Is Walmart a Giffen Good?

A Giffen Good is the Holy Grail of consumer theory--it theoretically exists, but it has never really been identified in practice. A Giffen Good is defined by an upward sloping demand curve. That is, as price increases, demand increases. The requisite criteria for a Giffen Good is that it be inferior and comprise a large portion of total consumption (not to be confused with a Veblen or snob good). So, if the price of the average bundle of goods purchased at Walmart increased, would the average Walmart shopper start having to shop there more?

Tax Policy 101

After I suggested inconsistencies in how people apply the ethics of progressivity, a friend asked what it really means for a tax policy to be progressive. Depending on how you define and measure progressivity, you can come to vastly different conclusions using identical numbers. Below is an illustration that, while contrived, is on the same order of magnitude as the Bush tax cuts.

Suppose there is an individual who has $10,000 of income and is representative of the bottom income decile—the “poor”. Suppose this person pays 10% of his income ($1,000) in taxes, leaving him with $9,000 of after-tax income. Now, suppose there is an individual who earns $1,000,000 of income and is representative of the top decile—the “rich”. Suppose this person pays 50% of his income ($500,000) in taxes, leaving him with $500,000 of after-tax income. (Note that I use “poor” and “rich” here only for convenience and contrast. In practice, “rich” is certainly not a misleading title for the top tax bracket, but the bottom tax bracket is better characterized as “middle class”.)

In the next election, suppose there is a supply-sider candidate who wants to cut taxes to “stimulate” the economy. The proposed tax cuts would reduce the tax rate for the lowest earners by five percentage points (to 5%) and by four percentage points (to 46%) for the highest earners. After-tax income becomes $9,500 and $540,000.

Is this tax policy progressive?

Well, it depends how you analyze it.

1. If we look at tax rates we see that the rate for the poor was reduced by five percentage points, from 10% to 5%. The rate for the rich was reduced by four percentage points, from 50% to 46%. So, this tax cut widened the tax rate gap between the rich and the poor. The result is a more progressive tax code. This is the only definition of progressivity that does not require manipulating or interpreting the data in a favorable way.
2. Another way to view the difference in (1) is by noticing that before tax cut the rich paid a tax rate that was five times as large (0.50 divided by 0.10), now the ratio is almost 10 to 1 (0.46 divided by 0.05). Clearly, the tax code is more progressive.
3. The tax cut lowers government revenue by $40,500. The rich receive 99% of the tax cut—a monstrous $40,000. Meanwhile, the poor get a measly $500 back, representing only 1% of the total amount of the tax cut. This is what the media and many public officials who opposed the tax cut in the first place would deem “tax cuts for the rich.” But, this is just demagoguery. The fact is, the rich were already supplying 99.8% of government revenue. Any way you slice it, unless you start redistributing wealth, the rich are going to receive a larger piece of the pie from an across-the-board tax cut.
4. Looking at tax rates again, notice that the poor’s tax rate was reduced by 50% (5% divided by 10%) while the rich’s tax rate was reduced by only 8% (4% divided by 50%). In other words, the poor got 50% of what he was paying in taxes back ($500 of $1,000) and rich got only 8% back ($40,000 of $500,000). Here, the tax cut looks extremely progressive. This is how Conservatives might demagogue the issue (although the Right seems especially inept at articulating tax policy) and is only slightly less misleading than the previous example. In this case, however, the fact that a small difference in the percentage point change in tax rates looks big as a percent of tax rates is a result of an already progressive tax code.
5. Now look at after-tax income. The poor’s after-tax income increased by about 5.6% ($500 divided by $9,000) while the rich’s after-tax income increased by 8% ($40,000 divided by $500,000). So, despite the fact that the tax code became more progressive, it appears that the tax cut was actually regressive, slightly favoring the rich. This is the view favored by Brookings Institute’s Tax Policy Center. But this interpretation is unnecessarily intricate and misleading because it is entirely an artifact of existing inequality and an already highly progressive tax code. In fact, the only way to remove this effect would be to make the tax code much, much more progressive—essentially by only cutting taxes for the poor. In Brookings’ defense, they are emphasizing the “distributional impact” of a tax cut, but that is a measure of inequality, not progressivity.
6. Another alternative distributional measure is the percentage of tax liability. Before, the rich were paying 99.8% of taxes ($500,000 divided by $501,000). Now they are paying a higher percentage, 99.9% ($460,000 divided by $460,500). This is slightly misleading because it’s mostly a function of inequality and the rich’s high tax burden.

In summary, the only reasonable and consistent measure of progressivity is the tax rate gap—the difference between the percentage of income paid by high and low earners [illustrated in (1)]. Any other definition is intended—intentionally or otherwise—to advance a particular point of view or it’s an idiosyncratic result from a specialized example and should be taken with a HUGE grain of salt.

The bottomline is that everyone should favor simplifying the tax code—if you don’t, then you are likely a bad person, a member of Congress, or both. Whether or not a person favors tax cuts at all or prefers a more or less progressive tax code probably depends on their ideological bent or where they fall on the income distribution....and perhaps a little bit ignorance, but that is by no means limited to one side of the issue.

Obama on Regulation

Yesterday KLR wrote about Richard Posner and Gary Becker's discussion regarding regulation and deregulation. This week on Fox News Sunday Chris Wallace asked Obama where he felt the traditional Democratic platform falls short of Republican ideas. Here is an interesting bit of his answer:

OBAMA: Well, I think there are a whole host of areas where Republicans in some cases may have a better idea.

WALLACE: Such as?

OBAMA: Well, on issues of regulation. I think that back in the '60s and '70s a lot of the way we regulated industry was top-down command and control, we're going to tell businesses exactly how to do things.

And you know, I think that the Republican Party and people who thought about the markets came up with the notion that, "You know what? If you simply set some guidelines, some rules and incentives, for businesses—let them figure out how they're going to, for example, reduce pollution," and a cap and trade system, for example is a smarter way of doing it, controlling pollution, than dictating every single rule that a company has to abide by, which creates a lot of bureaucracy and red tape and oftentimes is less efficient.

That's encouraging forthrightness. And a good sign for policy.

Transcript of the conversation here. HT: Michael Moynihan

The Best Intentions

Arnold Kling contrasts some consequences.

Here are some more comparisons to consider:

1. The total death and illness caused by all of the chemical pollution ever created vs. the death and illness caused by the ban on DDT.

2. The GDP lost due to consumption of illegal drugs vs. the GDP lost due to the drug war.

3. The deprivation and suffering caused by predatory lending and other subprime mortgage shenanigans vs. that caused by biofuel mandates.

I think that as the world gets more complex and interdependent, we will see government activism cause ever-greater harm, because the unintended consequences become harder to predict, or even to trace when they do occur.

I came to DC to learn about good public policy, but my views increasingly favor the government sitting on its hands. Admittedly, my philosphical tendencies are strongly individualistic and rationalistic. But under any ethical paradigm there is no denying that people in power can produce pretty nasty outcomes. Even (especially) if that power appears benign. Despite what people might think Chevron, Microsoft, and Walmart are essentially powerless.

Update: Exhibit B

Random Thought

Most instructors organize their syllabus so that the class is worth XXX points and students submit work to earn points. Suppose instructors instead gave you an initial allocation of XXX points and then deducted points based on student (lack of) performance. Would this induce a different attitude toward course work and a different behavioral response from students? In other words, is the carrot or the stick a better student motivator?

(Absence) of Markets Failure

Richard Posner:

Perhaps what the savings and loan and now the broader financial-industry crises reveal is the danger of partial deregulation. Full deregulation would entail eliminating both government deposit insurance (especially insurance that is not experience-rated or otherwise proportioned to risk) and bailouts. Partial deregulation can create the worst of all possible worlds, as the western energy crisis may also illustrate, by encouraging firms to take risks secure in the knowledge that the downside risk is truncated.

This is an important observation that a lot of policy debates miss. What is often percieved as market failure is really government induced market failure. Big pharma, for instance, is often accused of abusing market power. The truth is the drug industry is far from perfectly competitive and this has a lot to do with the way government intervenes in health care.

Who is REALLY progressive?

I have always lived with roommates. As many as 80 at one point. Then six or seven for a couple of years. Now two. In every case, there has been substantial financial inequality. Some people had parents that were loaded. Some had better paying jobs. Others had vastly higher potential earnings. Yet, in every situation we all paid equal rent.

So my question is this: How many Americans, if they shared a house with equal ammenities, would propose paying rent based on wealth? How many think rent in an apartment building should be indexed to income?

My guess is very few. The unfairness of progressive rent seems obvious. Once we can afford a reasonable standard of living, we pay based on what we get, not based on what we have. Duh. When I go out to dinner with my roommate who is in law school, I don't suggest that he pay for more of the bill because he will make more money when he graduates. He would laugh his ass off at me.

So why do so many people, who would reject the concept applied to their personal life, approve of progressive taxation.

The whole idea of progressivity relies on the ability to exploit an anonymous minority. I would suggest my rich roommate pay for dinner if a third person agreed with me and was willing to help enforce the rule...and if my roommate weren't my friend.

Well, duh!

Man says he grew marijuana because of debts

Drug detectives have arrested a Poulsbo-area man who told them he resorted to growing marijuana because of mounting debt.

John M. Pritzos, 44, is charged with manufacturing marijuana in his home.

According to court documents, he told Kitsap County detectives he had monthly expenses of $8,500 to $9,500 each month. He said he's losing money on a rental home in Berkeley, Calif., that fetches less than the cost of its three mortgages. He also said he has $1,200 child support payments.

Is this not the worst defense ever? Granted, growing some plants should not be illegal. But doesn't this amount to saying, "I killed him because I wanted him dead" or "I robbed the bank because I needed more money." If only it were that easy.

I'll Go Do My Laundry Now

Having a husband creates an extra seven hours a week of housework for women, according to a University of Michigan study of a nationally representative sample of U.S. families.

For men, the picture is very different: A wife saves men from about an hour of housework a week.

So, are men lazy and are women unfairly burdened with household chores? I doubt it. It’s a simple case of division of labor and divergent preferences. When two people are married there are gains from trade that free up labor. Individuals will allocate their excess labor toward the activity which provides them with the most utility. For women, that might mean spending more time cooking a good meal or keeping the house clean. For men, it probably means more Sports Center. What's wrong with that?

Suppose my neighbor and I both spend two hours a week keeping our yards tidy. Then, suppose we move in together and the advantages of cohabitating provides each of us with five additional hours that were previously used for necessary tasks. I could plausibly allocate all five of my *leisure* hours to yard work if I took a lot of pride in a nice lawn or if I really enjoyed gardening. The most my new roommate could reduce his time working in the yard is two hours. Is this new arrangement unfair? Would we really say that my neighbor/roommate was shirking his yard duties?If I cut back on my hours working outside my roommate would not necessarily pick up the slack...because there is no slack.

In fact, the only way an equal distribution of tasks would be ideal is if a couple had identical abilities and identical tastes. What fun would that be?

If sharing the burden of household chores is important, you would be wiser to look at your future partner’s preferences, not their work ethic. If dividing chores equally is not important, then go ahead and make your life easier by engaging in a little Coasian bargaining.

This Advice Stinks

Gadling has some tips on hostel etiquette today. My favorite:

Spontaneous farting is only funny under very precise circumstances. It requires exquisite comic timing that most of you don't have, so better to just save yourself the embarrassment and do the slow release or, better yet, leave the room.

I disagree. Although socially unacceptable in certain situations, farts are ALWAYS funny.

Movable Feast

Excessive boredom and procrastination caused me to send the following letter to the NYTimes this afternoon:

To the Editor:

“Movable Feast...” (April 26) introduces the idea of addressing pollution by including environmental costs in the price of food via fuel taxes. This principle, called a Pigouvian tax, makes for effective environmental and economic policy but, sadly, often finds its way to the legislative waste basket.

The article presents an alternative where food labels include a product’s carbon content. In fact, this ingenious labeling system already exists. It’s called the price tag. There are countless scarce resources included as inputs in any production process and the cost of those resources are easily aggregated through the always-honest price mechanism. Implicit in the argument for carbon labeling is the popular notion that buying local is the highest consumer virtue. Once prices account for environmental costs, however, there is nothing especially noble about voluntarily wasting additional resources. True, some consumers care about minimizing environmental impact. But everyone cares about managing their budget and some even care about helping farmers in impoverished regions earn a decent living. Maybe that cheap Chilean apple isn’t so bad after all.

Fantastically Nerdy Quote

"Statistics are like bikinis; they are interesting for what they show, but even more interesting for what they cover up." --Dr. Abe Rotstein

Why Isn't Meat More Expensive?

The BBC has some facts and figures on the cost of food. Obviously, the price of food soared during 2007. But take a look at the change in prices by food type. Meat and sugar haven't changed at all? Sugar doesn't change because it is highly subsidized and doesn't remotely approximate a competitive market. But how can we explain the steady cost of meat while inputs are rising so dramatically--the food crisis has to have produced a supply shock. Is demand for meat perfectly elastic? I'm baffled?

What Wealthy Nations Do When They Have Time on Their Hands

The Animal Liberation Front claimed responsibility for releasing mink and destroying breeding records at the Jefferson Fur Farm this week.

"Consider this your first warning," it read. "Tear down this death camp and let the mink live free. If you don't, we will be back to finish the job."

That is quite a threat! Animal rights is not an illegitimate cause, but ALF is legitimately insane.

Gun Musings from a Leftish Economist

Mark Thoma comes across as decidedly apolitical, thoughtful and pro-tradition.

This closely reflects my own experience with, perhaps, slightly less beer drinking. I probably also have a few more exciting--but relatively harmless--stories.

Bottom line: for many of those who did not grow up around guns there is an entire culture out there that they are unaware of. Can anyone think of a comparable tradition that would be equally foreign to most gun owners?