax rates on income or savings -- how much you lose if you make or save an extra dollar. The journal is full of useful tips to game the system. 
Now, to the larger question. What matters for economics is the total, marginal tax rate. If you earn one extra dollar, and then spend it, how much stuff or services do you actually get -- after all taxes are included, including payroll, federal income, estate, excise, state income and excise, local, sales or property (if a good) or a second round of income and social insurance taxes (if a service). Ideally, we'd add in the burden of taxation incorporated in product prices too -- if the government taxes a business and that raises the price of what you pay, that's just like taxing you for buying the good. 
The article Cochrane references isn't literally about taxes (commonly conceived), but it is about how earning more reduces your expected financial aid package from universities.  For the reasons Cochrane gives, effectively, financial aid phaseouts are behaviorally equivalent to taxes.  This subtlety won't be lost to students of economics, but it is often swept under the rug in political discussions of tax rates, which is why you should read Cochrane's post on the topic.

Monday, September 3, 2012

Off Reservation Casinos

Here is a new and relatively common phenomenon:  Off-Reservation Gaming.
Gov. Jerry Brown is allowing two American Indian tribes to build casinos off their reservations, over the objections of some neighboring gambling tribes and members of California's congressional delegation.
The Democratic governor said Friday that he agreed with a Department of the Interior ruling granting the tribes a rare exception to the federal law that prohibits gambling on reservations established after 1988.
The law allows the Interior Secretary to make an exception when an off-reservation casino is in the tribe's best interest.
To clarify, the Indian Gaming Regulatory Act (IGRA) of 1988 requires Indian casinos to be placed on existing tribal trust land (where "existing" means that it was tribal reservation land prior to 1988), unless an exception is granted.  For the first two decades of IGRA, exceptions were rare, and they were limited to nearby annexations of land.  In fact, the Bush Administration adopted a "commutable distance" rule for new acquisitions of land to meet the exceptions.  That rule is not longer in effect.

If the sole criterion is whether the casino is in "the tribe's best interest," it is going to be awfully difficult not to satisfy that criterion.  Off-reservation casinos seem to be almost strictly preferred to casinos on the reservation.  The negative consequences of casinos (crime, problem gambling) are usually local to where the casino is located.  If tribes are allowed to locate their casino away from the reservation's population, that keeps out the riffraff.  Moreover, off-reservation gaming allows tribes to locate near population centers, which is where the consumers are.  Of course, if your view is that the casino is a tribal enterprise that will employ members of the tribe (and thereby decrease unemployment), it doesn't make much sense to locate the casino away from the workers.

This is a striking example of how important the implementation of a law is if key components of it are left to the discretion of government agencies.  I doubt John Cochrane would be surprised.  With this new wave of off-reservation gaming, the IGRA of today feels quite different from the law that was enacted in 1988.

Economic Research: What's in a Soundbite?

Last weekend, I attended the Law and Economics of Indian Country Economic Development Conference at the Minneapolis Federal Reserve Bank.  It was an interesting mix of scholars (lawyers and economists), policymakers, and practitioners of policy regarding Native Americans, tribes, and American Indian reservations.  I was invited to the conference because I am an Indian Country Scholar (see here and here), but this was my first experience interacting at a conference with such a diverse crowd of people interested in the economics of Indian Country.

The audience was diverse across disciplines, but as the conference went on, I became aware of an interesting set of differences among the scholars of Indian Country.  To make a stark simplification, there are two camps of Indian scholars: 
  1. Those who want their research to inform Indian Country policy, and ultimately, improve the lives of Native Americans.
  2. Those who view American Indian reservations as an interesting and fruitful empirical setting from which to draw general conclusions.
Of course, this "two camps" view is a simplification because most Indian Country scholars in the room want both (1) and (2).  But, at the conference, it became clear that some Indian Country researchers prioritize (1) over (2) while others prioritize (2) over (1).  This conflict of priorities says quite a bit about  what it means to conduct research, especially research that has policy implications.

If you prioritize helping Native Americans over drawing general conclusions, you start to care about what you conclude.  That is, you do not want to come to a conclusion that will provide the foundation for hurting Native Americans through policy enacted because some politician takes an ill-advised soundbite from your work.  One Indian Country scholar actually suggested that we consider what conclusions policymakers will draw from our study when we first begin the project.  The implicit suggestion (not stated outright) was that any research that could hurt Indian Country through this channel is damaging, and should not be done.

This scholar was not implying factual inaccuracies or logical inconsistencies in the research to be done.  An implication was that perfectly well-founded research with inconvenient conclusions (or conclusions that could be politically skewed to be inconvenient) is not worth doing, and should be avoided.  This perspective is foreign to me because I view the goal of research as gaining a better understanding of the world.  This politicization of research is not an issue unique to Indian Country research, and it may help to take a more well-known example (popularized in Freakonomics) to show the general point.

Levitt and Donohue (2001) is an article about how abortion legalization in the 1970s caused crime reductions in the 1990s.  From their conclusion,
These estimates suggest that legalized abortion is a primary explanation for the large drops in murder, property crime, and violent crime that our nation has experienced over the last decade. Indeed, legalized abortion may account for as much as one-half of the overall crime reduction.
Now, a policymaker may take this quote as ammunition to implement pro-choice policies.  Indeed, the Levitt and Donohue article is controversial for this reason, but look at what the authors say two paragraphs later to conclude the paper:
While falling crime rates are no doubt a positive development, our drawing a link between falling crime and legalized abortion should not be misinterpreted as either an endorsement of abortion or a call for intervention by the state in the fertility decisions of women. Furthermore, equivalent reductions in crime could in principle be obtained through alternatives for abortion, such as more effective birth control, or providing better environments for those children at greatest risk for future crime.
The Levitt and Donohue study is a poster child for research that can be appropriated for a political purpose, but it has also been cited 466 times (according to Google Scholar).  Many of the cites are positive, but some are critical.  Regardless, the article that started a conversation.  If the research were abandoned at the outset for its potentially-damaging conclusions, this is a conversation that wouldn't have occurred.  

And, that's the way of economic research in controversial settings.  Certainly, there are different issues in Indian Country economics, but a productive way forward is to continue working on important questions.  If the answers to these questions are inconvenient on their face, it's important to think carefully before we map answers to policy, but it is equally important to continue doing the research.  Some conversations need to be had.