Greg Mankiw forgets about the income effect

Professor Mankiw says he can afford higher taxes.  For that I give him credit.  But he also says that higher income taxes might keep him from writing his New York Times column.   He then implies that higher taxes will generally keep people from working.

This is the substitution effect--because leisure becomes relatively cheaper, people consume more of it.  But higher taxes also reduce after-tax income (obviously), so in order to maintain living standards, one might decide to work more in the face of higher taxes.  This is called the income effect.  I can speak for my household--our after-tax income is more than sufficient for our "needs," but if we were taxed more, we might have to work more to satisfy these "needs."

It is an empirical question as to whether within certain ranges of tax rates, raising taxes increases or reduces effort.  Theory gives us an ambiguous answer.  (h/t Mark Thoma).

If NJ Governor Christie wanted to run New Jersey like a business...

...he would not have vetoed the construction of a new rail tunnel from NJ to NY.  It is hard to imagine that this is not a positive NPV opportunity.

A little data exercise on housing affordability

I just had two graduate students here at USC--Sarah Mawhorter and Ray Calnan--find 25th percentile gross rent and 25th percentile income for renters for the 50 largest MSAs in the United States using 2008 American Community Survey Data. If "affordable" means that every household has the opportunity to spend less than 30 percent of gross income on rent, not a single one of the 50 largest MSAs is affordable for renters at the 25th percentile. The least affordable is Miami, where 25th percentile rent-to-25th percentile income is in excess of 50 percent; the most affordable is Kansas City.

Favorite Line of the Week (h/t Bob Van Order)

The difference between a theorem and a tautology is how fast you think.

The William Cohan fallacy

William Cohan the other day complained that Elizabeth Warren fallaciously claimed borrowers did not know what they were getting themselves into when they took out exotic loans. Cohan suggests instead that the vast majority of borrowers knew what they were signing up for when they took out exotic mortgages.

This was certainly the case for some borrowers (particularly speculators), but I am not sure "vast majority" is correct. Understanding the intricacies of, say, a pay-option ARM requires a degree of mathematical sophistication that I would guess is beyond the capabilities of many borrowers. My former GW colleague Vanessa Perry has found that many borrowers do not understand anything about credit beyond their next monthly payment. In the case of pay-option ARMS, this payment was often low relative to income and stayed low for some time, so a potential borrower/homebuyer could be "advised" by a mortgage broker lender and/or real estate broker that an expensive house was indeed "affordable."

Should such borrowers have known better? I don't know. I do know that even though I really wanted to dunk a basketball, it was never going to happen, because I am short and can't jump. Similarly, no matter how much they try, there will be potential borrowers with generally good life skills who will never be able to understand an amortization schedule, and who are susceptible to a good sales pitch. To suggest such people are "responsible" for their plight is akin to suggesting that I am "responsible" for never being able to dunk a basketball.

Might Elizabeth Warren's idea of sufficient consumer protection go too far? Sure. But the events of the past eight years or so strongly suggest to me that consumer protection was insufficient.

Lisa Schweitzer on Transportation funding

She bring nuance to an issue that is often argued about with slogans (go to her post for graphs).

One of the common arguments I hear is that transit is underfunded. Now, this is a subjective question. For those who believe that having transit is absolutely vital to cities, no amount would be enough. So that’s not the point.

The other argument that I hear is that we spend too much on highways rather than transit. Again, subjective. There’s no way to suss this question easily enough for a blog post.

But we can take a look at what people seem to believe is a disparity in funding.

This is the graphic you are most likely to see when we discuss differences between highway and transit funding:

Ok, so of the total, highways get about 55 to 60 percent and transit gets 17 percent on average over the time period, but by the end of the time period, transit’s share has risen to about 20 percent and highways has gone to about 54 percent.

So that’s a pretty big difference in funding. But when you factor in the passenger miles served, the calculus changes. In the following graphic, I have assigned 100 percent of the spending on highways to passenger cars–a major overstatement, but it serves the point. It’s an overstatement because highways also serve trucks (a big deal), motorcycles and some transit (less of a big deal.)




My transit advocate friends will patronize me at this point and lecture me about how I’m not factoring in the external costs of the cars–and that’s true.

But I am not sure that external costs are relevant to expenditure fairness. Whether we factor in external costs or not is relevant to tax policy, for sure, but it’s probably not relevant to the budget equity arguments often made. It’s one thing to talk about optimum investment, which would require marginal social cost: it’s another to try to figure out if transit exists is “David” to auto’s “Goliath”.

Here, we’re trying to figure out if transit riders are getting the shaft. Are they getting the shaft (the transit advocate side)? Or are they rolling in dough they don’t need (the Reason foundation argument)?

This is one of the few times I actually might believe the apples and oranges arguments about comparing. Transit is in a building stage, but highways, for the most part, are in the maintenance phase. We could argue ourselves in circles: to reach investment parity, we’d need to double the transit numbers per passenger mile, etc, etc.

I just don’t know what I think. I need to fiddle with the numbers more.

All these data are from BTS, btw.

Hannah Green blogs from an NGO School in India

She writes:

On Tuesday afternoon, we could either take a nap or go to the Pragnya School, a K-10 NGO school in the village. I said that I wouldn’t go and got into bed, only to realize that I was not really committed to napping. My roommate Christina said that she would go but decided that she was too tired. We sat indecisively on the daybed outside our room, and Jesse said, “Come on, we’re going!” and I said “ugh” and we left.

Outside the Vihar gates, eight of us piled into a single autorickshaw. As soon as the rickshaw got going, I was glad that we hadn’t stayed in. The driver saw that we were having fun and put on some Indian pop. We grinned and jerked our heads to the music and felt the breeze coming in through the bars that held the ceiling to the floor. Music isn’t allowed in the Vihar, although we can hear it from the pujas outside all the time (and we’re allowed iPods). Still, we could never listen together like we could in the rickshaw.

When we arrived, we were surprised to find an assembly waiting for us. Girls with plaits in their hair and uniforms filled rows of benches facing a concrete stage with staircases set in three corners, in very Indian style. There were boys in the audience, too, but fewer of them. Sister Shoba, who wore a conservative pink sari and a large crucifix, showed us to a group of folding chairs in the shade.

The first dance was for the Goddess Dergah, which surprised me because of Sister Shoba’s crucifix. There were many dances. The small girls did a dance for the sun god with a lot of dainty marching and raised arms. Their movements were sweet and easy, even when they moved out of step. The boys did wild acrobatic dances which the girls’ clothing and cultural boundaries would not have allowed. In one dance five boys wore camoflage hats to show that they were soldiers in Pakistan. They died dramatically, doing backlfips and jerking along the ground. When they came back to life, one boy bent over backwards and kissed the ground between his feet. In the dance for the goddess Dergah, a teenage boy danced alone wearing only low-rise jeans and a white kerchief around his waist. He danced with two real torches, twisting his body and tracing his torso with the flames. I was a little envious of all the dancing. In America, you don’t learn to move that way. I also felt that it had been too long since I’d danced because dancing isn’t allowed at the Vihar.

When all the organized dancing was over, one girl got up and danced by herself, then the boys got up and danced and tried to take us with them. At first we hesitated. Robert had told us that once some American girls had started dancing in the street during Dergah Puja, and a crowd of five hundred men gathered within five minutes. But we were within the school walls, and that girl had been dancing alone earlier. Someone said, “Come on! If we all do it, it won’t be that bad!” We danced on the stage in the hot sun.

The boys had moves, and we tried to copy them, bouncing our knees, raising our arms and spreading our fingers. I tried to bend back and touch the ground like one of the boys did, but I tripped up, and one boy said “Is good! You try, you try!” Every time we tried to leave the stage, they said “five more minutes!” until finally Sister Shoba lead us back to the chairs. She looked a little embarrassed for us. “If you had not stopped them, it would have gone on all evening,” she said.

She told us that all the performance had been planned for us that day. I wondered what they’d have looked like if they’d had time to practice.

Sister Shoba and the teachers answered our questions about the school and showed us around. The school was founded in 1991 and now has five hundred students. A group of mediation teacher at the Thai temple had wanted to start a school, and they asked our abbot, the abbot of the Burmese Vihar, to run it because he has helped build and run so many monasteries. Most of the students are younger because a lot of them drop out early for marriage or other reasons. All the students attend for free, but admission is somewhat competitive. The poorest students are given preference, but some higher-caste students are accepted so that the classes can mix. Once the students are in school, the teachers to their best to keep caste hidden. All the students wear uniforms, but on the first day many come very dirty. When that happens, all the dirty students are forcefully sent home to take a bath. “Very soon they begin to come very smartly on their own,” Sister Shoba said. The school tries to teach religious acceptance as well. The students say all the different prayers: Hindu, Muslim, Christian and Buddhist. Of the 500 students, most are Hindu or Muslim. The are five Christians and no Buddhists. Sister Shoba told us that she was Catholic.

“‘Tis a very rare thing, for a Catholic nun to run a school like this,” she said.

Inside the school, we saw tiny classrooms painted blue. We saw the three or four computers that all the students use to learn. The ceiling fans had “World Peace” written in Hindi on each blade. From the upper stories and the roof, we got a good view of nearby rice fields and the Chinese and Tibetan temples.

Sister Shoba said that the school’s main problems are financial. Someone asked if they got money from the government.

“No. And we wouldn’t want because then we have to follow government rules.”