The Supreme Court Deals a Blow to Price Discrimination

Yesterday, the Supreme Court of these United States (I enjoy writing that while in Brazil) declared that companies that make and sell products overseas cannot prevent them from being re-sold in the US.  From the always excellent Nina Totenberg of NPR:

The case involves a part of the copyright law that was aimed at so-called gray market goods. These are U.S. copyrighted products — from textbooks to watches — that are manufactured in other countries for sale there, then purchased and imported to the United States for discounted resale.

Supap Kirtsaeng, a mathematics student from Thailand, discovered that some of his textbooks were being published and sold in Asia for less money. They were identical to the textbooks he used at Cornell and the University of Southern California, except that they were much cheaper and bore an inscription saying they could not be exported. He got his friends and family in Asia to send him many copies of the books, sold them on eBay and made about $100,000 profit.

Needless to say, the publisher of the textbooks, John Wiley & Sons, didn't like that one bit. It sued Kirtsaeng for copyright infringement and won in the lower courts. Kirtsaeng was ordered to pay $600,000 in damages.

I went a little Twitter crazy about this yesterday because I think it is absolutely the correct decision from a purely libertarian property-rights perspective but also because it is such a good teachable moment. 

Why, you ask (or should), do firms charge different prices anyway, especially on copyrighted material that they have a monopoly over? Wow, what an excellent question!

 It all has to do with price discrimination. If you know the willingness to pay on average is lower for some markets than it is for others (due to many things but the most obvious is income) then it is a profit maximizing strategy to charge those with lower willingnesses to pay a lower price.

Companies would love to do this all the time but it can be hard to know about willingness to pay and you have to be able to deal with the arbitrage problem. Income per capita figures that are readily available are one way to find out about willingness to pay across countries as is simply market experience, so international sales are ripe for price discrimination.

The arbitrage problem is what this lawsuit is all about. Companies want to stop precisely what Mr. Kirtsaeng was doing, taking advantage of the wedge between the prices in the US and Thailand that they created through this law. They like the ability to do this because they make more money that way.  If you cannot stop arbitrage then you can't maintain the wedge between prices.  For example if there was not a ticket taker at the movie theater then enterprising kids would just buy tickets for adults and charge them less than the full adult price.    

Mr. Kirtsaeng learned his economics well at Cornell (maybe he had me as a TA...) and engaged in arbitrage. And why not? Once you purchase a good it becomes yours. I'll agree that he cannot copy it but just as I can go down to Powell's and sell my book, why can't he get on a plane from Bangkok and sell his book at Powell's? In my opinion restricting resale across international borders is a mistake.

Thankfully the court agrees:

Kirtsaeng appealed to the U.S. Supreme Court, contending that he was protected by a rule called the first sale doctrine, which says that once you buy a product, it is yours to do with as you please.

On Tuesday he won in the high court. Writing for the court majority, Justice Stephen Breyer said that to impose geographic limits on the first sale doctrine would make no sense. He cited statistics from retailers indicating that $2.3 trillion worth of foreign goods were imported to the U.S. in 2011, and many of those products were subject to copyright protection when they were made.

Automobiles, calculators, microwaves, tablets, personal computers — all may contain copyrighted software programs or packaging, and many of these products are made abroad with the U.S. copyright holder's permission, Breyer observed. To forbid their importation unless the copyright owner agreed would mean, in essence, that a car owner whose GPS, radio or carburetor was made abroad could not freely resell his vehicle without the copyright owner's permission. Therefore, said the court, goods, once sold lawfully — whether in the U.S. or elsewhere — can now be resold in the U.S. without the copyright holder's permission.

The textbook analysis of the result of this decision is that we should expect prices for textbooks and other goods that have enjoyed the protection of this law to become cheaper in the US and for textbook prices to rise in Thailand and other less wealthy countries thanks to the law of one price that will now be in effect. Also, overall textbook sales and profits should fall for publishers.

Now, I have nothing against price discrimination in general. I think it is both just and efficient that I pay a higher price than a kid does at the movie theater - I simply think that this law went a bit too far.

One final note: Scalia, Ginsberg and Kennedy were the dissenters! Wow, what a Motley Crüe (TM)!

Oregon is Creating Jobs at a Healthy Pace

Molly Young has a nice article in The Oregonian today about the new Oregon jobs report.  She focuses her attention in the unemployment rate that hasn't budged much (the February rate is 8.4%) and the overall decline in the labor force.  Go there for that discussion, she covers it well and it is interesting to think about the supply side of the market, but my attention is on the demand side.

On the demand side, however, Oregon added 6,800 jobs in February on a seasonally adjusted basis, 6,000 of those in the private sector.  Additionally, they January number was revised up to 5,400 jobs.  That is a very healthy pace of job gains, it remains to be seen if this can be sustained, but remember, Oregon has been one of the leaders in the national recovery, our economy was one of the fastest growing in 2012.  So signs are good....or were until the sequester boondoggle.  Alas, we'll just have to wait and see how that plays out.

Still it is good to see signs of a sustained recovery.  

The Portland Economy and a Lesson in General Equilibrium

The Oregonian today contains a fascinating article on an equally fascinating report about the Portland economy from the Value of Jobs Coalition (and prepared by ECONorthwest).  It is fascinating reading and something that will now stick in my head as I sit and ponder what characterizes the Portland economy.  And the conclusion that we should focus better on eduction and work to increase the number of STEM graduates is spot-on and universally correct no matter what the economy looks like.

But there is a big problem in the interpretation that what we are seeing is the result of how we have engineered the economy and that by increasing the locally produced STEM graduates we will increase the tax revenues we take in.  The problem is that this is a partial equilibrium analysis - where we assume lots of other things stay fixed (like for example, the wage differentials, and the migration of workers). In fact this snapshot is of a general equilibrium.  You may not like it but it is hard to engineer away and it is easy to come to false conclusions if you don't consider the wider general equilibrium implications.

Let's take a step back and look at the 'puzzle' they are trying to solve:

Figure 1 from: Higher Education and Regional Prosperity

Portland has fared poorly in terms of per capita personal income relative to other US metro areas.  Looks pretty bad but a better comparison would be to look at cost of living adjusted personal income and apparently if you take away a couple of outliers like Washington DC and NYC, Portland is pretty close to average.  In a general equilibrium, prices rise with incomes as upward pressure is put on the demand for goods and services.

But to the extent that Portland is below the national average it is very important to remember that wages are also an equilibrium price.  The first thing you should ask is that if STEM graduates are so scarce and needed why aren't their salaries above the overage?  And if local salaries are low to what extent does that reflect a compensating wage differential where people are willing to accept less to live and work here.

This is what I mean about general versus partial equilibrium.  You can look at the figures and say we need more of those high paid engineers, but if you make more wages could just as easily decline.  And certainly there is nothing in theory that suggests that MORE STEM types will raise local within occupation pay to something closer to the national average!

The worry that lower incomes mean lower tax bases also seems misguided - from recent poll results folks are also willing to pay more in taxes to support public goods and I suspect that the two are related: the same folks that are willing to take less to work less and enjoy the Portland area are also willing to contribute more to public goods.

Really the story that is being suggested is a long term growth effect: that by investing more in education and focusing more on STEM areas the local economy will evolve in a way that creates high-tech industries that will employ folks at relatively high salaries.  I agree with that but looking at current relative wages isn't entirely appropriate - or I guess I should say ONLY looking at current salaries is not appropriate.  This is an general equilibrium growth story not a static, partial equilibrium story.  Yes the former is much harder to communicate to lay folk so I am not prepared to condemn the exercise but the point should be made by someone somewhere (thank goodness for blogs!).  I support investments in education in general for growth reasons and I support emphasizing STEM fields for the same reason.  There is not much in this report however, that confirms or undermines my conviction.

And finally, circling back to cost of living and tax revenues.  Higher local wages are no guarantee of funding anyway.  When local costs go up you have to pay teachers more, principals more, and so on.  What is most important is the willingness of the electorate to pay for such things and I would argue (as above) that the self-selection that is bringing all the humanities-types to Portland is probably hugely positive for future funding of schools.

Okay, this is a bit disjointed because I am rushed and now I have to get back to work!  Apologies.

Soccernomics: Timbers

Why is it that MLS crests have the little TM on them - even on the game jerseys?
If Barça, ManU, Munich, Milan and others don't need it, do we? Looks cheesy to me. 

Interesting to read (if only from afar) The Oregonian editorial board's take on the MLS Timbers 3 years later.  I find it hard to argue that the Timbers has been anything but a runaway success is just about any metric one uses to measure such things.  But of course there is always those that try and push the economic development engine that is, or is not, professional sports.  I have stated this before that this is not what spectator sports should be sold as. On the other hand there is nothing wrong with providing a city an entertainment option that is clearly valued and valued greatly.  Anyway, all I can say is it is nice to see old Civic Stadium reborn as centerpiece to the city for no other reason than I think it is a cool aspect of the city that I, personally, value.

Now that I have some excuse I can now chat randomly about the Timbers.  [This is, by the way, by popular demand - I have resisted so far to get a better idea of what the Timbers are and about but now I feel as if I am getting to know them better]

Unfortunately, my ability to follow the Timbers in Brazil is severely constrained - I have been able to watch the last two games only through the great and noble efforts of the great citizens of the Philippines, Belarus, Russia and other far flung places that manage to stream live TV on the internets. [Amusingly during Saturday's match with the sounders the person whose TV was being live streamed decided to set his DVR for another game - all of which I watched live and discovered that this person is a Comcast customer in the US]  The first match was televised here on ESPN+ which I don't get but luckily there are bars that do.

Anyway here is my analysis, FWIW.

The team is impressive and much improved over last year's team.  The biggest misconception about playing the 'Barcelona-style' possession game is that it is all about the movement and short passing.  The most under-appreciated aspect of Barcelona is how, when dispossessed of the ball, they immediately press as a team (from Messi on back) and make it incredibly difficult for the other team to work.  They generally win back the ball quickly.  This is a key component of the possession style game and it takes commitment and effort from all 10 field players - one person slagging off leaves gaps and openings that relieves the pressure.  I have been impressed with the Timbers so far on this account.

It is very hard to get teams to play this way for 90 minutes as you are asking a lot of your players.  Bringing in players like Will Johnson who provides the leadership and the effort is key.  It has to come from the field.  Chara has always been this kind of player and, so far at least, Valeri, Nagbe and Ryan Johnson (to name a few) have shown a great deal of industry and effort that shows they are buying in.

Often the way teams try and play against this style is to pack in the box and counterattack (read: Montreal).  The Timbers have shown some frailty in this area and need to improve, but given that Silvestre had little time to get used to Jean-Baptiste, who is young and a bit erratic but looks every bit the real deal, I am not too worried.

The desire to get the outside backs into the attack has hurt them a couple of times.  In my book a balanced attack will push one back up into the attack while the weak side back tucks in for cover.  Something that seemed to be much better against the sounders.

It is really the working through the center of the midfield that stands out to me.  Too often in the last couple of years the ball immediately went out to the wings for a generally poor cross rather than trying to break down the center of the defense (Songo'o at his peak at least showed some willingness to try).  There is a real emphasis on this in this new team, it seems. And Valeri is extremely adept at this and is already showing his class.

The real offensive machine takes a while to work itself out as players get more and more sued to each other.  I expect that the Timbers will, over the course of the next 4 games or so, start to become even more dangerous.

All in all then I give the Timbers an excellent mark so far in the season.  Yes results matter but already they are much more fun to watch and they seem o have much more heart and desire than in previous years.  That said, they still have some big steps to take and the results will have to start coming.

Some other quick thoughts:

Porter seems to be the real deal.  He already has placed his stamp on the team, has them playing exceptionally hard and has done pretty well dealing with the near crisis the center back position has been in (injuries, inexperience, late-arrivals. etc). Putting his faith in Jean-Baptiste is courageous and smart.  He will learn a lot from Silvestre and only get better with more field time.  He got the tactics and adjustments just right against Seattle IMHO, and if not for a blazingly quick and exceptionally well-excecuted counter, we would have shut them out.  He has a clear philosophy and appears, at this point, to be a good man-manager.

On that note, I am waiting to see what he can get out of Alhassan.  He is as talented as you get but still needs to learn to do the dirty work and translate his exceptional technical ability into team-orientated movements.  He is getting better, but I was sad to see him dropped from the Seattle game if only because I love to watch him play and would like to see him successful.

Valeri is the man so far.  Great find.

Wider field is working.  Great to see the Timbers fix a mistake (if not admit it) and make the field wider, it has a noticeable impact on the beauty of the game on the field.  Next up: shift the South goal back about 5 yards and it will be perfect....except for the grass.  Not saying now, but in 5 years that turf has got to go...

Wallace - please don't start calling for him to be in the starting lineup (eg, Geoff Arnold). His energy is great but his technical ability lacks.  He is the perfect super-sub and excels in that role.  It is nice that Porter has identified subs that can come in and inject something into a game.  This was one of the real failings of Timbers past - subs that did nothing to change the game.    Right now Wallace and Valencia both do a lot as subs and make life hard for tiring defenders.

Finally, it is a long and grueling season in the MLS, well see if the Timber can keep up the kind of energy and commitment throughout the year.  I hope Porter is thinking about this as this is a huge difference from the college game.

Oh and the new kit?  Meh.  I didn't mind the new shirts that much but now that I see them in action I think they are a step down from the previous ones.  My kids don't like all the detail that is missing from the youth versions.  Still, they could wear pant suits for all I care as long as they play well...

Go Timbers!

Ghost Bike in São Paulo

Sad but interesting to see the Ghost Bike memorial has made it to São Paulo.  I assumed it was about this horrible accident, but the bike is a few blocks away from where the accident occurred.  So I realize that it is for this accident a year ago, but I'm pretty sure the bike has been newly placed there - perhaps two new bikes have been placed motivated by the accident over the weekend.

Credit and Brazil: A Puzzle

You can buy these shoes for R$129.90 or you can pay in 5 monthly installments for R$25.98

Credit markets were notoriously tight in Brazil until very recently.  The government tightly controlled the banking sector (and still has a big foothold in retail banking - both Banco do Brasil, my bank, and Caixa are government run)*, the rules for collateral and banks ability to collect on collateral were tight, and therefore finding consumer credit was incredibly difficult.  I remember my friend buying an apartment about 10 years ago required most of the price to paid up front - only a small amount could be borrowed.

From what I have been told the liberalization of laws, loosening of restrictions and especially the arrival of the Spanish bank, Santander, changed everything in less than a decade.  Suddenly credit is everywhere and you see the effects: cars are now affordable to working class people and the housing boom is continuing unabated.  This is generally the story you get about traffic - it wasn't so bad in places like Salvador until suddenly everyone could buy a car on credit.

But one aspect of the credit market puzzles me: just about anything you buy that is even remotely durable, you can buy in installments and for no interest.  For example, you want a blender and so you walk down to Extra and pick one out for R$60.  You can pay it all now or you can pay for it in up to 12 monthly installments - sem juros or no interest.  As an economist I know the rational thing is to buy in installments (the present discounted value is less than the one-time price) but as a consumer not used to such things I never do.  I am still taken aback when I book a plane ticket and I am asked if I want to pay for it in installments.

These installment plans are everywhere, from the aforementioned plane tickets to tennis shoes.  But why?  And maybe even more to the point, why not in the US?

One reason may be that credit cards are still scarce?  But still spreading out payments on credit cards in the US required you to pay a lot of interest.  I suspect that this is an aspect of social norms carried over from when credit was scarce and stores figured out their own credit.

It is also, I suspect, an aspect of the ubiquity of the taxpayer ID here in Brazil.  The CPF is a number you need for almost anything that requires monthly payments, opening bank accounts, cell phones, you name it.  And I have been told that if you get a bad mark associated with the CPF - for example if you fail to pay for your new Adidas - it is very difficult to clean up.  A form of bad credit score if you will.  The US doesn't have such a system that is so ubiquitous in everyday life.  Credit scores are for big purchases and credit cards.  

Anyway as a good economist I figure that both systems are equilibria in their respective countries, but I am not entirely satisfied that I have figured out why.  Ideas?

______________________________________

*Corinthians Futebol Club had to get special permission from FIFA to have Caixa as a shirt sponsor as FIFA has rules prohibiting state sponsorship of teams.

US Unemployment Down to 7.7% on 236,000 New Jobs

Pretty good news on the eve of the 'great and pointless austerity:' the US unemployment rate fell to 7.7% on the strength of 236,000 new jobs.  There was a time when I would find that number to be woefully insufficient given the depth of the crisis in jobs.  But after years of moribund growth, I'll take anything that is reasonably higher than the 100,000-plus-change jobs it take to keep up with the natural rate of growth of the US workforce.

Unfortunately any momentum that the US economy might have picked up is likely about to be scuttled or at least seriously slowed by the sequester...

 

Correlation, Causation and Gun Violence

I dont really want to get into the debate about gun laws but the causal link has been something of a holy grail for economists.  Look at earlier posts and reactions to get an ides of the complexity of trying to pin down causation.

So I'll leave this study for all you econ geeks to discuss, here is the graph reported on in the O:

Though you can't argue causality you can make the case that there is a pretty strong correlation and explanations that suggest that the true causal link is opposite (as some would argue) are a pretty big stretch.  It is hard to see how restricting firearms makes us less safe...

However states with little firearm affection are both more likely to pass legislation and less likely to have firearm deaths.  So is it the legislation that is driving the low deaths or other unobservable state characteristics?

Picture of the Day: x3

Ok, here are some images to provoke thought and wonder.

First, I bring you my current adopted hometown in 2025 according to McKinsey:

A GDP of $37,000 per capita would be roughly equivalent to today's UK.

Next, from the Wall Street Journal, I bring you this interesting graphic about the US savings rate, especially among the youngsters.  It seems the great recession has taught them a lesson about financial prudence:

Finally, again from the Wall Street Journal, a little reminder that the oft-repeated and completely incorrect assertion that the size of government is growing is, well, incorrect:

This is as a share of non-farm jobs.  And here comes the sequester!

At least you have been aggressively saving, right?

Economist's Notebook: Utter Stupidity

So, let me be the millionth economist to say it - slashing spending arbitrarily in the midst of a struggling recovery when borrowing rates are already incredibly low and on stuff that does nothing, nothing, to address long-term debt issues is just about the stupidest thing the government has done in my lifetime.

I cannot believe that we are being governed by grade schoolers.

Picture of the Day: Federal Spending in the States

Is this good news or a condemnation of our congressional delegation that is failing to bring home the bacon?

Compensation and PERS

Here is the problem with studies that look at PERS in isolation like the one by PSU that is featured in today's Oregonian: it is only one piece of compensation.  Oregon for many years appears to have saved on wage bills by shifting compensation more heavily to retirement.  This is, of course, problematic when it comes time to pay for the retirement of its workers.  It makes the accountants are happy at the time because the books balance and the unfunded liability stays hidden.

I can only speak for myself but when I took the job at Oregon State I had a job offer in hand for 20% more from a certain state to the south.  Oregon's generous benefits helped close the gap and the compensating wage differential meant that I was happy in the end to accept less to live in the state of my choice.  I am Tier III so don't get mad at me by the way.

To retroactively change the terms of the contract that workers agreed to at the time is not acceptable in my mind.  Economically the sanctity of contracts must be preserved. Going forward however, it would be better for Oregon to get more in line and shift more towards wages and away from defined benefits.    

Fred Thompson: Coal for the Powerplants of China

While away in Brazil, Fred Thompson, helps keep the blog relevant by commenting on local issues. Thanks Fred! [Need a hint about the title?]

Coal-fired power plants are a major source of greenhouse gases, carbon monoxide, nitrogen oxides, sulfur dioxide, and particulate matter. Compared to burning coal, burning natural gas is cleaner and, in the US, cheaper.

Increased reliance on natural gas in the US has led to substantial reductions in domestic coal prices, making US coal more attractive to European importers and potentially more attractive to East Asian importers as well. Nevertheless, despite steep cuts in US coal prices, once transportation costs are taken into account, the price of US coal, especially cleaner coal from the Great Basin, is often higher than the price of locally mined coal in Europe and East Asia. Evidently the reason that US coal is preferred in Europe and East Asia to local coal is that it is cleaner. Compared to the lignite mined in Europe and China, burning western coal from the US generates 50 percent less CO2, Carbon monoxide, and nitrogen oxides per unit of energy, 30-60 percent less sulfur dioxide and particulate matter, and one-tenth the oxides of mercury. Burning imported cleaner coal in European coal-fired power plants has, therefore, likely reduced global greenhouse emissions, plus most other kinds of air pollution, although it may have slowed the transition to alternative, cleaner energy sources. Burning cleaner imported coal in Chinese power plants should have an even greater effect, both because the Chinese burn more dirty coal than the Europeans and because they do not now anticipate an early transition away from coal.

Most US coal exports flow through US Atlantic and Gulf ports, like Newport News VA and New Orleans LA, which are a long way from markets in East Asia. Consequently, Canada is beefing up its Pacific Coast coal-handling facilities to take advantage of East Asian opportunities and ports up and down the West Coast of the US are contemplating expansion.

However, the most attractive Pacific Coast option in the US would probably involve diverting the coal now being shipped to a PGE power plant in Boardman OR, which is planned for closure by 2020, to East Asia. This option is attractive because the infrastructure needed to move coal from the pit to Boardman, which is on the upper Columbia River, is already in place and currently in use.

The only major question associated with this option has to do with getting the coal from Boardman to the sea. Here, there are two main alternatives: off-loading the coal trains to barges at Boardman and moving the barges to a deep-sea port on the lower Columbia River, where the coal would be loaded onto freighters for transport across the Pacific, or sending the coal trains on through the Columbia Gorge and the Portland-Vancouver metropolitan complex to a deep-sea port.

Under most circumstances, it might be hard to say which of these alternatives would be better without additional study. The former involves twice the freight handling costs; the latter entails higher transportation, environmental, and aesthetic costs and probably significantly greater traffic disruption, roadway and grade crossing improvements, and safety problems. Given the unusually high levels of unemployment currently obtaining on both the upper and lower Columbia rivers, however, it seems reasonable to discount the freight-handling costs associated with first alternative, since, in its absence most of the labor used would be unemployed, thereby adding to the net socio-economic gains associated with this project.

Shipping cleaner coal from the Great Basin to East Asia via the lower Columbia entails tradeoffs, as do all activities. But its net economic benefits are clear. It even appears, on balance, that its environmental benefits could easily outweigh any environmental costs, although not necessarily the local ones, which under the first alternative are likely to be small. 

Economist's Notebook from the Southern Hemisphere: In Praise of Bulk

Before I begin, let me just say that I do not own a big car, I am not a member of Costco or other such bulk store and I generally do not buy in bulk.

But the proto-typical American stereotype of the SUV driving Costco shopping consumer is the subject of much ridicule, especially from enviro-types, and I think unfairly so.  Because bulk is efficient. Assuming that overall consumption does not go up (and therefore essentially assuming prices are the same) bulk saves packaging, saves carbon emissions from consumer trips and saves energy from storage.

I bring this up because on the plane ride down to São Paulo, my wife had a very pleasant conversation with a Paulista woman who was very environmentally minded and critical of the US for all the packaging they use.  I was very confused, in my mind Brazilians love wrapping things up: here in São Paulo they will bag any purchase in a little plastic single-use bags and if you say you don't need it they look at you cross-eyed.  At the grocery store they will practically bag each item individually and plenty of fresh stuff (veggies and such) come pre-wrapped.

But more than that with the small Euro-style packages and refrigerators I go through much more packaging than at home.  Little jars of sauce for pasta, small packages of crackers and cereal and so on accumulate rapidly.  It may be kind of romantic to stop at the store every day and buy food for one day, but it is terribly inefficient.

Now of course the fact that bulk and low prices lead to increased overall consumption is another matter but as far as saving resources, bigger is often better.

So make fun of big US refrigerators if you like, I prefer to buy my milk by the gallon not the liter and using a quarter of the packaging.

Fred Thompson: Don't Fix What's Not Broken

While away in Brazil, Fred Thompson, helps keep the blog relevant by commenting on local issues. Thanks Fred! 

In a recent editorial entitled “Oregon dawdles while other states take action on taxes,” the editorial board of the Oregonian called for bold tax reform, concluding that we must find a way to balance “the progressivity Oregonians demand with the need for a broad revenue base.” To be honest, my gut instinct is to reject this advice. There is one point that almost all economists who study public finance agree on: other things equal, the most important efficiency attribute a tax system can have is predictability – up to point, whatever is, is right. Don't change things unless the change is clearly for the better.

In this instance, however, I have more to go on than gut instinct. A couple of former students and I did a ranking of state and local tax systems on the bases of fairness, adequacy, and efficiency. We were surprised to find that OR ranked #2 overall out of fifty-one. In other words, our tax system may not be perfect, but it’s not bad. Consequently, to the question, what would the ideal tax system for Oregon look like, I answer: a lot like the one we have now.

Our result was surprising because theory tells us that balanced tax systems have a lot of advantages and Oregon’s tax system is more unbalanced than most. Unbalanced tax systems are supposed to be bad because they increase revenue volatility and because they necessitate high marginal tax rates, which impose substantial deadweight losses on an economy. It turns out, however, that the volatility reducing portfolio effects of relying on multiple tax types are small. Portfolio effects result from the fact that various revenue sources are uncorrelated. But all major tax bases – income, consumption, wealth, real property values – turn out to be highly correlated, >.85. In practice, the tax designs actually found in the US reduce these correlations to between .60 and .70, but at the expense of reduced progressivity – equally progressive tax systems would be equally volatile. Besides, the real fiscal problem is spending volatility, not revenue volatility. As for deadweight losses, tax rates at the state and local level are simply too low to cause big inefficiencies. The implications of these facts are that the costs of balancing Oregon’s tax system would be outweighed by the federal tax penalty involved, not to mention the reduced progressivity and increased administrative costs that sales and transactions taxes impose.

To say our tax system is pretty good doesn’t mean that it is perfect. The main issues that I think need addressing have to do with the property tax, the personal income tax, and upgrading the state’s Department of Revenue.

The property tax is potentially a really good tax; it is also unpopular with voters, especially those who own their homes free and clear and who take the standard deduction on federal income taxes. We can and should make paying property taxes a lot easier and more convenient for those folks. That is something every jurisdiction that relies on the property tax ought to do. I find it astonishing that they fail to do so. Property tax problems specific to Oregon include assessment distortions and multi-jurisdiction compression. Property tax assessments and obligations ought to track market valuations more closely. A reasonable move in that direction would be reassessment at title transfer. Given our land use planning policies, increasing tax rates on land and reducing them on improvements might make a lot of sense. (I think that ALL land ought to be assessed and charged property taxes and discriminatory rates eliminated wherever possible, but this is probably too radical to contemplate.) Compression is a harder nut to crack. (A return to a levy-based as opposed to a rate based property tax system would do the trick, but this is also probably too radical to contemplate).

Oregon should impose a smaller personal income-tax burden on families with low incomes. My preference would be to reduce state personal income-tax rates on the first two brackets to zero. But reducing collections from the poor could be accomplished a lot of different ways, including increasing the state’s EITC. Actually, thousands of low-income individuals fail to file tax returns. In many of those cases more has been withheld from their pay than they owe. Moving to a taxpayer-passive administrative system for personal and corporate income taxes could fix this problem and also increase collections significantly, but that would necessitate a significant upgrade of Oregon’s Department of Revenue.

From a state and local perspective, escaping a jurisdiction’s tax net does not necessarily involve physical movement. It can be accomplished by “a mere stroke of a pen,” or a mouse click. This is especially true of corporations, which are legal fictions or constructs. But it is nearly as true for anyone with enough wealth to make tax arbitrage worthwhile. Relatively high marginal tax rates, which we have, call for more and better tax administration. We have too long ignored that fact in Oregon. As a consequence we allow excessive non-reporting and under-reporting of income and do a half-backed job of collecting taxes owed. This is basically an information management problem and it is a critical one.

The Department of Revenue needs to re-engineer its core administrative processes for all tax types. Modern information technology could reduce both the fixed and variable costs of gathering, entering, storing, organizing and searching data on the tax base, deductions, exemptions, credits and liabilities, and payments, which is fundamentally what the DOR does, but, right now, compared to what is needed or even some other states, let alone what is possible, not very well.

Bike-o-nomics: Bike Research (Correlation and Causation Redux)

I have held my tongue for a while about some of the bike research that is being reported on by the Oregonian, The Atlantic Cities and others because I did not want to seem to be bashing the research.  Nor do I want to really bash the fact that it is being reported on.  Mostly though I do not want to be branded an enemy of the state by bike fanatics whom I have found at times to be a little less than circumspect about their own cause.  But I do want to point out some serious problems with the way the findings are being presented and discussed.

So, what studies am I talking about? First there was a lot of coverage of the PSU study that found that bikers spent more money in local stores.  Then there was a study from PSU that found that bike commuters were happier, and today I learn from Joseph Rose that the Danish have produced a study that said that bike riding children concentrate better in school.

Now, a few things first: I am an avid biker, I chose to live in a place where I can walk and bike to most things, my kids bike to school almost every day of the school year, rain or shine, my wife, when she worked downtown bike commuted everyday and has led the Walk + Bike to school activities for my children's school, so my family has plenty of bike cred.  Additionally, I want to state again that I have nothing against these studies nor their being reported in local and national media.

What I have a problem with is the way the media (and sometimes the authors themselves) fudge the distinction between what the studies find - some very interesting correlations - and the inappropriate causal interpretation of the results.

Here is an example:

Kelly Clifton has heard this stereotype a number of times: "Cyclists are just a bunch of kids who don’t have any money," says the professor of civil and environmental engineering at Portland State University. "They ride their bikes to a coffee shop, they sit there for four hours with their Macintoshes, they’re not really spending any money."

...Clifton says, "we start to see businesses say, ‘Hey, wait a minute. You’re taking away on-street parking to put in bike lanes, you’re taking away the one parking spot in front of my store to put in a bike corral. I don’t see many bikers around here. So what does this mean for me?" 

...Until now there hasn’t been much empirical evidence to allay such concerns. Clifton and several colleagues have attempted to fill that research gap in a project for the Oregon Transportation Research and Education Consortium.

But the study, though interesting and of plenty of merit in its own right doesn't really address the business owners concerns at all.  The study asked folks exiting a set of selected stores how they got there and how much they spent.  There is a problem of selection here in the way stores were chosen but mostly there is a problem with establishing any sort of counterfactual.  The business owner's concern is about the relative revenue impact of lost car parking and additional bike parking.  I'd like to think it is positive, and I think there is a good chance it is, but the study does not address that at all.

The study asks about the money spent at the time of the interview, in some cases the average was higher for car drivers than bikers (grocery stores) and some times it was lower (smaller stores).  They do a good job controlling for some household characteristics (especially income) but they still end up with some controlled correlations of one variable: spending for that trip.  This also does not address overall spending habits hoe biking correlates with spending or how biking affects consumer behavior.

Now both the author and the reporter are careful not to say that you get any firm answers from this study but they sure do fudge the point and make it appear that you would do fine drawing your own conclusions.  What would I like to see?  A better factual description of the actual study, a frank discussion about what it found and some of the potential conclusions an equally frank discussion about the limits of the study and what you cannot say from the findings.

Here is another example:

A new study by Portland State University urban studies doctoral candidate Oliver Smith found that getting to work via “active transportation” – e.g., under your own power – “increases commute well-being, even when controlling for distance, income and other factors.”

Um, no it doesn't. It finds a correlation between commuting and self-reported happiness. It doesn't say that if you take car commuters and force them to ride bikes to work they would be happier, it says that those that self-selected biking to work instead of driving are also more likely to describe themselves as happy. Full stop.

The fact that you control for income, distance and other factors does not change the fact that this is a correlation from which you simply cannot make a causal statement.  Again, this interpretation is, I hope, true, and certainly excercise and happiness are very, very closely related for myself, but this study does not allow that type of causal interpretation.

Finally, we have this:

Every day outside my son’s Brooklyn school, no matter what the weather, you will see a distinctive pale blue bicycle locked to the rack. It belongs to a 7th-grade girl from a Dutch family whose members have stuck with their traditional practice of riding to school each day, despite finding themselves in the not-so-bike-friendly United States for a few years. This lovely blue city bike was a gift from the parents to their eldest child... 

According to the results of a Danish study released late last year, my Dutch friends are giving their daughter a less tangible but more lasting gift along with that bicycle: the ability to concentrate better. (emphasis mine)

No, no a thousand times no!  According to your interpretation of the results of the study which found that bike riders could concentrate better (a correlation), bike riding improves concentration.  Again, this is likely true but the study was of self-selected bikers (as far as I can tell from second-hand descriptions, the study itself in in Danish) not of a group of students some of whom were randomly chosen to bikes and other who were driven - so no such causal interpretation is appropriate.

So as not to be a scold, here are some helpful hints:

-Report that studies find correlations or say "those who bike also X..."

-Be careful not to say or imply that "biking causes, or leads to, X..."

-If you want to make the link, use language like "it is possible that biking causes X..." but if you do make sure you qualify by saying that the results do not support such a conclusion.

-Yes I know reporters rely on academics to interpret their work, but we are not copyeditors, and since you don't have them anymore anyway, you have to be careful in your use of language not to imply causality when there is none.

-Academics, make sure you tell reporters the limitations of your study so it does not look like you are selling conclusions that your research cannot support.

Shopping Malls

Shopping Paulista - in the heart of the business district

Yes I am still alive. It turns out the process of moving an entire family to Brazil, getting settled, setting up and apartment, dealing with Brazilian bureaucracy and finalizing and starting school for the kids and getting myself settled that the university is a pretty long and exhausting job so please excuse my absence.

I did manage to get a pedantic blog post on mergers and anti-trust on the beer blog which is pretty straight econ - so go and have a look if you are having withdrawals - and I managed a few tweets.

Today I'll make a less than spectacular return to blogging my mentioning something from the local paper. [One of two thriving print dailies in São Paulo, by the way, maybe budding reporters in the US should consider a change of hemisphere!  It is nice to have a big fat paper to read through every morning, though a sad reminder of how much we have lost with our local paper fading into a 5 minute read...but I digress]  The Folha de São Paulo reported over the weekend on the flood of new shopping centers being built in SP, 19 over the next two years.  What was interesting to me was the figures they cite that 60% of all retail transactions in the US happen in shopping malls, whereas the figure for Brazil is only 19%.  The latter doesn't surprise me but the US figure, while not really surprising when you stop and this took me aback a little when I saw it.

So here are a few random thoughts:

In a place like São Paulo, where transit is a nightmare, parking difficult and safety an issue, the rise of the shopping mall makes a lot of sense.  With the booming economy, the growing middle class and the increased consumer culture it might be sad but perhaps inevitable that shopping malls would come to dominate the landscape like they do in the US.

Though I am no expert, though they certainly exist in Europe, I do not remember them creeping their way into central cities - my experience in seeing them is mostly on the periphery.  But in SP, they are in both the central districts as well as the periphery

Shopping malls lack romance, but I wonder how to feel about them ecologically.  They seem pretty darn efficient in general (though I am thinking of them in a partial equilibrium - that is I am taking the amount of consumerism as a given and not thinking about how malls may effect it).  

That is all for now, I'll try and keep up a reasonable stream of posts from here out.

Sellwood Bridge

Today the Sellwood Bridge closes for (hopefully) a week so that the venerable old bridge, made on the cheap and from scrap metal, can be shunted on to temporary piers.  Though, as a Sellwood resident, I will be very happy to have a bridge with real sidewalks and bike lanes, I will miss the old bridge which I always found an elegant and interesting part of the landscape.

So, to follow on yesterday's theme, I give you a look and the brand new Sellwood Bridge...in 1926:

I love the view of the old lumber mill located where the Sellwood Riverfront park sits today.  Whatever the new bridge finally looks like on the deck (which is still being planned), I hope and pray that this sign will reappear:

Photo credit: Canon Crawford

Though I suppose we could modernize it and replace 'men' with 'people,' though some of the old-timey charm would be lost.

Fan Mail: Vintage Portland

Just a quick plug for perhaps my favorite blog of all: Vintage Portland.  The blog is simple, it finds and publishes historic photos of Portland.  

I love historic pictures, especially of the place I call home. Portland is a very young city with a very recent and very present history.  I remember watching the log rafts float on the Willamette when I was a kid, and though I realize I am comfortably middle aged now, it feel not so long ago to me in years but so distant in memory.

Which is why I am often mesmerized by historic photos and enjoy looking at them so much.  This city has evolved but it is still a town built on timber and the river.  Go take a look.

Oregon December Unemployment Remains at 8.4%

Oregon added 2000 jobs (2,300 in private and a -300 in public) in December on a seasonally adjusted basis and the unemployment rate held steady at 8.4%.

Not much to say that hasn't been said continuously for the last two plus years.  Doldrums.