Economist's Notebook: On Ronald Coase and Joe Rose

Nobel prize winning economics Ronald Coase passed away recently leading to many eulogies and explanations of his work and, in particular, his eponymous theorem.  I did my part as well.  I have always enjoyed teaching the Coase theorem because it is not obvious until you really think about it and it usually stirs up passions, especially if you use environmental pollution as the example.  But there are many others and one came to mind the other day when reading Joseph Rose's column in The Oregonian about who is at fault when a door opens up an whacks a car or bicyclist (or even, I suppose, a very fast runner).  

Joe explains that it is the responsibility of the opener of the door to avoid whacking people.  This makes sense and is probably uncontroversial, but for me the point is how property rights more or less solves the whacking problem and how it didn't really matter to whom you gave the right - this is what the Coase theorem tells us.  You see you could have given door openers the right to adequate space to open doors and held the bicyclists and other cars at fault for not yielding enough space to do so safely and the same 'efficient' solution would have resulted: folks would be careful not to get too close and no whacking would be done. 

This is just as efficient a solution as giving the cars and bicyclists the right to pass by closely and not be whacked.  Either way the important thing for efficient outcomes is that everyone knows how the property rights are assigned and acts accordingly.  No matter to whom the right was given, efficiency would result from the clear assignment of rights.   

Which is why it is good to have places like the Oregonian and reporters like Joe Rose to make sure people know to whom the right belongs so that efficiency can result.  For it only takes on driver who thinks that they have the right to open their door whenever they want for someone to get whacked.  

NB: This is also why I hate the unsigned intersection which are a plague in Portland. 

Fred Thompson: Cooperating with the IRS to Collect Delinquent and Liquidated Debt

Another dispatch from Fred Thompson:

Yesterday we hosted a National Association of State Auditors, Controllers, and Treasurers webinar on the IRS’ Treasury Offset Program (TOP) at Willamette University for interested state officials. TOP intercepts federal tax refunds and other payments to delinquent debtors prior to their disbursement on behalf of state governments and provides access to the Treasury’s Do Not Pay program. This year TOP has recovered nearly $7 billion in delinquent child support obligations, supplemental nutrition assistance program (SNAP) debts, income tax debts, unemployment insurance compensation debts, and other federal and state debts, including penalties and fines due to the state courts.

Oregon participates in this program, although currently only to collect child-support and personal income tax (PIT) arrears. In FY 2012, Oregon recovered $43.8 million for these programs ($15 million in PIT delinquencies).

Nevertheless, there is a lot more that we could do. Currently, Oregon sits on a backlog of nearly $4 billion in delinquent and liquidated debt. Moreover, this stock is growing at a rate of about $300 million per annum. If we had done no more than collect our fair share of recoveries, we would have grabbed an additional $30 million.

In addition, the state could potentially take advantage of TOP to collect hundreds of millions of dollars in PIT and business taxes that are evaded or avoided when taxpayers file incorrectly or fail to file, especially from those who choose to file in states other than Oregon. Oregon is a big tax exporter (net). Consequently, its taxpayers pay a lot more taxes than Oregon collects, mostly to states with lower PIT and business tax rates. Much of this borderline tax evasion could be preempted if the state had the capacity to monitor and analyze income flows promptly and more accurately.

More than anything else, what’s needed here are information system upgrades at Oregon’s Department of Revenue. As noted in a recent blog, those are on their way.

Indeed, these upgrades are needed to fully participate in TOP. A case in point, where the social security number (SSN) or employer identification number (EIN) of a TOP debtor matches the SSN or EIN of a payee, but the names do not match, the state lacks the capacity verify or falsify the match. Consequently, such offsets aren’t pursued. The situation is even more fraught in the case of non-tax delinquencies.

Centralizing the state’s debt portfolio and payment streams would facilitate working with TOP, not only because TOP accepts only one or two points of connection with a state, but also because duplicating the capacities to pursue delinquencies would be very costly. Finding the funds to upgrade the Department of Revenue’s collections capacity took ten years. It make no sense to try to duplicate this capacity for the courts, DHS, etc.

At the same time, nearly everyone agrees that the legal requirements governing collections programs need a second look. Debt collection laws quite properly require that debtors be given notice prior to intercepting funds owed to them: 60 days notice before a tax refund may be offset, 30 days notice for most other debt collection actions. However, the requirement that notice be given by certified mail seems entirely obsolete. That Federal law requires the IRS to charge a fee to cover its costs of running the TOP program, but does not permit it to pay a fee to the states when the state offsets a payment to collect a federal debt, also appears to be open to question. Possibly these examples are only the tip of the iceberg.

Are People the Problem or the Solution?

The debate about humans and the self-destructive deterioration of the environment in which they inhabit is one that has continued since Thomas Malthus started worrying about it in the 18th century.  Malthus famously predicted that humans would quickly overwhelm the carrying capacity of the earth.  Then we had the Population Bomb in which Paul Ehrlich predicted, again, that population increases would soon lead to the end of humanity.  Of course the Green Revolution soon followed the population bomb and completely discredited it - not that it hurt Ehrlich's reputation at all, it seems one is always safe predicting the worst, because every one is happy and ready to forgive if it does not come to pass.

And then we had this ridiculous tautology: that humans themselves were more impactful on the environment than any one individual action.  (This is tautological because humans can be thought of as a collection of actions and thus the sum is greater than the parts).  This is a particularly pessimistic view of humans and the view that humans represent a problem and not a solution to me is dangerous. As birthrates and poverty are closely related, environmental scolds in rich countries are in danger of blaming the world's poor for the world's environmental problems.

Anyway this is all a long lead in to this interesting and (in my mind) quite correct essay on how to think about humans and their place on earth in The New York Times by Earl Ellis. Here is an excerpt:

The science of human sustenance is inherently a social science. Neither physics nor chemistry nor even biology is adequate to understand how it has been possible for one species to reshape both its own future and the destiny of an entire planet. This is the science of the Anthropocene. The idea that humans must live within the natural environmental limits of our planet denies the realities of our entire history, and most likely the future. Humans are niche creators. We transform ecosystems to sustain ourselves. This is what we do and have always done. Our planet’s human-carrying capacity emerges from the capabilities of our social systems and our technologies more than from any environmental limits. 

Two hundred thousand years ago we started down this path. The planet will never be the same. It is time for all of us to wake up to the limits we really face: the social and technological systems that sustain us need improvement. 

There is no environmental reason for people to go hungry now or in the future. There is no need to use any more land to sustain humanity — increasing land productivity using existing technologies can boost global supplies and even leave more land for nature — a goal that is both more popular and more possible than ever. 

The only limits to creating a planet that future generations will be proud of are our imaginations and our social systems. In moving toward a better Anthropocene, the environment will be what we make it.

I think this is quite correct. And as I think about the impact of a new baby on the earth I prefer to think of the possibilities: to invent the next sustainable energy technology, to help solve world poverty, be a leader and lead people forward to a better future. I reject the pessimistic view of humans as only resource-suckers leading us to our doom. Our future is us and we need to figure out how harness the power of human potential rather than dismiss the world's poor as an overly reproductive cause of our problems rather than a symptom of a system that we have created.

Oregon Adds 4,500 Jobs but Unemployment Rate Climbs to 8.1%

Oregon's jobs picture keeps playing the same old song.  Decent jobs growth, but not great.  Unemployment stuck at an unacceptably high rate, though not as bad as the worst days of the recession.  And Oregon's economy showing signs of life but not really springing back to full health.  

So the long slog continues but at least things are still in the positive direction.

Well, I suppose we can rejoice that we are now five years since the financial crisis and thus halfway through our lost decade!

The Gilded Age, Redux

From Emmanuel Saez:

Welcome to the roaring 10s!

Economist's Notebook: Specialization vs. Generalization and the Research University Model

This little article in The New York Times on some research by David Figlio and others caught my eye: it essentially claims that non-tenured instructors do a better job teaching introductory-level university courses than do tenured and tenure-track faculty.  There could be many reasons for this and as an economist I am obliged to talk about incentives first.  Instructors have to be more worried about performance in the classroom than to tenured faculty - although I should throw in a note here about the increasing use of merit-pay and promotion to improve the classroom performance of tenured faculty.

Other reasons could be that research takes time and energy away from a professors classroom performance, or that instructors do not teach as difficult a class, who knows?  What interests me is that the mostly likely reason in my mind is due to specialization: instructors that focus on intro classes become extremely good at it thanks to the time and energy they can devote.  They also have time to experiment with new classroom techniques and teach these classes more frequently so there is no depreciation in their skills.

This, of course, points out that the traditional role of a professor at a research university is not how an economist would necessarily design things.  The principle of comparative advantage suggests that the efficient distribution of tasks would have those with a relative advantage in research do mostly research, those with a relative advantage in teaching do more teaching and so on.  The ideal of the tenured research faculty is one who devotes about half their time to research and half their tie to teaching - the very thing David Ricardo suggested was a bad idea!

But this makes two big assumptions: one, that the goal is efficiency; and two, that there are no spillovers - that having to do research does not help teaching and vice versa.  Even if you accept the efficiency goal, I believe strongly that in some classes this latter statement is false.  Perhaps not as much in intro classes though, which would help explain the Figlio, et. al., result.  But I for one have become a better economist from having to teach and continue to think deeply about very basic economic principles and I think my research experience definitely makes me a better teacher of classes that overlap my research areas (and in a big research university the ideal is that professors teach within their research areas) but also in the more intro and intermediate level classes as well.

Despite this, it does make me wonder whether the new model, that almost all universities seem to have gone to, where each department includes a team of instructors working along side the research faculty, isn't perhaps a better model.   Despite it being the subject of much derision, perhaps it has been better all along?

Jobs: National, Local and ... Porno?

The US gained 169,000 jobs in August, something of a disappointment for those convinced that the economy was picking up steam and who expected a larger number.  This is more than the natural growth of the labor force, but not a lot more and is not significantly reducing the unemployment rate.  The rate fell to 7.3% but that drop was due to labor force drop outs as much as new jobs.

The New York Times has a nice discussion about what the Fed does now.  The common wisdom was that the Fed would wind down its stimulus efforts as the economy appeared to be transitioning to full on recovery.  Again, reports of the recessions demise are somewhat exaggerated.  What the Fed does next is a interesting question.  Those like Paul Krugman who have felt the Fed is doing too little in the face of this liquidity trap will no doubt champion even new efforts to stimulate the economy.  Those worried about sparking an inflationary episode appear to be a little off base given that the inflation we really worry about is the inflation that starts working through the labor market.

On the local scene, Mike Rogoway has a nice piece on how high-tech employment is leading the way in Oregon's job market recovery:

Mark McMulen sounds the note of caution that though this is great news there is an element of risk as many of these jobs can be a bit volatile and many are from companies that have outposts in Oregon, not HQ which makes their connection a bit tenuous.

Finally, an article from Britain's Telegraph which cheekily makes the suggestion that the 2 week work stoppage in California's massive porn industry could have caused the unemployment rate drop due to those workers temporarily leaving the labor force.

Have a good weekend.

Ronald Coase

Photo Credit: Steve Kagan for The New York Times

Nobel Prize-winning economist Ronald H. Coase passed away at the age of 102 on Monday.  As usual, the New York Times does an excellent job with his obituary in explaining why, even among Nobel prize winners, his influence is larger than most.

[As an aside, obituaries for persons who managed to reach triple digits are interesting things to encounter for there is an absence of the usual melancholy of a life cut short - rather there is a feeling of satisfaction that this was a life lived to the fullest extent, but I digress]

Most economics students know his name because of the 'Coase Theorem' which explains how well-defined property rights leads to market solutions to externalities that are efficient. This idea is very simple and seemingly obvious once it is explained to you, but of course it is only obvious once it is explained.  This is the way with some of the very best Nobel winning ideas including Akerlof's market for lemons, Nash's equilibrium concept in non-cooperative games, etc.  But what is particularly profound about this idea is the magnitude of its impact among regulators and especially the judiciary. In fact, Coase thought of himself more as a law scholar than an economist.

Fewer people will have heard about his theory of the firm but it is as impactful within economics as is his theorem.  Another simple idea: why do firms do what they do?  For example why do some firms keep R&D and HR and other functions within the firm and others contract them out?  His idea was that it is all about transactions costs.  There are costs to contracting out, it takes time and energy to design and execute a contract, to make sure the outside firm is doing what you want it to and so on.  There are also costs to doing things in house: you have to monitor, manage and add complexity to do so.  The resolution of these tensions, Coase's theory states, explains the limits of the firm.

For a field that is often math-intensive, it is surprisingly often that the simple yet elegant ideas that are the most influential and generally the things that got me and other graduate students the most excited.  Unfortunately, these days, someone like Coase would have a hard time making it in economics which tends to reward technique more than ideas.

Fred Thompson: Taxes Don't Collect Themselves

Fred Thompson checks in again!  

Wednesday morning I attended the Interim Revenue Committee meeting in the Oregon State Capitol. The headline topic was the September economic and revenue forecast presented by Mark McMullen, State Economist, and Josh Lehner of the Department of Administrative Services’ Office of Economic Analysis (they predicted more lackluster growth). But I was there primarily for the update on the Department of Revenue’s (DOR) core-system replacement project, presented by agency director Jim Bucholz, and project manager Eric Smith.

This project, which has been in the works for several years, was finally authorized at the tail end of the legislative session and is scheduled for kickoff in October. Over the next four years, it will replace DOR’s thirty year-old information systems and processes and promises to upgrade DOR’s performance materially. Arguably modern IT systems would use artificial intelligence algorithms to determine how best to process each account and do so on a just-in-time basis, thereby minimizing discrepancies between processing time and cycle time and maximizing collections.

This spring, a group of my students looked very carefully at the DOR’s processing of past-due accounts (so called liquidated and delinquent accounts). They estimated that a one percent reduction in processing cycle time would increase past-due accounts collections by >.5 percent. They observed that obsolete information technology substantially retards the speed and the accuracy with which the DOR identifies failures to file, filing errors, and payment delinquencies, impedes execution of the collections process, and slows decision making almost to a standstill. The current collections process operates like a series of fallible filters. Accounts receivable are processed more or less in their order of arrival to a revenue agent’s (RA) in-basket. Processing follows a series of prescribed steps in which the account moves from RA to RA, often spending far more time awaiting processing than being processed. Only when these steps fail, is the account subjected to additional scrutiny and assigned to the next higher level of collection effort. Paradoxically, these procedures appear to subject the most difficult accounts to the greatest delay. As a result my students concluded that if core systems replacement reduced processing cycle time by only 20 percent, it would pay for itself in seven years (or less) from increased collections alone, which is really quite remarkable given that the project won’t generate substantial operational improvements prior to its completion.

Jim Bucholz and Eric Smith did not make their case for the core-systems replacement project in terms of improved performance. Indeed, they very careful to make no performance-related promises. Instead, they emphasized the need to upgrade (replace) antiquated systems and equipment (COBOL programs and green screens) and sought to reassure the committee that this project would not be Oregon’s next information technology disaster. They noted that they were buying an off-the-shelf system that had been successfully installed in 16 other states for a firm fixed price.

Two issues that did not come up in this forum were DOR’s choice of a contractor and overall performance of the DOR. Frankly, I think they made a pretty canny choice of a contractor. Fast Enterprises is relatively small company, but it is the leading supplier of integrated tax-processing systems to state governments. Its principal competitor, CGI, works with fewer than half as many states and, largely based on word-of-mouth, is growing much more slowly. Moreover, Gen-Tax is Fast Enterprise’s main business; tax, revenue and government collections management is a sideline for CGI.

Both the legislators and most of the folks present at the hearing seemed pleased with the overall job DOR is doing. Mostly this assessment seems to be based on the fact that Oregon spends thirty-to-forty percent less than the average state to collect a dollar of revenue. But this fact probably has very little to do with the DOR’s operational excellence and a lot to do with the state’s tax structure. Unlike most states Oregon relies on a single revenue source, the personal income tax (PIT), which means it needs only one administrative apparatus to collect its revenue. Every tax type requires its own collection organization and every one of those organizations costs money. Moreover, to the extent that our PIT and business taxes are aligned with the U.S. tax system, we can piggy-back on the efforts of the IRS to combat tax evasion and excessive avoidance.

Arguably, however, we carry that virtue to excess, relying on the good people of the state to pay what they owe more or less voluntarily; most do, some don’t. One way to assess the performance of a tax system is to look at the difference between net revenue (revenue less the cost of collection) and potential revenue (given the tax base and rate structure). We call this difference the revenue gap. Oregon’s PIT revenue gap is quite a bit higher than the national average and its business tax gap one of the largest. An additional reason our collection-cost per revenue dollar is low is that we spend less than other states to combat tax evasion and avoidance; consequently, we probably do a poorer job of identifying non-filers and under reporters. This is especially likely where our statutory rates are higher than those of other states or where our tax code deviates from the federal tax code. Each of these factors calls for greater investment in collecting taxes and that investment has been put off for far too long. The core-system replacement project is a timely down payment on what needs to be done.

Everything Old is New Again

Note: Just about every post these days begins with an apology for it has proven to be extremely difficult to keep up with the blog while in Brazil trying to accomplish all of the tasks big (completing the research project that brought me here) and small (comprehending the intricacies of the Portuguese language, understanding the Brazilian school system for my kids and navigating the byzantine Brazilian bureaucracy).  But my time here is quickly drawing to an end and as of September 15th I will be back full time at OSU.  It is my hope to resuscitate the blog upon my return but that may prove difficult as well as I will be taking on the duties of 'coordinator of the economics program' which is moderno speak for 'chair of the economics department' except that they don't trust me to make final decisions about the budget. [This was all a part of the grand reorganization of OSU that was supposed to make it lean and mean and lower administrative costs, but for me at least it has just added an entirely new layer of bureaucracy and the associated costs therein - but I am sure that statement is evidence of my lack of understanding of the 'efficiencies leveraged']  Plus I am writing a textbook which is no small task as well.  Anyway, the point is that I am doing my best but this blog has always been a hobby and I started it and maintain it under the strict self-imposed constraint that it not interfere with my real job(s).  So my apologies and I hope it will get better soon, but I can make no promises.  

During the last decade or so of Chinese triumphalism I was often asked, as a development economist, what I thought of China and whether it was poised to become the dominant economy in the world.  I would always sound a note of caution: deficiencies in social services and infrastructure as well as poor environmental safeguards were tremendous challenges to China that I was unconvinced they were well prepared to tackle.  Recently India, Brazil and Russia were also added to this sense of a new economic world order taking shape.  Again I was cautious.

Being in Brazil only served to deepen my sense of caution about declaring these newly emerging countries triumphant.  The protests in Brazil during the Confederations Cup perfectly demonstrated my point.  As Brazil has grown extremely fast and succeeded in many areas such as decreasing poverty, increasing primary education and the like, it still faces tremendous challenges as the protest showed.  Complaints about corruption, lack of adequate health care, education and public transport reflect the challenges that rapidly growing economies face. São Paulo itself is a perfect example (as is, I am sure, Beijing): a city that has exploded in growth, much faster than planning and infrastructure could keep up with which, as a result, has left is a bit of a mess.  It is a city of enormous wealth, enormous inequality and enormous problems that will not be easy to fix - they will take a very long time and a lot of money.  

Anyway, this is all a lead in to an interesting New York Times article about this and how the 'old' economies of the US, Japan and Europe are starting to pick up steam just when the growth of the BRICs is slowing considerably.  Here is the interesting graph that accompanied the article. 

This is not to say that the era of strong BRIC growth is over, just that there is a maturation process that is probably about a 50 year horizon that these countries have to go through in order to create economies that are mature, self-sustaining and work for the entire population, not just the lucky few.  

The other theme that I have talked about when asked about China and the relative position of the US, echoed by the NYT, is that China is going to have to shift to a more consumer-driven economy rather than a government-driven one and that the US is poised to become a prime beneficiary of this shift.  

Sitting here in Brazil it is pretty easy to become a bit pessimistic.  Years of commodity-driven growth have allowed some social spending, which has been good for the Worker's Party in its quest to hold on to power, but they have done far too little to tackle government graft and corruption, and invest in transportation, healthcare and education.  Without healthy, educated people and a transportation and information infrastructure to support them, where is future growth going to come from?  

My favorite image that, to me, is evocative of all of Brazil's promise and challenge is around Avenida Paulista in São Paulo - Brazil's version of wall street.  Among all of the high rises and wealth and situated next to Jardim Paulista one of the fanciest neighborhoods in São Paulo, overhead power and telephony wires struggle to stay aloft under the massive weight of the sheer number of wires.  You see, the area grew so fast and with so little planning, regulation and public investment that the power lines for buildings 20 stories high are not buried in tunnels below the street but are carried aloft on old poles never meant to hold so many lines.  And despite the sheer wealth that Avenida Paulista represents something as fundamental as a reliable power source is left unattended.  [In response, most modern buildings have their own generators to provide power when the outside source is interrupted - once again showing the privatization of what should be a public good.]

Democracy and Economics

Yes, I am well aware that this blog has become moribund to the point of extinction.  But it is not quite dead just "pining for the fjords" to borrow a phrase, it has not ceased to be.  My sabbatical in Brasil has caused severe disruption in the content of the blog but I hope that normal programming can resume once the fall term begins.

But here in Brasil I do keep track of the goings on on the The Oregonian blog (as this appears to be what the O is quickly becoming, the hallmarks of the blog species are all there: typos, fluff and opinion mixed in with a bit of news) and this caught my eye, apparently someone has been going around posting flyers declaiming the fact that those that benefit from government handouts are also allowed to vote:

I wonder what dear Artemis believes a government by, for and of the people is all about?  We all benefit from the work of the government - that is the entire point of the exercise.  Pointing out one small population is absurd.  Ranchers get federal grazing rights, farmers get subsidies, the timber industry gets to cut on federal land and then counties receive payments when these timber revenues dry up.   All of these folks vote.  The poor get assistance in the form of tax subsidies, food stamps and healthcare, and they vote.  But it is not just these particular groups, we all benefit from government provided roads, parks, fire and police protection and so on.  And we all vote.  Many of our kids go to pubic schools and still we vote.  We are all beneficiaries of government spending and we all have a say in that spending.

The whole point of a democracy is for us all to figure out together the proper limits of government.  But the point of government itself it that it makes out lives better, it takes care of public goods, it controls and regulates activities that have externalities and it promotes the advancement of the citizenry and the economy through investments in human capital, research and infrastructure.  If it didn't we would not have it.

It has been known since the beginning that voters in a democracy will have a say in the benefits that accrue to them, that is the very point of democracy.  And to complain about a subgroup is simply absurd - it is precisely because such groups are relatively small that they cannot decide for themselves the amount of benefits they receive.  Their votes (nineteen in one neighborhood!) are too few to matter, it is the votes of the rest of us that will determine their fate.

Now I realize that arguing with a flyer-posting crank is a bit silly, I do think it is important to understand the point of government.  

US Unemployment Data Show Continuing Struggle to Recover

Yet another month with good-but-not-great job growth figures.  How long has this been now, five years?  Today we find out that the US economy added 162,000 jobs and that unemployment fell to 7.4%.

I think it is pretty clear that folks that were pointing to a Japan-style malaise had it just about nailed.  Japan's lost decade is looking a lot like what the US is in now.  I think those that argued for a more forceful monetary and fiscal response has the weight of the evidence on their side though I for one remain unconvinced that we have the ability to pull off more fiscal and monetary stimulus.  Needless to say the timing of the sequester and the Fed's potential tapering look unfortunate.

 

 

Fred Thompson: Does Oregon Need a Mileage Tax?

Note: Another dispatch from Fred Thompson:


Oregon’s State Highway Trust Fund is broke. Options addressed by the Oregon Transportation Commission, the Governor's Office, and the Legislature aimed at fixing this state of affairs include raising DMV fees to recover the full cost of the products/services it delivers to Oregonians. By state law most of the division’s services are supposed to recover their costs; the remainder are supposed to make substantial contributions to the Highway Trust Fund. But, because the legislature has repeatedly failed to authorize DMV to increase its user fees, the DMV is instead costing the Highway Trust Fund over $100 million per annum. ODOT has also been looking at alternatives to replace the gas tax, now the main support for the Highway Trust fund, among these are a fee for studded tires, a leading cause of road wear, and a weight-use-per-mile tax for personal vehicles. Cars are becoming more fuel-efficient. Consequently, the gas tax isn’t keeping up our needs for highway construction and maintenance. A car that gets 60 miles-per-gallon is great for the environment, but it contributes substantially fewer tax dollars and as much highway wear-and-tear and congestion as any other car.

Oregon is a leader in the study of mileage-based taxes. It has long relied on a weight-use mile tax for commercial vehicles. And it began to develop a mileage tax for personal vehicles as early as 2001. The pilot programs it has conducted since then have garnered national attention in transportation circles. As Governing Magazine reports: “Many view the state as being on the cutting edge of transportation funding. A Congressional Budget Office report published in 2011 suggested a miles-driven fee as a viable alternative to the gas tax, and many national transportation experts have endorsed the idea too.” These pilot projects have looked at outfitting cars with a special-purpose GPS device that would tell them where they have been. The latest iterations rely on commercial GPS devices (like phones or navigation devices) or more simply a wireless device that would report mileage back to ODOT HQ on a daily or weekly basis.

A lot of folks don’t like mileage-based taxes. Blue Oregon’s Keri Chisholm calls them a “terrible, horrible, no-good, very bad idea that just won't die.” Keri grants that more money is needed to maintain Oregon’s transportation infrastructure, but, like a lot of people (although not a majority of the state legislature), he would prefer to increase the gas tax, 15 to 20 cents per gallon.

I like mileage taxes. Most people do as long as they remember that the tax is a charge for highway use, not primarily a means of deterring driving or harmful emissions. A good mileage tax would reflect axle weight and miles travelled, which, together with vehicle speed, constitute the main determinants of highway wear and tear. Ultimately, it would probably be advantageous to incorporate operating speed into the mileage rate. This would allow the tax to be calibrated to the damage a car causes to the State’s streets and roads, but would require something more than a simple report of miles traveled. Installing a system based on GPS data on highway usage, would also make it easier for ODOT to figure out when and how much maintenance state highways need and to allocate funds to municipalities and counties based upon the actual use of their streets and roads.

Of course, the critical advantage of a GPS-based mileage tax is that: "You can potentially calibrate the level of the tax to the degree of congestion on the particular road at the particular time of day, so the tax better reflects the changing externality associated with driving." In the longer run, congestion pricing would also be useful for planning for future highway needs. In my opinion, its potential use in congestion pricing is the best possible argument for building a GPS system.

Several reasonable objections have been raised against mileage taxes. The first is that vehicles licensed in other states would be exempt from the system. That is not now the case with commercial vehicles and occasional visitors to the state could simply be included in system by which we collect taxes on commercial vehicles. More frequent visitors would undoubtedly find it more convenient to plug into the state’s GPS system.

Second, “removing financial advantages of low carbon impact driving is antithetical to the health of our ecology and the direction our economy needs to go.” I have a lot of sympathy with this argument, but Oregon’s current gas tax is too low to have significant effect on carbon emissions, the state is the wrong entity to impose a carbon tax (although in the absence of national action, better than nothing), and abating greenhouse gases calls for taxing all sources at the same rate, proportional to the harms they produce, not just motor fuels. Moreover, there are substantial federal and state incentives aimed at persuading folks to substitute high mileage vehicles for gas guzzlers.

Third, giving ODOT the means to monitor our cars’ movements throughout the state would infringe upon personal privacy. Putting a GPS device in everyone's car is evidently upsetting to a lot of people. This seems silly to me. Most new cars already have such devices and many of us carry cellphones around on a regular basis. Is it safe for Verizon or GM to have access to the information produced thereby, but not ODOT? OK, I think we are a bit nuts about privacy in any case: that personal and corporate tax returns, information on children and families, and personal heath records are all private makes the formulation of coherent public policy nearly impossible. By my opinion here doesn’t matter. The fact is that it would be a simple matter to allow folks with serious concerns about their privacy to buy their way out of the system. 

There is one objection to this proposal, however, that really doesn’t make sense, that road use is the wrong tax base: “even people who don't drive are road users. Any type of commerce or business depends on our road network; every product we buy is shipped via roads at least partially. The idea that the cost of roads must be paid through a ‘user fee’ is silly. We are all road users.” That we are all road users whether we drive on them or not is absolutely true, but it is equally true that insofar as paying a road tax is a cost of doing business, the tax will be shifted to those of us who ultimately benefit from their use. But, in fact, this argument is irrelevant to the proposal under consideration, which is concerned exclusively with the use of personal vehicles. Oregon already applies a mileage tax to commercial vehicles.

Fred Thompson: Thinking About School Districts and Property Taxes

Note: I have been bust moving my family back from Brazil to Portland and have had not time to blog.  It is back to Brazil in August so my time here in Oregon is tight and I will have difficulty blogging regularly.  Fortunately Fred Thompson rides to the rescue with a couple of blog entries - the first is what follows:

Local school districts, their boards, school superintendents, and district offices have come in for a lot of criticism of late. Dylan Scott, in a recent Governing magazine article (May 2013), reports that advocates, both left and right, increasingly call for the outright elimination of local school districts, which would mean turning educational policy/finance over to state control. This notion is surprisingly attractive to some conservatives, who would make state governments the only higher authority for individual schools, which would be state funded but independently controlled and operated, although a more likely outcome of full state-level funding and control would seem to be machine bureaucracies of even greater scale and scope than at present.

Is the antagonism toward local school districts justified? In Making the Grade: The Economic Evolution of American School Districts, William A. Fischel argues that it is not. Fischel adopts the prevailing economic view of the function of local governments in our unique system of fiscal federalism: local governments, both general-purpose governments and special tax districts are like businesses, property owners are equivalent to shareholders, and local officials create value by maximizing property values within their jurisdictions’ boundaries via the provision of services and amenities that can be more efficiently financed collectively than by individual property owners. This basic logic underlies local reliance on user fees and property taxes, which, where assessments reflect market prices, are the economic equivalents of user fees.

According to Fischel, school districts play a central role in this system, because of the importance of schools to a critical class of property owners: homeowners.

“A significant factor for many people deciding where to live is the quality of the local school district, with superior schools creating a price premium for housing. The result is a ‘race to the top.’ as all school districts attempt to improve their performance in order to attract homeowners.” Fischel also argues that locally funded schools, especially those funded by ad-valorem property taxes, provide homeowners with the motivation to monitor and control local jurisdictions, because amenities and taxes are capitalized in the value of their largest asset, their homes, and local governance gives them an opportunity to do so. Finally, he provides evidence that home prices are more responsive to district boundaries than to the boundaries of school attendance zones, which he attributes to the special role played by local school districts in the accumulation of community-specific social capital, “mainly through the networks parents establish,” which spills over to a wide array of collectively provided services and not just to schools.

 In defending school districts supported in part by local property taxes, Fischel also questions voucher programs, noting that their greatest virtue is also their greatest vice: greater competition among schools erodes location-specific social capital.

The tax-financed, local public school system makes “exit” (to private schools) more costly, which in turn promotes more “voice” within the community. Parents will inevitably seek to make their voices heard in their children’s schools, wherever they are located. Public schools induce those within the same jurisdiction to have a more common voice in self-governance in other community matters.

Critics of Fischel’s argument in favor of linking resources to location typically ground their claims on two priori beliefs. The first has to do with the demand for educational services, the second with democratic governance. The first of these is that education is primarily a public, not a private good, and should, therefore, be supplied equally to all. I am inclined to believe that this argument misconceives the nature of public goods. Public goods are characterized by two characteristics, non-excludability and non-exhaustibility, which means that only one quantity can be supplied to the citizenry within a given jurisdiction, that the citizenry’s enjoyment the good is entirely passive, and that the good must be equally provided to all, whether they like it or not.

Clearly neither of these characteristics nor their implications applies to educational services, at least not for the most part. Consequently, most economists believe that educational services are primarily private goods. For a friend of education, this should generally be seen as a good thing. The single most powerful implication of the theory of public goods is that they tend to be under supplied. The principal exception to this generalization occurs where they are combined with private goods and dominated by the latter.

However, to say that education is not primarily a public good does not mean that this argument is wrong. Repairing it in this case is fairly straightforward. Equity or, more correctly, enjoying the benefits of living in a reasonably fair and equitable community is itself a public good and the delivery of educational services and amenities may be an effective means of promoting its provision. However, the relationship between educational services and a more equitable society is an empirical question, one that that most of those calling for equal student funding neither ask nor answer. My own view of the evidence is that improving access to and the scope of pre-school services and meeting students’ basic needs and, thereby, raising attendance once they have started school will go further toward improving outcomes for students from low-income families than increasing school resources per se, and that those things are appropriately state responsibilities

Opposition to using local property taxes to finance schools also rests upon a peculiar view of democratic governance, which holds that citizens are entitled to certain services simply “by virtue of their membership within a polity,” that governments are obligated to provide these services equally to all, and that this obligation cannot be outweighed by other considerations. Consequently, if education is one of the services to which the citizens of a state are entitled, it must be provided equally to all. Here too, I am inclined to take issue with the argument. I would freely grant that all citizens have certain rights and have been afforded certain entitlements, but what those entitlements are and how far they go is entirely a matter for the members of the polity to decide through its participation in the processes of democratic governance, deliberation, and debate. Folks are well within their rights to argue that education should be a service to which all citizens are equally entitled; that education is a service to which all citizens are equally entitled violates both fact and logic.

Indeed, I would argue that, from the standpoint of democratic governance, the most important criterion by which any institutional arrangement should be judged is the degree to which it promotes citizen engagement and participation in the management of the polity and an understanding of the consequences of collective choices for themselves and their neighbors. And, while this factor does not outweigh all other considerations, it should weigh very heavily in our assessment of alternative institutional arrangements.

From this standpoint, our idiosyncratic system of fiscal federalism appears to work fairly well in general and specifically with respect or the governance of public education. There is evidence that the system promote citizen monitoring of school performance, that higher tax prices and home ownership are associated with higher levels of monitoring, and that greater reliance on property taxes and other measures of decentralized control are associated with greater efficiency on the part of school districts. Further, looking at interstate variations in average student achievement, operating stability, flexibility, and transparency, one consistently finds that they are inversely related to state level financing and control, both in cross-sectional analysis and panel studies. In the face of this evidence, one might conclude that it would be wiser to question the merits of state-level finance/governance than district-level governance.