Student Presentations

I've generally given up the struggle to comment productively and politely about student presentations, in favor of the uncontroversial point that the LKY school should put more resources into training students on public speaking and presentations at the beginning of the school year, and should do something to get professors to be a bit more rigorous and consistent on evaluating student presentations. And I do have one more point:

A simple test to determine if a recommendation is meaningful or just bullshit is to see if offers a real choice. Would you actually consider doing the opposite? Consider:

• get on the "learning curve"
• build capacities

Is that helpful? Did you depend on that advice to help you NOT do the following things:

• get off the "learning curve"
• destroy capacities

That aside, I want to make a point about cancer. There's a serious problem in how cancer statistics are interpreted by scientists, doctors, the media, and the public. I think Gird Gigerenzer's book was my first exposure to this paradox. It's this: cancer screening is not a purely positive thing, and actually may be a bad thing in some cases. Let's look at how this could be true:

Take a simple country with 1000 people, who live to age 70, and only one kind of cancer. If there is no cancer screening or cancer treatment, 10 will die of cancer, and all at age 60. Since there's no cancer screening, these ten cases are not discovered until they have severe symptoms, let's say at age 58. So the average survival duration after cancer detection is 2 years.

Now restart our clocks and add cancer screening, every two years starting at age 40. This time, 10 cases of cancer are discovered, all at age 54. Everybody gets treatment. They all die at age 60. The average survival duration after detection has risen to 6 years. But all that really happened was that ten people each spent an extra four years dealing with cancer. They didn't actually have longer, better lives.

Now, let's go one more time around, adding super-sensitive cancer screening. This time, 20 cases of cancer are discovered, all at age 50. Everybody gets treatment. Many go into remission, but ten still die of cancer at age 60. The rest die of other causes at age 70. The average survival duration after detection has risen from 2 to fifteen years! But in fact, nobody lived any longer than they would have without screening, and twenty people lived as cancer survivors for years or decades, having paid in money and blood and tears for treatment that didn't actually help.

Think this model is absurd?

AN Australian researcher says there's little evidence that prostate cancer screening saves men's lives.

And Professor Simon Chapman of the University of Sydney said a study of Australian newspaper and television stories about such screening for prostate cancer found most of them promoted it aggressively, ignoring the almost complete absence of evidence that it would save lives. — The Australian

The point is that not all cancers will kill you, at least not before something else will. We can detect cancers that we can't effectively treat, and we can't always differentiate between cancers that will kill you and cancers that won't. And it's a fallacy to say it's always better to be safe than sorry, because it doesn't work that way. False positive results, being told you have cancer when in fact you aren't slated to die from cancer, can lead to more than a little sorrow, especially if you undergo expensive and painful unnecessary treatment. The National Cancer Institute in the US says the same thing, but in a much more convoluted way:

At least two requirements must be met for screening to be efficacious:

1. A test or procedure must be available to detect cancers earlier than if the cancer were detected as a result of the development of symptoms.
2. Evidence must be available that treatment initiated earlier as a consequence of screening results in an improved outcome.

These requirements are necessary but not sufficient to prove the efficacy of screening, which requires a decrease in cause-specific mortality. For example, these two criteria are met in the case of screening for childhood neuroblastoma by assessment of urinary catecholamine metabolites. On the basis of these criteria, a mass screening program was conducted in Saitama Prefecture, Japan, between 1981 and 1992 for 6-month-old infants.[3] Over that 12-year period, the annual incidence of neuroblastoma in children younger than 1 year increased from about 28 per million to 260 per million but without a significant reduction in incidence in children older than 1 year. Because there also was no reduction in mortality for the disease, this experience provided strong evidence of overdiagnosis—diagnosis of some neuroblastomas detectable by screening, which would not have been clinically diagnosed later. Similar experiences have been reported elsewhere in Japan [4] and in the Quebec Neuroblastoma Screening Project (QNSP) in Canada.[5] The history of screening for neuroblastoma also provides a useful illustration of the benefit of undertaking well-designed evaluations of emerging screening technologies before implementing screening programs. Although such studies are very costly, it has been shown that the QNSP itself averted unnecessary morbidity for thousands of children and did so while returning a yield plausibly estimated at a cost savings 64.5 times the investment in the study.[6] —NCI

In case you didn't follow, let me translate:

Cancer screening is a bad idea unless there's a test that finds cancers early, and treating these cancers early actually helps. Even then, screening may not be a good idea. They did a twelve-year test in Japan where they found way more brain cancer in infants under age 1, but cancer detection rates in older children didn't change and on average nobody lived any longer. So screening infants for brain cancer (at least, with that kind of screening and that kind of brain cancer) was a big waste. That 64.5 times savings they mention is, if you read carefully (and I had to check the abstract of footnote six to be sure I had it right), is the savings from scrapping unnecessary cancer screening programs, not the savings from performing screening. Bury the lede much?

Remember, these are general points. This is not a diatribe against all screening, or in favor of cancer. But it is clear that screening is not an unmitigated positive, and it's a big mistake to think it is. This is a tough point to make in the face of powerful individual appeals from survivors, but the underlying issue is the same as other kinds of medicine: individual testimonials are not data. If you have a mental picture of someone dying unnecessarily from a late diagnosis, you need to balance it with a mental picture of someone dying unnecessarily from treatment for a cancer that they don't actually have. Then you can put all of this emotion to the side and get back to evidence-based medicine. Put another way, humans are not wired to think accurately about statistics, and we need to remind ourselves of this weakness constantly.

Student presentations.

CPF changes in 2007

CPF is Singaporean Social Security. The first presenter spends 6:30 giving a recitation of minor details of the 2007 changes to the CPF, presented devoid of context or interpretation. Example: "By legislating re-employment by 2012, to require employers to offer re-employment to workers reaching 2 up to age 65, and eventually to 67".

Second presenter: Analysis. Will the reforms encourage people to work longer? will they benefit low/middle income/older? Will the resource be enough [sic]? More reading verbatim from slide.

Do the changes actually benefit low/middle? Not really.

Questions: What does it mean that the plan allows reduction of older workers' wages?

Joel's evaluation:

• Reading/reciting text from slides: check.
• Poor time management: check
• Slides filled with hundreds and hundreds of words in small text: check
• Overall thoughts: might be a good presentation to a group of Singaporean accountants. As a presentation of policy analysis, dry and difficult. Dives directly into excessively detailed exploration of minutiae without without any introduction, explanation of context.

Prof's evaluation: presentation doesn't refer to any economic concepts from class.

Public Housing Subsidy: UK vs Singapore

• Reading/reciting text from slides or notes: check. Softer-spoken reader, too, so the soporific effect is amplified. I want (as I do with most student presentations) to go up and rip the notes out of her hands and shout "snap out of it!" Next presenter in the group much better on this account. Update: no, I take that back. As she's gotten deeper into her time period, she's talking way too fast as she simply shovels out words in a stream. If you have 20 minutes, you need to reduce the number of ideas to fit, not just talk faster. And you need to present a hierarchical structure: here are my main ideas. Now I'm talking about the first main idea. Now I'm telling you three details in support of my first main idea. Now I'm telling you my second main idea. Etc. Instead, this is just a flood of words that goes on and on, almost in a chant, without any use of pauses or any other structure, so once you tune out, you're gone.
• Poor time management: No. finished 2 minutes early
• Slides filled with hundreds and hundreds of words in small text: check
• Overall thoughts: Once again, the presenters' focus is on the minute facts and details that they have researched, not on introducing an idea to the audience. These presentations are way, way, way too detailed in the wrong, wrong wrong places. All facts and data, little to no information or knowledge.

Singapore Healthcare Policies and Financing

In 2005 Singapore spent 3.8% of GDP (with government contributing a total of 0.9% of GDP, or about a quarter.) Would love to see that directly contrasted with other countries (the US as the most expensive, Japan, the other Tigers, etc). Oh, now we get some pointless small details.

• Reading/reciting text from slides or notes: Check. Just as painful as the last one. If you are reading your entire presentation verbatim from a piece of paper, you are failing. If you can't hold the ideas of your presentation in your head, how do you expect your audience to do so? Second presenter is much better on these terms, though he's picked up the hyperfast talking problem. (I also talk way too fast when presenting.)
• Poor time management: finished 4 minutes early. borderline between good and too short, but certainly far better than too long.
• Slides filled with hundreds and hundreds of words in small text: check. Bonus demerits for using clip art figures with incongruously pink skin. Further demerits for pointless animation. Credit for actually stating a conclusion more or less clearly, but still the same absurdly busy, pointlessly overformatted, essentially randomly organized slides as everybody else.
• Overall thoughts:

Das-Gupta, Arindam (2005), “Non-Tax Revenues in Indian States: Principles and Case Studies”

Asher, Mukul G. (2005) “Mobilizing non-conventional budgetary resources in Asia in the 21st century”, Journal of Asian Economics, 16, 947-955. Via ScienceDirect

Here's the abstract:

The 21st century will be characterized by the curtailment of tax policy autonomy and high locational elasticities for economic activities. Resource mobilization tasks for Asian governments will therefore be far more complex. With respect to traditional taxes, base broadening and modernization of tax administration will have to be primary instruments of raising additional revenue rather than rate increases.

The paper suggests that Asian countries will need to substantially enhance their capacity to benefit from innovative instruments of resource mobilization. These include public asset restructuring, treasury management, and revenue from creation of property rights, regulatory levies and more effective use of cost recovery and user charges. Resource mobilization and delivery of public services will have to be increasingly linked. An Asia wide tax forum to address common concerns, such as tax avoidance will need to be considered.

Here's my translation:

Attention Asian governments: it's going to get much harder for you to collect taxes. You should try to collect taxes from more people, and do a better job collecting taxes. But you're also going to have to find new ways to get money, like renting out government land, getting more money for your oil, and charging more for government services. And you should start cooperating with each other to catch people trying to hide taxable revenue in each others' countries.

Bailey, Stephen J. (1994) “User-charges for Urban Services” Urban Studies Vol 31, No 4/5, pp 745-765. Via EBSCOHost/Business Sources Premier. (Optional)

• "User-charges increased from about one-quarter to one-third of all own-source revenue in the US during the 1970s and 1980s" What's "own-source" revenue?
• Some services traditionally have user charges: sewers, street maintenance, waste collection. Not fire or police. Libraries avoid heavy user charges. "User charges for [outdoor] sports facilities [in the UK] ... cover less than a quarter of the debt charges and running costs ... Copy-cat charging leads to a broad uniformity of user-charges ..."
• The history of user charges is more complicated than simply substituting user charges for taxes.
• Look, look, actual humility from an economist: "More generally economists' pricing prescriptions lack situational relevance for practitioners, policy-makers and users .... Government and academic economists [tend to] fail to consider implementation theory. Economists are partisan advocates of efficiency with no natural priority over other participants in the public expenditure process."

Lecture

Various points about wages and taxes. The backward-bending supply curve.

Here's an interesting review of a book about the real shape of the supply curve: inverted S.

[Work Behavior of the World's Poor: Theory, Evidence and Policy by Mohammed Sharif] provides a sound theoretical alternative to the conclusion that poor workers are irrational or perverse when they increase labor supply in response to falling wages. Instead, by focusing on how, when wages fall below subsistence, workers are forced into a distress sale of labor in order to survive, the authors may awaken in economists and policy makers greater sensitivity to the plight of poor households.

We're running in circles on the point that "Income tax with FULL LOSS OFFSET encourages risk taking." I'm not really following the specific math, but the underlying point, if it's the same as the reading (page 589 in Stiglitz), is this: If you can get a full tax offset for your losses, then the net effect is a bit asymmetrical, like a bit of a subsidy (not sure why, lost track of the numbers). Also, and I think this is the main point in the reading, if the government provides tax offsets, the government is effectively acting like a partner. The government thus becomes the partner of last resort, and this is probably economically good.

Covering the Week 7 reading. I'll blog more if anything surprising happens.

Who pays Malaysian taxes on food grown in Malaysia and exported to Singapore? Singaporeans, because Malaysia taxes food at the point of production, and that tax gets passed along the supply chain. (Which is good, I think, because source taxes are the most efficient in internalizing costs. Appropriate source taxes on carbon-based energy would solve the global warming problem.)

The Greek letter η sure gets around; Wikipedia lists 17 uses ranging from "the efficiency of a Carnot heat engine" to "viscosity". I wonder which Greek letter has the most diverse scientific uses? Today in Class notes I investigate ... and the results may surprise you!

Letter	# of uses*
α	14
β	11
γ	17
δ	24
ε	15
ζ	4
η	17
θ	13
ι	3
κ	10
λ	29
μ	18
ν	10
ξ	13
ο	0 (zero)
π	17
ρ	8
σ	19
τ	16
υ	1
φ	21
χ	11
ψ	10
ω	24

* According to Wikipedia, counting only direct uses of the letter symbol in a science (math, etc) context, not the name, and combining upper and lower case.

I think we are covering the material from week 4's reading. Market power, monopolies, and regulation. Did I mention that Brad Smith will be talking at the NUS Law department tomorrow afternoon? The topic is "Globalization: The Changing Role of Lawyers In A Flat World". My dismay about the further propagation of a classic Friedman malapropism aside, I think it should be interesting. We'll see what he has to say about Microsoft's steady accumulation of billion dollar fines from the EU; it must be frustrating to buy off one government only to have another shake you down for more petty cash.

Detailed explanation via supply and demand curve (as our management professor says, economists have only one trick, that of drawing diagrams with crossing lines) of how a monopoly imposes a net social cost. That is, not only does a monopoly transfer more than a "fair share" of wealth from buyers to it, but an market with a monopoly has lower total productivity than a market with competition. Joel's note: A classmate previously opined that the key to making serious money is to make some kind of monopoly, c.f. Bill Gates and Carlos Slim. (But what is Buffett's monopoly in?). So the real meat in economics, especially in terms of public policy, is probably in figuring out how organizations make monopoly spaces in which they can rake in the rent while, presumably, hurting society.

If you regulate a monopoly by allowing them to earn a certain rate of return, they are incented to over-invest.

A legal cartel: OPEC. Joel's note: OPEC is only legal because there is no international antitrust law. I guess a libertarian would say that anything that isn't outlawed is legal, but I wonder about that from a linguistic standpoint. If there is no relevant law one way or the other, it seems neither legal nor illegal.

No mention of AT&T and monopolies should go without this picture.

Joel's note: if we are talking about monopolies in the context of Public Administration, especially in Asia, shouldn't we be talking about how many governments depend on telecommunications monopolies for tax revenue?

If a monopolist can perform complete price discrimination, it will operate with no deadweight losses, which is good for society.

Real manatees, 1,200-pound mammals sometimes referred to as 'sea cows,' are not considered the most agile of creatures and often get caught in boat propellers. —AP

Uh, yeah. If only those clumsy fools would stop bumbling into boats. Certainly the fact that humans are operating motor boats in manatee habitats is not the problem. This reminds me of Diddy's claim that the other guy's "face ran into my fist.

N.B. The picture above links to a fairly mild story. Here is a much more pertinent story about manatees and boating, but the picture is slightly more gruesome. This story claims that "25-30% of manatee deaths statewide [Florida] are attributed to watercraft injuries". However, it also claims that "the difference between the force of a strike at 30 miles an hour is exactly twice that of a strike at 15 miles an hour, all other factors being equal". Grammar error aside, the problem with that sentence is that kinetic energy increases by a factor of four if the speed doubles, and kinetic energy is more pertinent than force in determining the severity of the wound.

P.S. Yes, I am procrastinating from class public finance reading. You would too if you had to read that "if private savings currently equals 5 percent of GDP, and the interest elasticity is .1, then reducing the tax by 50 percent increases the return to capital by 12.5 percent, and increases savings by just over 1 percent, or .05 percent of GDP". And this is a relatively well-written and very readable text.

Stiglitz: Chapter 18 (except 510-513, US taxes), 19

• p 483: Taxes often end up affecting people other than those intended. In the United States, social security tax is paid equally by employers and employees, but economists believe that employers have enough power to shift almost all their share back to workers. This makes it a bad tax, because it is not transparent: the actual incidence (distribution of tax burden) differs from nominal incidence. (This becomes apparent when people argue that low-income Americans don't pay any tax. It's true that workers below a certain income level don't have any tax deducted from their paychecks. But the employer still pays payroll tax, and to compensate the employer reduces the wage of the worker. This can be so invisible that even the US Treasury leaves it out of some analysis (see "Who Really Pays?" section in that link))
• p 484: Subsidies have the same shiftiness problem. A subsidy paid to corn farmers may not stay in their pockets: "if the price of corn falls, the benefit is shifted forward to consumers; if the price of land ... increases, the benefit is shifted backward to the owners of the land"
• p 486: If an item currently selling for $1 is taxed at 10¢, the supply curve shifts by 10¢. In a perfect market, sellers will always raise prices as much as the market will bear. How much the market will bear is determined by elasticity. If price elasticity of demand is 1 (or perhaps -1?), then the new equilibrium price will be $1.05, and half the tax ends up landing on consumers.
• p 495: taxes on purely inelastic factors will land on the intended recipients and can't be shifted. The supply of crude oil is long-run inelastic, so a tax on oil in borne by owners of oil and can't be shifted.
• p 496: taxes on purely elastic factors are shifted completely. "The supply of capital to a small country is ... highly elastic." The capital can go anywhere, so if the country tries to tax it, it will go to another country. The only way for anyone in that country to get capital from abroad is to offer a return equal to what the capital can get elsewhere, plus the tax. So the tax is shifted to local users of capital, not paid by the suppliers of capital.
• p 496: Philadelphia's wage tax ultimately is paid by landowners.
• p 498: with imperfect competition, these rules change.
• p 507: corporations don't bear taxes. Shareholders, workers, and consumers bear corporate taxes. (Yes, but how do you push the corporate tax burden onto shareholders instead of workers and consumers?

Chapter 21, pp 582-592

• p 584: "FairTax" proponents are correct that, in theory, a tax on consumption is macroeconomically better than a tax on income. But in practice, many factors intervene, most notably foreign investment.
• p 589: Capital gains tax, with provision for deducting losses, may increase risk taking (in a good way, I think the point is) because the government is effectively sharing the risk for people who could not otherwise find any investors.
• p 591: His name is Steven, not Stephen. Also he's adopted and his biological father is a Syrian political science professor.

Chapter 24, pp 678-686, and 25, pp 704-711( Tax avoidance)

• There are lots of ways to avoid taxes (legally). They boil down to moving taxes to the future, or moving taxable assets to a category with lower rates.
• In 1997 Americans spent $60B on illegal drugs. The US underground economy is about seven or eight percent of the size of the visible economy.

Rajan, R.S. (2004), "Measures to Attract FDI: Investment Promotion, Incentives, and Policy Intervention", Economic and Political Weekly, January 3.

A new study involving 32 developing economies indicates there exists a statistically and economically significant negative [correlation] between administrative costs and FDI to GDP ratio.

If there's a lot of paperwork, you get less foreign investment. If you think foreign investment is good (which is the consensus view), this is a bad outcome.

Das-Gupta, Arindam (2005), “The economic theory of tax compliance with special reference to tax compliance costs” in Amaresh Bagchi (Editor) Readings in Public Finance New Delhi: Oxford University Press, pp. 250-255. (Rest of the chapter is optional)

M&M, Chapters 14, 15 and 17. (Optional)

Fletcher, K. (2002), “Tax Incentives in Cambodia, Lao PDR, and Vietnam”, Paper prepared for the IMF Conference on Foreign Direct Investment: Opportunities and Challenges for Cambodia, Lao PDR and Vietnam Hanoi, Vietnam, August 16-17, 2002

Musgrave, Peggy B. (2006) “National Taxation in a Globalizing World”, in NPF, pp 167-194.

I started reading this, and fell asleep. When I woke up, I tried again but stopped when the drowsiness returned. I do think the subject is interesting: how should personal and corporate taxes work when the residency/location and citizenship of the taxed person are in different countries? But just about every sentence in this text was filled with specific technical terms from tax policy and I couldn't get my mind to track.

Lecture

How is globalization affecting the ability of countries to raise funds? Many countries derive substantial revenue from taxes on or ownership of telephone monopolies, which are challenged by globalization and new technology. Countries have to pay attention to financial analysts who cover them. Taxation issues cross national borders. Many US policies, such as international phone call rate agreements, have had substantial fiscal impacts on developing countries, which were not planned.

The next big global argument may be on procurement. Should domestic companies get preference in procurement? (Joel's note: this is certainly an issue already in the US in military equipment issues. Don't forget the Richard Perle scandal, when the uber-hawk was being paid to lobby the Pentagon to use a phone system owned by a Chinese company. That's perhaps a bit off the main point of global procurement issues, but it's so easy to forget just how comprehensively corrupt so many people in the Bush administration were and are.)

"The tax and expenditure to GDP ratio has held reasonably steady" but will be under steady pressure as globalization undermines tax bases. Examples of fiscal termites: ecommerce, e-money, intracompany trade (e.g., transfer pricing to shuffle money between subsidiary companies to avoid taxes), offshore financial centers (race to the bottom), derivatives and hedge funds, inability to tax financial capital (because it's so mobile) or to tax incomes of workers with mobile skills, growing foreign activities (e.g., the Rolling Stones stashing their money in the Netherlands), and foreign shopping.

Joel's note: This article, although containing some silliness ("the Coolidge tax cut in the 1920s, the Kennedy-Johnson tax cut in the 1960s, the Regan tax cut in the 1980s and the Bush tax cut a few years ago all led to both increased economic growth and increased tax revenues"—see this rebuttal), raises interesting points about nationality and taxation.

Further note: here's an interesting tidbit from the 2008/9 Singapore budget that came out last week:

Singapore’s financial centre has seen good growth and has significant new opportunities ahead, particularly in Asian markets. Islamic finance is a promising area and we will ensure that Singapore’s financial markets are conducive for its growth. To encourage more Shariah-compliant financial activities to be done out of Singapore, I will introduce a 5% concessionary tax rate for income derived from qualifying Shariah-compliant activities ...

Race to the bottom: it turns out people realized that the environment is economically important, and so there was no race to the bottom after all. (Joel's note: I don't think I captured the explanation properly, but he definitely just said there was no race to the bottom. Huh? Does shifting headquarters to tax havens not count?)

China didn't set up a national tax entity until 1994.

More tidbits from browsing the budget: "I have therefore decided to remove Estate Duty from our tax regime, with effect from today." Notice not just the tax policy content of this, but the tone and process. Doesn't the budget have to get ratified by Parliament? Or can the finance minister just get rid of the Estate tax by executive decision?

Comprehensive vs gradual tax reform. Crisis provides the political window but is not a good time to solve complex, long-term issues. Gradual reforms have less shock.

Is there a case for global tax? "The world hasn't even digested WTO yet," so no.

Non-conventional sources of revenue

Prediction: taxation as a revenue source is going to get trickier; there will be less emphasis on ideology and more on practicality.

New sources: use existing assets more productively: forex reserves, real estate, people. Create new property rights: emissions trading, fees and user charges, property rights for the poor. More revenue from oil and mining concessions.

When Singapore left Malaya, the government owned 40% of the land. Now it owns 80%, and generates 3-5% of GDP from leasing. (Joel's note: I'm assuming that Temasek or GIC owns my landlord, Far East Corporation, and so my rent is paying for my tuition scholarship.)

Better treasury management. More efficient procurement. Better use of remittances. Gambling duties and taxes on TV prizes.

Economic Effects of Taxation

A multi-million dollar study of the effects of tax breaks on research showed no real effect in research—companies just redefined their existing business activity as research. (Boy, it's hard to google for research on the effects of tax breaks on research.)

A direct tax is one which can't be shifted. If a doctor used to see you for 10 minutes, and after the tax increase they see you for 7 minutes, they just shifted 30% of cost to you. In practice, there's no meaningful difference between direct and indirect tax, despite their entrenchment in policy thinking.

A progressive tax is one in which the effective tax rate increases as income increases. Classmate: corporate tax rates are flat, so is that a progressive tax? A: corporations don't pay taxes, only households pay taxes. You have to do the analysis to find out to what extent the corporate tax is borne by wealthy and unwealthy households. It's shared among shareholders, possibly consumers, maybe the suppliers. Every tax in a capitalist economy can ultimately be traced to households. In terms of this deep analysis, economists don't exactly know who pays corporate taxes or property taxes.

Income is anything that increases a household's potential consume more scarce resources. Joel's note: Where does that put stock options? It seems like, by that definition, a lottery ticket that doesn't pay off isn't income, so is a stock option income prior to being turned into stock?

After taking into account the bigger definition of income and all of the different taxes, the effective tax rate in the US is fairly flat, with a little increase at the end. Joel's note: That's not what this report shows, although it is from 1994 and from a likely biased organization.

Meanwhile, the "poverty trap" still exists: "A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. ... I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. " —Jeff Liebman.

The key is not more savings. It's possible to implement government programs that appear to increase savings but don't. What's most important is how well savings translate to productive investment.

In rem: "of judicial actions, claims, or rights: against or with reference to an object or property and not availing against a specific person; so as to impose a general liability, esp. to respect ownership" (OED). A sales tax is in rem, because it can't be tailored to the taxpayer. An income tax is personal, not in rem.

States greatly overestimate the amount of impact on behavior they can effect with tax incentives.

A lot of tax policy is based on normative thinking.

Musgrave, R.A. and Musgrave, P.B. (1984), Public Finance in Theory and Practice, McGraw Hill, 5th edition, Chapters 12 and 13

A study of tax incidence, that is, who actually pays a given tax. Like cockroaches, tax burdens tend to squirm around. If there is a tax on X, the price of X will go up, so some people will buy Y instead, which increases demand for Y, so the price of Y goes up. (It reminds me of orbital mechanics: "East takes you out, out takes you west, west takes you in and in takes you east".)

Since this seems to affect almost all kinds of tax, it doesn't seem like something to worry about too much. But it is useful to consider progression vs regression. In particular, tax on capital tends to be progressive, and tax on income tends to be regressive. Now you know why the capital gains tax is lower than the income tax: the people who can afford to buy legislation would prefer to pay less tax.

• p 213: there's a great chart of "points of tax impact in circular flow". If you want, I dunno, maybe 30% of the knowledge of the entire class (for example, the difference between a VAT and a sales tax), understand that chart. Here's another version of it, although not as good.
• p 215: In order for a tax to take into account the taxpayer's ability to pay—that is, in order to have a progressive tax—the tax must be applied at the householder. So most of the tax points on the chart are going to be flat or regressive.
• p 219: two theoretical foundations for defining fairness in taxation, benefits principle and ability to pay.
• p 220: this definition of benefits principle is starting to sound like use tax: "each taxpayer would be taxed in line with his or her demand for public services." What about the notion that, if you live in a secure, free-market society, the richer you are the more benefit you are deriving from what that society makes possible? That is, it seems like both of the theories should support progressive taxes.
• p 220: by benefits theory, whether a system should be regressive or progressive depends on the ratio of income elasticity of demand for public services to price elasticity. Given how sticky the market for citizenship in different countries is, how can either of those elasticities mean very much?
• "Conclusion: ... the choice of tax base cannot be made in a theoretical vacuum."
• Defining equality in terms of equal sacrifice. Under what circumstances is the sacrifice of not being able to buy a Gulfstream IV jet equivalent to the sacrifice of not being able to buy a used Honda station wagon?

Recap of the first three weeks.

Comprehensive budgets

The US has among the most transparent budgets in the world, but even the US doesn't have a consolidated budget, because the federal, state, county, and city levels all have different budgets.

Joel's side research: the seven key budget documents are the budget, the pre-dudget report, monthly reports, the mid-year report, the year-end report, the pre-election report, and the long-term report.

Tax expenditures: forgone revenue, i.e., subsidies, in the form of tax exemptions, deductions, rebates, or concessional tax rates. Should be counted as costs in the budget but nobody does (though the US and Canada put them in addendices). By the way, note that the US budget has grown as a percentage of GDP during Bush's tenure. It was roughly the same at the end of Reagan's terms as at the beginning, grew during Bush 41, and shrank during Clinton. In absolute terms, of course, it grew the whole time.

Autonomous agencies: Owned by the government but not part of government. "Singapore specializes in them."

Governments are switching from cash-based accounting to more economically accurate accrual-based accounting.

If you must have a partial budget, what can you do to keep it from being totally fictitious? Don't net. Use consistent categories on and off budget. Provide full oversight of off-budget funds, even if legislatures don't do it. Fully disclose.

Budget systems

• line item/compliance. Money is subdivided into various buckets, "line items". Money can't be moved between lines ("virement"). Tightly controlled, but inflexible (Joel's note: which usually means that, because it's too tight, people find all kinds of workarounds in order to get their work done and so the nominal figures are meaningless).
• performance budgeting. Never widely used. Focus on cost efficiency, but not on the purpose of the expenditure. Florida has something called performance budgeting, but it's not the same thing. Based on some searching, it looks like the definition in this class is the anomaly. Perhaps input-based budgeting is the better term.
• Activity-based costing
• zero-based budget. Impractical. Announced in India in 1980s but abandoned. Classmates: we use this in the Philippines.

History of Singapore's budget process:

1. until 1978: line item
2. to 1988: programme
3. to 1996: block vote
4. to 2000: "Budgeting for Results"
5. to 2003: "Budgeting 21"
6. present: Resource management (accrual accounting, Net Economic Value)

Next step in Singapore: take into account the value of Singapore government's assets.

Joel's note: as we discuss "features of sound budgets", it's worth noting that Alaska's congressman, Don Young, is head and shoulders above the crowd doing his best to bring the quality of the US budget process back down to third-world standards. In addition to the pork that all US lawmakers pursue, he has also earmarked funds for a Florida road that benefited a (Florida) campaign contributor. (It's 3934 miles from Naples, Florida, to Anchorage, Alaska.) Even more egregiously, he's violated the constitution by changing the text of a bill after Congress passed it. Which makes you wonder ifhow often that's happened before ....

Alan Schick's Reform Sequencing. Things like account for cash before accounting for accruals. External controls before internal controls. Financial auditing before performance auditing. Etc.

Png, Chapters 8 and 9.

Economics of the Public Sector, Joseph E. Stiglitz, Chapter 8.

A basic discussion of what conditions under which governments should, in addition to funding goods and services, actually produce them. This is the crux of privatization, and I suppose that what you think of privatization depends on what mental image it summons: exceptionally inefficient government agencies with bad lighting and employees that should have been fired years ago, or corrupt companies buying off congresspeople to get money for nothing. It also depends, fundamentally, on something Stiglitz perhaps doesn't state strongly enough: the purpose of civilization is not to maximize allocative and productive efficiency. It is to improve the lives of its members. These two purposes are not universally coincident. That said, two details in the chapter caught my eye. Remember that the text was written circa 1998 or even earlier:

"There is concern that if the Patent Office became a performance-based organization, it might not make these decisions in a way which best reflected the national interest."

In 1991 the US Patent Office was changed to be funded by fees on patents. The more applications processed, the more money they take in. That, combined with the internet boom and various bad decisions about what can be patented (business methods, genes), has led to a meltdown of the patent system, to the point where there's a plausible argument that the patent system in its current form is doing more economic harm than good. See James Gleick's 2000 article for starters. Here are some actual patents:

• Animal Toy (a plastic stick)
• Getting a cat to chase a laser pointer
• Swinging on a swing

(many more here). Why is this a real, multi-billion-dollar problem instead of just a gag, you ask?

Bad patents are everywhere: covering obvious inventions (the crustless peanut butter and jelly sandwich), ridiculous ideas (a method of exercising a cat with a laser pointer), and impossible concepts (traveling faster than the speed of light). More troubling, countless patents that seem reasonable to a lay audience overreach in technical fields as blatantly as that peanut butter sandwich overreaches in a familiar one.

For example,

• System and method for creating multiple files from a single source file
• Method and system for installing software on a computer system.
• Information pointers

(More here). No matter how stupid they are, no matter how obvious the prior art, each one is a legally valid, enforceable claim that will take time and money to challenge. Here's how they get used:

After IBM's presentation, our turn came. As the Big Blue crew looked on (without a flicker of emotion), my colleagues—all of whom had both engineering and law degrees—took to the whiteboard with markers, methodically illustrating, dissecting, and demolishing IBM's claims. We used phrases like: "You must be kidding," and "You ought to be ashamed." But the IBM team showed no emotion, save outright indifference. Confidently, we proclaimed our conclusion: Only one of the seven IBM patents would be deemed valid by a court, and no rational court would find that Sun's technology infringed even that one.

An awkward silence ensued. The blue suits did not even confer among themselves. They just sat there, stonelike. Finally, the chief suit responded. "OK," he said, "maybe you don't infringe these seven patents. But we have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?"—Gary Reback

While some of these abuses predate 1991, I think it's safe to say that patent office has not been making decisions in a way that reflects the national interest. The current status of patent reform remains murky.

The other quote from Stiglitz:

In many areas, there cannot be competition, or competition might be feasible but undesirable. Do we want ... two competing judicial systems?

It seems to be working just fine; the secular court simply defers to the religious court on any conflicts, and the followers of that religion are happy and everybody else is denied judicial recourse. What's the problem? A bit more responsive to Stiglitz's point, here's an article about fatwa shopping, a market for religious decisions.

Expenditure Analysis

Expenditure on final goods and services vs transfer (redistribution). Joel's note: I question the basic premise of today's class. Or I guess I question the implied application. Today's class is about how government spending affects the economy. It uses a strict economic model in which robotic actors maximize utility of available resources. But nations are not bounded by resources, at least not physical resources. Singapore got wealthy without physical resources (it had a good location for shipping services, but it's certainly not the only land near the straits of Malacca. So people as resources are the real limiting factor, in particular their skills and training and motivation and "social capital" (willingness to trust others and do business with them, or even just to not try to kill them). While economics claims to include this within the letter A in economic equations, it's so crude as to be useless in explaining differences in development in China, Singapore, Nigeria, Malaysia, Korea, etc. I agree that we should learn the conventional economic explanation of government expenditures, but it seems like learning Newton's equations to fly to Mercury—if it's all you use, you'll probably miss.

Example from the lecture: building a road increases land prices near the road; this is a distributive effect, because it doesn't add or subtract from the economy. It just moves money to the people who used to live near the road but sold their property, and that money comes from the buyers, who are in the same society, so no net change. But building the road increased the total value of all of the property. Now I've confused myself: the value of the land has increased, but only if people are willing to spend more money for it, and that money has to come from somewhere, so it seems like wealth both was and wasn't created.

"Health care is income [in]elastic, so when you get richer you consume more." I really wish I had heard clearly if he said elastic or inelastic. On the one hand, my anecdotal knowledge tells me that rich people spend a lot more and poor people forgo even necessary health care, which sounds like income elasticity. But I also know that people spend what they have to spend in emergencies, and poor people who don't get preventative care end up paying (or at least costing society) more in the long run. A quick search suggests that "the income elasticity of health care [is] 0.817 to 0.844", which makes it a necessity good, not a luxury good. I guess that means it's slightly inelastic? But RAND finds an even less elastic number, 0 to 0.2. That's so different that I have to be suspicious of both numbers.

Paraphrase from lecture: Marx faltered when he treated labor as the only input; that's where Das Capital gets confused. You can't produce without including all of the factors.

Paraphrase from lecture: the Singaporean honors students get worked up when I tell them they are all walking bundles of subsidies. "no, no, Singapore doesn't have subsidies," they say.

It's impossible to subsidize a single good, because if you reduce its relative price, you change the overall balance of how much of that good people buy relative to all other goods. Joel's note: but the psychological effect of subsidizing something is probably also real.

When income tax exemptions are used to incent people, richer people (who pay more taxes) are being subsidized. Joel's note: but not by the poor, who don't pay taxes, right? Though the poor are still paying sales/VAT and presumably other taxes. Taxes in Singapore start at S$22,000 (US$15,460). See also this forum discussion.

The overall point the professor is making, which many students at break hadn't quite caught, is that if taxes are progressive, subsidies on the form of tax rebates are regressive. And we have a fresh example of this at hand.

Once again I am on call to provide facts about the US, and once again I'm close but wrong. I said that the cap for mortgage interest deduction was "in the millions, or maybe there is no limit". The truth is more complicated, which may not surprise you since we are talking about the US tax code. There's no limit for mortgages from before 1987; after 1987 the limit drops to (skipping over some details) $1 million. But there's a limit on how much you can deduct overall, and the Alternative Minimum Tax kicks in at some point. So (and I'm not going to research any further) I think that the tax break for mortgages must trail off after maybe $200,000 in annual income. I also said the top tax bracket was 38%, but it's actually 35%.

A side note: the co-author of some of our textbook readings, Edgar K. Browning, is also the author of Stealing From Each Other: How the Welfare State Robs Americans of Money and Spirit, which argues that

Almost all Americans would be better off if none of the federal welfare-state policies of the last century--including Social Security--had ever been enacted. ... Welfare-state policies have large hidden costs which all told have reduced the average income of Americans by about 25 percent. ... There is much less inequality and poverty than is commonly believed

Perhaps he's intended to balance out our Stiglitz?

Negative income tax. Comprises a flat tax plus a gradual rebate. It has to be a gradual rebate or else there would be no incentive to make money. Three variables: income guarantee, marginal benefit reduction rate, and breakeven income. Suppose the rate is tax rate is 10%, the income guarantee is $5000, and the reduction rate is 50%. If you make zero, you get $5000. If you make $2000 in income, your rebate is reduced by $1000, so you get a $4000 rebate to bring your total income to $6000. Once you are making $10,000, you get no rebate, and any additional income is taxed at 10%.

Here's an interesting argument for income guarantee (as opposed to get-a-job-based solutions). "The 1996 Welfare Reform Act ... says mothers must accept job training as a condition of their eligibility. Why should flipping burgers at McDonald’s be considered more important than raising one’s children?"

Browning, E.K and Browning, J.M, Public Finance and the Price System, 4th edition, 1994. pp. 100-126.

• Public spending has both allocative and distributive effects. Allocative: how does it change "the pattern of goods and services produced by the economy"? Distributive: how does it move income between people? between classes or groups? For a timely debate on this very subject, see Krugman and Robert Greenstein on the US stimulus package. "... the two most targeted and economically effective measures under consideration — a temporary extension of unemployment benefits and a temporary boost in food stamp benefits — were zeroed out, apparently at the insistence of House Republican leaders." I would like to challenge my classmates to identify similar analysis on current events in other countries.
• Government spending cannot create jobs because it is financed by taking money from the private sector, where it could have been used to create jobs. Uh, yeah, but the point is that it wasn't being used to create jobs
• p 123: we've seen an awful lot of charts and graphs and theories telling us what should happen, but no actual research data.
• p 123: every dollar the government spends costs taxpayers more than one dollar, so there must be justification for the spending: either it solves a market failure (and so returns more than it costs) or it serves the collective will of the people to support the needy: welfare, social security, etc.

Inge Kaul, Isabelle Grunberg and Marc A. Stern (1999), "Global public goods: Concepts, policies and strategies", in Inge Kaul, Isabelle Grunberg and Marc A. Stern (eds), Global Public Goods, New York and Oxford; UNDP and Oxford University Press.

• p 450: Three gaps:
  • jurisdictional: global problems but national governments
  • participation: "international cooperation is still primarily intergovernmental". I think that's stated in a way that begs the question. Most international activity, measured by money, is surely happening through supply chains within and between MNCs, and through remittances (which are bigger than global aid payments).
  • incentive: there's no good reason not to screw your neighbors
  These problems are very familiar—it's easy to get this reading confused with the Global Issues class.
• p 453: "Based on the case studies, we now propose a typology of global public goods ..."
  • natural global commons
  • human-made global commons. " scientific and practical knowledge, principles and norms ... the internet. For these global public goods, the main challenge is underuse. ... If we take basic human rights as an example of a universally accepted norm, we see yet another type of underuse: repression." Joel's note: Is it really helpful to frame the problem of political repression in the economic language, underutilization of public goods? Is anybody looking at this poor fellow (warning: graphic violence) and saying, gee, it's too bad he wasn't able to consume more of the global public good of not getting shot and killed by the soldiers of a corrupt military junta? I guess (looking at the charts on pages 454 and 455) that I can see where this is intellectually going: trying to analyze these problems to determine economic reasons for their perpetuation. Okay, let's start down that path. Why does a brutal, repressive regime control Burma? Because its citizens cannot resist without getting massacred. Why not? Because the regime is well-funded and well-equipped and the citizens are not supported by the rest of the world? Why? Because the neighboring countries make deals with the regime for Burma's oil and gas resources and even provide medical treatment to the rulers without any suggestion of criminal charges. Why do Thailand, Singapore, and other countries cooperate with the dictators and not with the people? Because they have incentive to do, and no incentive not to do so. How can we fix that? I don't know. Do the actions of the neighboring countries' governments reflect the will of their people? (Note that Thailand is itself still under military rule, albeit with a thin veneer of civilian rule. How thin? The prime minister is Interim Prime Minister General Surayud Chulanont.) I don't know. At a minimum, criminal charges could presumably be brought against some members of the junta, so that they could not leave the country safely? Is it useful to think of that of increasing supply of the global good called justice?
  • global policy outcomes
• p 456: "several authors found it easier to describe the bad than the good. For example, Charles Wyplosz relies, for his analysis of global financial stability, on a systematic examination of global financial instability. Why? Because the bad is often present, while the good has yet to be realized."
• p 458: "when a public good or bad has nonexcludable or only partly excludable effects, it brings costs or benefits to innocent bystanders. So, nonexcludability is an extreme form of externality. ... transborder pollution ... ethnic strife"
• p 460: "Making a good more private will increase the chance that it will be provided, even in a decentralized setting. Two methods may be used: assigning property rights (Joel's note: c.f. Coase from Institutional Design class) or internalizing externalities."
• p 461: "If the concept of global public goods offers a useful lens for understanding current problems (Joel's note: we'll accept that as true for the purpose of finishing the reading and no further), does it also help point the way to new policy solutions and actions to manage them? Yes." Three important facts:
  • An emerging class of global public goods. freedom on the high seas. "behind-the-border" issues: poverty, health, banking standards. linking global problems to national actions: ozone and CFC reduction.
  • New realities: openness, systemic risk, and power shift from the state (Joel's note: which we debated in States, Markets, and International Governance last semester. Wow, this paper is really trying hard to repeat all of the lessons of all of my other classes, but in a less distinct, useful, or engaging way.)
  • policy deficits. "To turn intentions into policy actions, cooperation seems to move only hesitantly, if at all." Because of uncertainty, to be addressed by "epistemic communities" that provide empirical facts and figures and forward-looking policy research, and the free rider problem. But more fundamentally, the three gaps mentioned before.
• p 465: solutions. Close the three gaps.
• p 466: jurisdictional gap. You could strengthen supranational governance, or trim issues back to the size of nation-states, which could involve rebuilding protectionist barriers (and, presumably, border fences and giant sky domes to block the pollution). "We prefer to follow a third path: creating a jurisdictional loop that runs from the national to the international and back to the national—by way of several intermediate levels, regional and subregional." How? "establishing national externality profiles, internalizing cross-border spillovers, re-engineering national approcahes to international issues, linking national and global policy agendas, strengthening regional cooperation, bringing cooperation gains back to the national level." Joel's note: that doesn't strike me as a list of policy recommendations. It's a list of goals which are probably good, and you could use them to keep score on actual politics and policy, to have a better idea of which actions are better or worse. But you can't go out tomorrow and "link national and global policy agendas." You can only vote for and support candidates who act in that way.
• p 467 to 498. Many, many pages with many, many detailed policy prescriptions. For example, "establishing national externality profiles": For each country, make a list of good and bad things they are doing to their neighbors. Use this to start the bargaining.
• p 472: "But why would countries be willing to accept this principle of internalizing externalities if, as noted before, they are self-interested ...? ... If countries agree to avoid negative cross-border spillovers as much as possible, there is less need for international negotiations and special cooperative efforts that might prove more costly to countries than implementing necessary adjustments voluntarily." Joel's note: I think there was some sleight of hand there. How can we make countries cooperate if they have no incentive to do so? Countries will cooperate by cleaning up their own messes, since that's cheaper than cleaning up messes together, even though there's no reason for them to clean up messes together. Hmm.
• p 475: carrots. In order to join international regimes (WTO, EU) which bring benefits, countries must make internal changes to qualify.
• p 480: "... numerous examples of NGOs being the prime provider of a global public good and of governments joining in the effort only hesitantly."

Okay, there's a whole lot of ideas in there, and that's just the conclusion to a big book. What's missing in my reading is a sense of which ones are really possible, and which ones are stuck (UN Security Council reform is mentioned as if it were an option). But that next level of discussion would be astoundingly long. So I think this article is not as useless as it first seemed, but it's not realistic enough to "[start] tackling the growing agenda of common concerns".

Consumer behavior theory:

• consumer preferences
• budget constraints

Here's another theory: neuroeconomics. Actually, I suppose it's another way to determine consumer preferences rather than a completely new theory. What I find surprising is degree to which economists apparently resist the notion that emotions, rather than cold logic, control economic decision-making:

But a clever economist can always come up with a rational (time-consistent) model to explain what appears to be irrational hyperbolic discounting. Laibson, however, uses fMRI scans to show that different parts of the brain are activated when making decisions at different time-scales. As Andrew notes, the isolation of the different decisions to different parts of the brain gives Laibson's argument significant credibility against more standard neo-classical explanations for the same phenomena. —Alex Tabarrok

So they are holding out for brain scans before they believe that people don't actually perform calculus in their heads when spending money.

Thus, dealing with probabilities also relates to the issue of understanding the psychology of how we make rational decisions. According to decision theory, rational decisions are made according to the so-called expected utility calculus, or some variant thereof. In economics, for instance, the idea is that if you make an important decision — whom to marry or what stock to buy, for example — you look at all the consequences of each decision, attach a probability to these consequences, attach a value, and sum them up, choosing the optimal, highest expected value or expected utility. This theory, which is very widespread, maintains that people behave in this way when they make their decisions. The problem is that we know from experimental studies that people don't behave this way.
There is a nice story that illustrates the whole conflict: A famous decision theorist who once taught at Columbia got an offer from a rival university and was struggling with the question of whether to stay where he was or accept the new post. His friend, a philosopher, took him aside and said, "What's the problem? Just do what you write about and what you teach your students. Maximize your expected utility." The decision theorist, exasperated, responded, "Come on, get serious!" —Gerd Gigernezer

The actual fMRI study being discussed:

The subjects were told they were tasting five different cabernet sauvignons sold at different prices. However, there were actually only three wines sampled, two being offered twice, marked with different prices. ... The testers' brains showed more pleasure at the higher price than the lower one, even for the same wine. —AP

Meanwhile, back in class, we are discussing the equation of a straight line on a graph:

Y = mX + b

If m is positive, the line slopes up, and if negative, negative. And there are actually questions. Let this moment stand as a rebuttal to the notion that US math education is lacking. I'm going back to my morning blog reading.

... where I find this:

This kind of flow -- at least in my view -- has an impact on the global markets. It is simply too big not to matter. With annualized reserve growth coming in above $1.2 trillion and the US external deficit a mere $800b, it is reasonably to think emerging economies dollar reserve growth came very close to financing the entire US deficit. Let's assume that the BRICs end up adding $800b to their reserves this year. ..." —Brad Setser, 10 July 2007

which provides context for this:

China’s government added $430b to its foreign exchange reserves.

Russia’s government added $150b to its foreign exchange reserves.

...Brazil’s government added a bit over $90b to its reserves. Brazil’s Treasury holdings are up close to $70b for through November, in another kind of reverse bailout.

...

Counting the state banks and the CIC, the total is more like $900b. I was conservative back in July. ...

It is likely that the world’s central banks added close to $1,200b to their assets in 2007, China’s state banks chipped in another $150b or so, and various sovereign funds – including Norway’s funds – combined for about $150b. Those sums are so large that they are almost impossible to fathom, let alone believe.

... And for all the attention that sovereign funds have received ... the overwhelming majority of the increase in sovereign assets still came from central banks.

China ... spent far, far more buying Agencies and (yes) Treasuries ... than buying Blackstone, Morgan Stanley, Barclays and South Africa’s Standard bank. The big shift has yet to come. Blackstone and Morgan Stanley represent less than a week of China’s foreign asset accumulation.

... Sovereign funds may be managed commercially, but in ways that do not reflect the wishes of their populations. It isn’t at all clear that China’s residents would rather lose money ... investing on commercial terms abroad rather than investing more at home on non-commercial terms. ... The CIC has done better financially on its investment in the China railway group than on its investment in Blackstone.

... Imagine the outcry i[f] sovereign funds – not private hedge funds and private banks – had shorted the Thai baht (a very good commercial decision) back in 1997, helping to trigger the broader Asian crisis....

... The positive case is that this shift will end some of the distortions associated with excessive official demand for bonds, distortions that indirectly helped to encourage over-investment in residential real estate, excessive home price appreciation and the subprime crisis. The negative case is that this shift will introduce new distortions to new markets. ...

... to date, most attention has focused on how sovereign funds manage their money, rather than why sovereign funds have so much money in the first place....

[China is] accumulating assets to avoid a faster pace of exchange rate adjustment. ...

[The oil exporting economies's] sovereign funds have so much money because their governments have made a policy decision to save the majority of the countries oil wealth centrally rather than find ways to distribute more of the revenue to the broad population. This is fundamentally a political choice, one that has had the effect of strengthening the power of many less-than-fully democratic states. ...

... Yet absent adjustment ... the US will necessarily be selling large quantities of itself to emerging market governments for a long time.

—Brad Setser, 18 Jan 2008

This strikes me as very convincing, making it all the more informative that last Thursday's seminar by a well-connected former US official, despite speaking (he said) in a non-official capacity, scrupulously ignored the why question and its political answers.

Speaking of two-variable utility curves, I wonder if we could integrate this list into the discussion.

Musgrave, R.A. and Musgrave, P.B. (1984), Public Finance in Theory and Practice, McGraw Hill, 5th edition, Chapter 31: pp 532-537.

• p 532: "for income to be at its equilibrium level, saving must be equal to the planned level of investment."
• p 533: "the role of saving ... differs as we consider an economy which automatically operates at full employment, i.e., where private investment always adjusts to the full-employment level of saving as previously defined." I know that I missed the first 531 pages, but is there any reason to believe such an economy actually exists? If not, what is the value in studying this theoretical beast? What is going to be illuminated? "... whereas the assumption of automatic adjustment to full employment is unrealistic in the short run, this assumption is usually made when it comes to consider the longer-run effects ..." Uh-huhhh.
• p 534: the point: "tax finance is thus more favorable to economic growth that is loan finance." In Australia, just to pick a country that isn't the US, the current figures are a budget surplus of A$10.6 billion, a debt of -A$12 billion, and tax revenue of about A$230 billion. If I read the charts right, a negative net debt means savings; Australia's government has been out of debt since 2005. I guess they read the textbook, because they have all tax finance and no loan finance.
• p 535. The estimated capital budget for guess which country? That's right, the US, apparently the only country in the world to publish public finance textbooks. The point of the chart is to show that you get different figures if you count 1987 defense spending as investment or as consumption. That, in turn, is probably a political decision: does $10 billion worth of bombs sitting in bunkers comprise waste or a wise investment in our security against the threat of a Cuban invasion?
• p 536: the key here is to be thinking about the government budget in terms of what it does for the country, not what it does for the government. "As distinct from the balance sheet of a private firm, the purpose of the public capital budget is not to test the financial soundness of the government ... but to measure the government's contribution to the economy's capital stock." Remember, it's a capitalist democracy.

The point of this section seems to be that government spending often causes things to be built, that this can help the economy, and whether those things are paid for by taxes or by loans makes a difference, with taxes being better for the economy but loans possibly more fair to the present generation.

Shah, Anwar, editor (2006), Budgeting and Budgetary Institutions, Washington DC: The World Bank, Chapters 1 and 2.

• p 2:

  The core of public finances is that some people spend other people's money. In democracies, voters delegate the power over public spending and taxes to elected politicians. In chapter 1, Jürgen von Hagen argues that two aspects of this delegation arrangement are particularly important for the conduct of fiscal policy. The first is the principal-agent relationship between voters (the principals) and politicians (the agents): elected politicians can extract rents from being in office and spend public moneys on projects other than those that the voters desire. The second is the common pool problem of public finances: governments spend money drawn from a general tax fund on public policies targeted at individual groups in society. As a result, the net benefits for the targeted groups typically exceed the net benefits for society as a whole, and this situation leads to excessive levels of public spending and deficits. The adverse consequences of the principal-agent problem and the common pool problem can be mitigated by appropriately designing the institutions governing the budgeting process.

• p 3:

  Chapter 2 ... The fundamental requirement of fiscal management is that the executive branch of government can take no moneys from the public ... except with explicit approval of the legislature ... Consequently, the budget should be the financial mirror of society’s economic and social choices ... The unity of the budget is therefore a basic principle [but] Extrabudgetary funds (EBFs) are government operations set up outside the annual budget process and thus not subject to the same legislative approval procedure as the budget.

• p 6:

  Incremental line-item budgeting practices offer well-established methods for satisficing within a time-delimited budget process. In such a traditional system ... the base of spending is taken almost as a given for each agency, and the focus of the budget process is on marginal changes to this base. Once programs are judged to be satisfactory, they become part of the budgeting base ... and are rarely challenged. Line-item incremental budget systems include an array of institutionalized behaviors that detract from good budget outcomes. ... Spending agencies pad budgets ... deep and often arbitrary expenditure cuts ... [deliberate] underestimating ...

• p 5:

  [some countries] have moved or are moving to accrual accounting and budgeting and therefore observe the distinction between operational and investment budgets. Australia, Chile, and New Zealand are in this group; ... The second category of countries includes those that show current and capital transactions in their accounts, which are now based on an accrual system. The budget itself, however, makes no such distinction, although, for analytical purposes, extensive data are presented on capital formation. The United States belongs to this category. The third category includes ... modified accrual system. The fourth category comprises most industrial countries (including some of the former centrally planned economies ...) Countries in this category show expenditures in terms of those incurred on physical and financial assets and those transfer payments that are of a capital nature. ... Countries in the fifth group had capital budgets, but they have moved to an investment budget. Denmark is one such country; it now maintains an investment budget that can be spent beyond the fiscal year. The sixth group includes those countries that have equivalents of capital budgets. Japan, the Republic of Korea, and Southeast Asian countries ... In many developing countries, governments have developmental budgets of a hybrid character. ... The last category includes countries, such as India, that have a capital budget but do not maintain depreciation allowances.

• p 28: references to actual research! yay!

  This tendency toward excessive spending, deficits, and debt increases with the number of politicians who have access to the same general tax fund, a point empirically confirmed by Kontopoulos and Perotti (1999). In soci- eties divided along ideological, ethnic, language, and religious lines, there can be an increased tendency of people in one group to neglect or ignore the tax burden falling on other groups, making the common pool problem more severe. Empirical studies showing that such schisms result in higher spending levels, deficits, and debt confirm the importance of the common pool problem (Alesina, Baqir, and Easterly 1997; Alesina and Perotti 1996; Annett 2000; Roubini and Sachs 1989).

• p 30: many ways in which politicians subvert budgeting (remember, politicians are responsive to their constituents; people want services and don't want to pay taxes, so the enemy is us. How do we set up systems to tie our own hands sufficiently to have prudent fiscal policy (whatever that may be) but still be able to response to surprises, which are constant):
  1. off-budget funds
  2. making non-decisions, such as indexing spending and open-ended spending appropriations.
  3. Failing to differentiate between non-financial and financial laws.
  4. Contingent liabilities such as guaranteeing other entities.
• p 35: most entities, from balanced-budget US states to European countries, tend to work around borrowing limits
• p 35: Belgium has something called a "golden hamster" principle controlling unexpected budget surpluses. That reminds me, did Belgium ever get around to forming a new government or did they split up or what?
• p 36: "office if they run undesirably large deficits. Skilling and Zeckhauser’s empirical work confirms that the competitiveness of electoral systems reduces deficits and public spending." So is the US deficit due to the powers of incumbency?
• p 39: different ways to do delegation-based budgeting: "In the French model, the finance minister and the prime minister together determine the overall allocations of the spending departments. These limits are considered binding ... The U.K. model, in contrast, evolves as a series of bilateral negotiations between the spending departments and the finance minister, who derives bargaining power from superior information, seniority, and political backup from the prime minister. In the German model, the finance minister has weak agenda-setting power but strong veto power in the cabinet ... In a number of African countries, ... finance ministers systematically withhold information about government revenues and the cost of public policies from the members of parliament in an effort to prevent parliament from enacting budget bills with excessive spending and deficits. [But] hiding important information from the legislature shifts the relevant decisions outside the budgeting process. The result is that spending and deficits are still excessive. The better solution is to strengthen the agenda-setting powers of the executive..."
• p 53: I'm definitely convinced, though I guess I wasn't unconvinced before, how important budgets are in realizing policy.
• p 54: Four pillars of good governance: accountability, transparency, predictability, participation. Do we have enough information about the US presidential candidates to judge their potential administrations by these pillars? The Bush administration fails on all four. Rudy fails on transparency, certainly. I don't know enough about the rest on these terms, but Romney and Huckabee were both governors and should have track records as executives.
• p 57: "There is no such thing as a multiyear budget anywhere in the developing world." Annual budgets are so common that it's hard to think through alternatives. Longer budget periods seem problematic because too much changes. Shorter ones and you spend all of your time budgeting. Hmm. Well, what if budgeting was a continues instead of periodic function, and people rotated through the budgeting function? Or, what if budgeting could be streamlined so that it could be done every six months or three months?
• p 63: "... the standard advice of international organizations to developing countries has been to avoid creating EBFs and to eliminate them as quickly as possible when they do exist." We've had some controversy about an EBF in the US.
• p 80: a tax expenditure is expected tax revenue foregone because of preferential tax laws (exemptions, deductions, credits, etc).
• Budgeting laws should be graduated—the most fundamental parts enshrined in the constitution, and then more volatile parts in "organic tax law" and other easier-to-change parts.

Polackova, Hana Brixi, "Addressing Contingent Liabilities and Fiscal Risk", Chapter 7, Anwar Shah, Editor, Fiscal Management, Washington DC: The World Bank, 2005.

There were three optional readings this week; I chose to read only the most exciting-looking one.

• p 163: governments, especially those with emerging-market economies, have a lot of fiscal risk that could go boom. Four reasons: the government underwrites economic transition schemes, the government provides guarantees support in order to privatize (which you would think would call into question the wisdom of privatizing everything: if you have to keep the risk in order to get somebody else to run it, you're steering right back to the private profit/public risk scenario that is all too common in public/private partnerships), off-budget shenanigans, and supporting local governments.
• p 167: therefore, you can't get happily low budget deficit reports at face value.
• p 176: a figure showing the level of telecommunication competition per country. Amusingly, the US is shown with Full Competition. Not sure what this has to do with fiscal risk and contingent liabilities.
• p 182: international organizations should reward governments that disclose their risks accurately and fully. But the Czech Republic was punished for doing so in 1997.

The official name of this semester is apparently S2 AY2007-08, or "Semester 2, Academic Year 2007-2008"; I guess equatorial nation-states don't have enough seasonality to use "Winter" or "Summer".

PP5504: Public Finance and Budgeting

The reading list is enormous; some students have assembled bound printouts of the readings. The week 2 lecture readings are over an inch thick, double-sided. The sight of the binders prompted a disclaimer from the professor that most of the readings are optional.

Instructor's disclaimers: there is nothing more practical than a good theory.

Economics talks about first-best optimizations, Pareto-optimal. In public policy, the word optimal is sub-optimal. Public policies come with a lot of tradeoffs. All we are trying to do in public policy is make the tradeoffs better than they were. We are in the Nth-best world, and the first-best theories don't apply. (Joel's note: Dani Rodrik calls them second-best institutions).

The analytics must be combined with a good database. Reasoning and the causal linkages have also become more complex.

"The state and the market are two social institutions, and therefore both are imperfect." nation-states are four centuries old; the market is about two centuries old. (Joel's note: For comparison, the Catholic church took nineteen centuries to become perfect.) Complementarity, public-private partnership. (Joel's note: I would like to hear about new institutions other than nation-states and capitalism.) Wealth is not capital.

"Think society, not economy." For example, one person one vote is a more important principle than free markets that allow vote selling.

"Need to recognize the importance of sound budgeting..." (Joel's note: I don't think the problem is generally that sound budgets are considered unimportant. I think the problem is that politicians face powerful incentives to use unsound budgeting practices—the most recent example being Schwarzenegger's short-term patches in the 2003/04 California budget crisis, which have made things worse.)

The Bill and Melinda Gates Foundation spends US$3 billion per year, which is so much that any health ministry official in the world should be aware of the Gates Foundation plans as part of their job. Similarly, ranking—IMF, transparency, Doing Business index, World Competitiveness index—agencies and governments need to take these into consideration.

Traditional case for public sector: to prevent market failure, enforce contracts, manage macroeconomy. Discussion of public and private goods, rival and non-rival, excludable and non-excludable, in order to define the public sector.

What's an externality? An effect external to the supply and demand functions. We should be concerned because externalities drag us below the Pareto-efficient curve. Eliminating all externalities is not usually efficient because marginal cost usually starts to overwhelm marginal benefit (e.g., cleaning the last drop of pollution costs far more than it's worth). Market incentives fail at the extremes—low-probability, high-impact risks like shipping toxic wastes through cities are better regulated or banned than disincented. Turning former wastes back into private goods improves efficiency.

If you believe the government should incent people to save, what single ratio is most important to know? Interest elasticity of savings.

"Research suggests that governments has [sic] little ability to impact underlying distribution of income/wealth ... but can improve the status of the poor..." (Joel's note: quick search comes up with this, which seems related but not a direct support or rebuttal. No time to read, but I would like to see this research. I remember Krugman recently posting some correlation between the Bush tax cuts and an extreme surge in wealth inequality in the US, but that may be an anecdote rather than data. Here's something: "The results show that progressivity and overall tax burden appear to be negatively correlated with income inequality and with poverty.") Long-term planning, representing future generations, paternalistic functions.

The five minimal public goods: defense, law and order, property rights, macroeconomic management, public health.

Government provision: financed by government. Production: produced by government-owned entity. US Air Force F-16s are government-provided but privately produced. (Temasek-owned) Singapore Airlines produces airline service, but is financed by customers.

Definition of tax: involuntary transfer of funds from private to public sector.

Joel's Note: Correction to my contribution to class discussion: Boeing is actually only the second-largest defense contractor. I regret the error.

One of the biggest problems in public policy is, how do you define success? It is often not asked, and often not measured after the policy is implemented. "Many countries use this data like a drunk uses a lamppost, for support, not illumination. They reveal data in dribs and drabs when it supports them ...." (Joel's note: That sounds familiar). Example: taxing cosmetics may be regressive: even though they are "luxury" goods, poorer women who deal with the public (receptionists, etc) spend a much larger percentage of their income on cosmetics than do wealthy women. "The biggest way to get my blood pressure rising is to get me to read an economic law. And the second biggest is to read the implementing regulations." People who write the details have no concept of what is a big number, a small number, what is the incentive structure, .... Many of the laws are badly written; the same guys are drafting constitution law, and the next day they are drafting international income tax regulations.

Modern economies depend on both income and sales (VAT, etc) tax.

A repeat of this equation from prof's class last semester. Since the equation was developed, remittances from foreign workers have grown to exceed many other foreign sources of income.

Economics of the Public Sector, Joseph E. Stiglitz, chapters 1-3

• p 3: The first lines of text in chapter 1: "From birth to death, our lives are affected in countless ways by the activities of government. We are born in hospitals that are publicly subsidized ... Our arrival is then publicly recorded (on our birth certificate), entitling us to a set of privileges and obligations as American citizens." Oh look, yet another economics textbooks that ignores the other 95% of the world.
• p 6: "Today, the countries of the former Soviet Union and the Eastern bloc are in the midst of a monumental transition to market systems." The question this brings to mind is, if the book was published in 2000, and this text was written in, perhaps 1998, was that really too early to notice China, already in the midst of a transition much more monumental than the former SU/Eastern bloc?
• p 16: "The complexity of the [US] government's operations is so great that it is difficult to assess what its total expenditures are and what they go for." True, but this helps.
• p 17: "Understanding and, insofar as possible, anticipating the full consequences of these government activities ... the consequences of government policies are often too complicated to predict accurately ..." strikes me as understatement. Some things, like the correlation between tax policy and wealth stratification, seem pretty clear, but so many others seem bewilderingly convoluted. One of the most horrifying unintended consequences could be that German tax policies have unleashed the movies of Uwe Boll on the world
• p 19: "positive economics" and "normative economics": yet another set of words for descriptive and prescriptive.
• p 28: "Economists and philosophers often try to imagine what life would be like in the complete absence of government." So too do science fiction writers, often much more convincingly. Or you could just read the news coverage of New Orleans after the flood.
• p 30: Interesting. The size of US government as percentage of employed has been consistently around 18% since 1930s, dropping slowly from a peak (excluding WWII) around 1970.
• p 31: "The size of agricultural subsidies has fallen since 1987 ... under the new farm bill passed in 1996, these subsidies are scheduled to decline over the coming years." I wonder what actually happened? The USDA doesn't seem to use the word "subsidy" prominently in its data sets, so it will take some digging to find out. This seems to be a key page: "Government Payments and the Farm Sector: Who Benefits and How Much?". Apparently direct payments soared from US$8 billion in each of 1996 and 1997 to over US$20 billion in 2000, and have since fluctuated in the US$B teens. But "the direct government costs of commodity support do not include the costs to consumers of programs that restrict supplies and raise food costs, such as the sugar and dairy programs. Also excluded are USDA, Natural Resource Conservation Service conservation payments that are not paid through USDA, Commodity Credit Corporation." That seems to capture some of that, but since it's labeled "directpay.gif" it's hard so if it's supposed to be the total cost of subsidies or not.
• p 59-60, Pareto efficiency. Stiglitz mentions that Pareto efficiency is indifferent to fairness, but doesn't really critique it effectively. Pareto improvement means somebody benefits and nobody loses. One big problem with using Pareto efficiency to measure "better" economic outcomes is that, of course, fairness is important. Governments shouldn't pass policies that benefit only one person, even if they don't harm anybody else. The other big problem is that it ignores net benefit: if 100 million people benefit but one person suffers, the change is Pareto-inefficient. A realistic example would be steel tariffs, where a big chunk of the US economy (and the world) suffers to protect a few steel jobs, resulting in a big net loss for the economy; i.e., for us the people. This point shows up in the summary but not very well in the text.
• p 64: The utility possibilities curves are interesting but, I think deceptive. They show these nice arcs that, if taken to be true, suggest that maximum (Pareto) welfare occurs when both parties share equally. Is there any factual basis for believing that shape is realistic?