Worthwhile Canadian Initiative

Presidents: do you get what you pay for?

In 1915, Woodrow Wilson earned $75,000 per year, or $1.9 million in 2018 dollars, for serving as President of the United States. The current incumbent of that office receives only a fraction of that amount: $400,000 annually.

Congress has increased the presidential salary three times in the past 100 years: raising it to $100,000 in 1949, to $200,000 in 1979, and to $400,000 in 2001. These rises appear as sharp spikes in the graph below. After each one of these increases, the real value of the presidential salary has been gradually eroded by inflation, except during the deflationary 1930s. 

Pain, brioche, and the language of taxation

Ireland's Supreme Court recently ruled that the buns Subway uses in its sandwiches contain too much sugar to be considered "bread", and are thus subject to Value Added Tax (VAT). The decision lead to headlines and discussion along the lines of "Irish High Court Rules Subway’s Sandwich Bread Is Not Legally Bread" or "Ireland declares that Subway’s bread is basically cake". The emphasis was on how "confused" and "bizarre" the entire debate was, and the cost and arbitrary nature of distinctions made in tax legislation: "Having moral distinctions between foodstuffs in your tax regulations turns out to be an awfully expensive thing".

Yet the discussion of whether or not Subway buns are bread is only confused and bizarre in English, with our barren culinary language. In French, the discussion would not seem peculiar. French distinguishes between three broad categories of baked goods: unsweetened bread is "pain", sweetened bread (often made with eggs and milk) is "brioche", and cake is "gâteau." Hence the expression "Qu'ils mangent de la brioche" is (somewhat misleadingly) translated as "let them eat cake", because there is no English word for sweetened bread.

Subway's response to the ruling was that “Subway’s bread is, of course, bread.” Yet even though the English language does not distinguish between "pain"-type bread and "broiche"-type bread, the distinction does exist - and can hold up in court. Yet the fact that Subway believed they had a plausible case, and the bemusement the case generated in the English-language media reveal the extent to which language and culture influence the types of distinctions tax systems are able to make.

The national and first official language of Ireland is Irish, rather than English. I don't know whether "arán"  - the Irish word for bread - also encompasses brioche, or the extent to which various forms of bread are distinguished in everyday speech. If you know, please leave a comment! 

Can you be confident about an economy you can't see?

Canada's economy may be on life support, but it is still hanging on. Even on streets that seem empty and shuttered, there are a few businesses getting by, or even thriving.

The bookstore on Beechwood Avenue looks closed, but every so often a customer pops by to pick up an order from the bookrack hidden in the vestibule. At Life of Pie, the neighbourhood bakery/restaurant, the tables are stacked up, and the lights dimmed - but in the back the kitchen is humming, as the staff works hard to fill a steady stream of orders. When I ordered take-out from the local  Indian restaurant, the owner sounded busy and cheerful for the first time in months. The local farmer's market has moved on-line - no more lingering over the potatoes and fighting hipsters for the last bag of arugula. All orders now have to be in by Thursday noon, paid in advance by e-transfer, and picked up in a quick, physically distanced transaction. There is economic activity going on, but much of it is invisible, and hidden at home. As for the rest - if you don't look closely, you'll miss it.

I hope that policy makers can be creative and figure out ways of opening up more local businesses. But even if they do, what will that do for consumer confidence? Can you be confident in an economy that you can't see?

The behavioural economics of the Marie Kondo method

Marie Kondo is the guru behind the best-selling Life-Changing Magic of Tidying Up and Spark Joy. For some people, like me, her method works. One possible reason for its success is that, underneath it all, there are some sound behavioural economics principles.

1. Shift the reference point

Marie Kondo recommends dividing one's possessions into five categories and tidying them a category at a time: first clothes, then books, papers, miscellaneous and finally sentimental items. Within each category, the first step in tidying is to empty all of one's cupboards, closets and drawers, and put every single item of say, clothing, into one big pile.

It's a brilliantly simple and effective nudge.

Moving one's clothing creates a new, shifted, reference point. The default or status quo position changes from "in the closet" to "on the floor." Taking each item of clothing and putting it back in the closet then involves a deliberate choice; an act of will. (Marie Kondo emphasizes that each item must be dealt with one at a time - shoving a pile of t-shirts back into the t-shirt drawer is not allowed). Once the status quo has changed to "on the floor" it's much easier to take the next step and say "off to the thrift store."

2. Counter loss aversion

Homes become cluttered and untidy when they contain too much stuff. But it's hard for people to part with things, because we are loss averse - we feel the pain of giving something up much more acutely than the thrill of getting something new. 

The Marie Kondo method creates a series of rituals to counter loss aversion. Pick up an article to see if it "sparks joy". If it does not, thank it for its service, and let it go. However hokey it seems to say an emotional farewell to a t-shirt, the act fits with standard psychological advice: the best way to cope with negative emotions is to observe your feelings, acknowledge them and work with them. Allow yourself to feel sad, and the sensation will pass; suppress those emotions, and they will linger and fester.

Does (cohort) size matter?

In the US, the portion of young men between the ages of 18 to 34 who report having at least one partner has fallen substantially in recent years (sorry for the small image size):




Charts similar to the one above have prompted talk of a sex recession. Yet worries that Millennials are killing sex (as well as napkins, diamonds, and casual dining) may be premature. This data comes from the GSS, which samples a few hundred people between the ages of 18 and 34. The 95 percent confidence intervals around these estimates, shown by the whisker bars on the chart, are very large. For example, the margin of error on the 2018 estimate for men (77.5% with at least one partner) is 7.5 percentage points.

In my submission to the annual Macleans Charts to Watch compilation here I compare the GSS numbers to those obtained from the much larger Canadian Community Health Survey. I find a smaller, but similar, downwards trend in young men's sexual activity rates north of the border. With the larger sample, I could pinpoint the downturn more precisely: it is concentrated among 20 to 24 year olds.

It does seem that these numbers are picking up something real. The question is, what?

Robinson Crusoe and the Carbon Tax Rebate

Suppose I impose a carbon tax on Robinson Crusoe. But I give him a rebate exactly equal to the tax he pays. That tax plus rebate will have no effect on Robinson Crusoe's behaviour. He knows that if he cuts carbon by 1kg, and pays $1 less tax, his rebate also falls by $1, so his net tax (= tax minus rebate) stays the same. He has no incentive to cut carbon.

Now imagine an archipelago of 100 identical islands, each with one identical Robinson Crusoe clone. And suppose I impose the same tax per kg on each of them, but give each one a rebate equal to 1% of the total tax I collect from all.

You might think the result would be exactly the same. But it's now very different.

Each of the clones knows that if he were to cut carbon by 1kg, and pay $1 less tax, while the 99 other clones kept doing the same thing, his rebate would fall by only $0.01, so his net tax falls by $0.99. Which gives him an incentive to cut carbon.

In the new equilibrium (we call it a "Nash Equilibrium") they all cut carbon by the same amount, and so each gets a rebate equal to the tax he pays. But each knows that if he alone were to move away from that equilibrium, by increasing carbon, his net tax would increase by $0.99 per 1kg of extra carbon. Which is sufficient incentive not to move away from that equilibrium. Which is what makes it an equilibrium.

It's like a competition, where each entrant has to put the same $10 into a pot for prize money, and the total pot is divided between them in proportion to how quickly they each run. That creates an incentive for each to try to run faster relative to all the other competitors. Only if they all collude, and collectively agree to walk the race slowly, and none cheats on the agreement, would the incentive fail. Except the carbon tax works in reverse, because they pay money into the pot in proportion to how much carbon they create, and share the pot equally. So they compete to create less carbon.

What is true for each of the parts is not necessarily true for the whole, and vice versa, even if each part is identical to the others. What is individually rational is not necessarily collectively rational, and vice versa, even if each individual is identical to the others. Prisoner's Dilemma is one example that illustrates this point. My carbon tax example is another.

This post is not really about the carbon tax. I know nothing useful about the carbon tax, except for this one point. It's about teaching economics. The point I am making above is true and important, but it is not obvious. Teaching is hard.

Maybe what non-economists don't get is not income effects vs substitution effects; it's the Fallacy of Composition and the difference between individual rationality and collective rationality. Free riders, collective choice problems, and all that. (If there were no difference we wouldn't need a carbon tax anyway.) And the best way to explain the difference is in a representative agent model, because the difference is at its starkest and clearest in a symmetric equilibrium.

[Update: I changed the title from "Robinson Crusoe and the Carbon Tax". Because it dawned on me that it's about the rebate, not the tax.]

The Federal Debt of the United States, 1791 to 2018: A Presidential Ranking

A recent story in the National Post by Tristan Hopper highlighted the “utterly unbelievable scale” of current US federal public debt levels.  As is always the case, it is useful to get some historical perspective on the evolution of the U.S. federal debt over time – which under President Trump has become the biggest U.S. nominal gross federal debt ever at about 22 trillion dollars.  It is also interesting to see how US federal debt levels have varied across assorted administrations over time.

The Meaning of Life, Labour Supply, and all that

Here are the results of my Twitter poll:

This post is my interpretation of those results.

I recognise all the usual caveats. I am more concerned about bias in the sampling method than in the small size of the sample (because it's not that small). The people who follow me on Twitter (or who follow those who follow me and reTweeted it) are probably richer than average, so less in need of the extra $50, so more likely to choose B. But they are also more likely to be economists, or to "think like economists", and maybe think it might be a trick question, because why would anyone leave $50 on the sidewalk, and if there's no trick then A is the obvious answer. Plus the normal caveat that how people answer any survey might not be the same as their revealed preference in any real choice. (But it's an anonymous survey, so there's no point in signalling a socially-approved answer.)

I would have answered "B" myself. And I wanted to find out how many people thought the same way, and how strongly they felt about it. (I would have switched to "A" if I had been poorer and needed the money more, but I would still have switched back to "B" if the $50 had been raised closer to but still less than $100.)

It's not easy explaining my choice in terms of economists' standard means-end dichotomy. And it wasn't easy constructing a poll question that would get at what I was trying to get at (and I'm not satisfied I've got it right). I find doing something more satisfying when I think it has a purpose than doing the exact same activity when it doesn't have a purpose and so isn't a "real job". And it's not (just) about altruism vs egoism; I get satisfaction out of chopping wood for my fireplace, or my Mother's fireplace, that I don't get out of chopping wood for no reason at all (except exercise), that is separate from any satisfaction I get later from the firewood itself. And I think most people think like me, at least to some extent. And my little poll was intended to try to find out how many people and to what extent.

If I'm right about this, it will matter for labour supply curves. People (or some people) will choose jobs they think need doing over otherwise identical jobs they think don't need doing, unless there's an offsetting wage difference. It will also matter for comparing programs like Basic Income (Negative Income Tax) vs wage subsidies vs job guarantee.

[A few years back I installed a heat pump in my home. The salesman said I would get a subsidy from the Quebec government as an incentive to install a heat pump to reduce electricity consumption. Filling out the forms to collect that subsidy got stuck on my "To Do" list, because it was a pointless job I would get no satisfaction from doing, just to transfer some money.

And I'm recently retired, so I'm still adjusting to a life where I don't really need to do a lot of the things I used to need to do.]

But how could I have asked my question better, to measure what I am trying to measure?

The macroeconomics of Stanley Cup dynasties

This post was written by Davin Raiha at the Ivey Business School.

As the NHL playoffs inch closer to the Stanley Cup, it is an appropriate time to reflect on how economic conditions and forces have impacted competition within the NHL over the past few season. A few seasons ago – specifically during the 2015 Stanley Cup final series between the Chicago Blackhawks and Tampa Bay Lightning – I noticed how an interesting circumstance was emerging that might impact the competitive landscape of the league. The powerhouse Blackhawks appeared to be headed for an especially challenging off-season due to reasons that were macroeconomic in origin, and coming from across the globe from Saudi Arabia’s oil production policies and its resultant impact on oil prices. I thought the situation could make for an interesting teaching case.

Some basic facts about the distribution of sex

The Canadian Community Health Survey is an annual voluntary survey, carried out by Statistics Canada, that collects information about a wide range of health outcomes and risk factors. As part of the 2013-14 survey, 47,764  Canadians between the ages of 15 and 49 were asked about their sexual activity - whether or not they have ever had sex, and if they have had sex in the past year.

The majority of those surveyed reported being sexually active, as shown in the graph below. For example, about 88 percent of 18-19 year old women surveyed in 2013-14 (or 0.88) reported having sex in the last year.  For women, the probability of having had sex in the past year peaks at age 25-29. For men, it peaks 10 years later at ages 35-39. 

These estimates, because they are based on survey data, are subject to some margin of error. The vertical bars represent 95 percent confidence intervals - the true population mean will lie within that confidence interval 19 times out of 20. When there is little to no overlap between two confidence intervals, it is fairly certain that one group of people is having more sex than another group of people. So it is possible to say, with a high degree of confidence, that 18-19 year old girls are more likely to be sexually active than 18-19 year old boys, and 45-49 year old men are more likely to be sexually active than 45-49 year old women.

It's time to blunt dentists' incentives to use general anesthetics

I recently consulted a dentist about getting a tooth extracted. The dentist recommended getting it done under general anesthetic. I responded, "I've had four wisdom tooth extracted under local anesthetic. I've given birth to two children without medication. I think I can handle it." "Ah, but some patients say dental pain is worse than child birth."

Eventually the dentist agreed to extract the tooth under a local anesthetic, and I was presented with an estimate for procedure - $350. "Why so low?" I asked the receptionist, remembering past estimates for dental work. "It's because you're not having a general anesthetic - if you were the bill would be more like $700." Indeed, I checked against the Alberta Dental Association fee guide (one of the few available on-line). The recommended charge for straightforward extraction done by a general dentist in Alberta is $242.25; the recommended charge for two units of general anesthetic is $228.62. A general anesthetic just about doubles the amount a dentist can charge for an extraction.

Making guns obsolete

The US supposedly has a unique gun culture. Yet, for an economist, culture is a lousy explanation. We seek the origins of culture; the economic and social forces promoting and sustaining it.

Hunting, frontier living, and war can explain how the US gun culture got started, but not its persistence.  Gun-friendly rural areas are losing people; population growth is centered in urban centres and suburbs, where gun ownership rates are lower. The US population segments that are growing most rapidly, namely Hispanics, Asians, and Blacks, are the ones least likely to own guns. Moreover, these trends have been going on for decades, explaining why the percentage of US adults living in a gun-free household rose from 50 percent in 1973 to 64 percent in 2014 (General social survey data here).

The US gun culture, I would argue, has been sustained by the direct and indirect marketing and lobbying efforts of gun manufacturers. These manufacturers have gone to - or have been driven to - extreme lengths because of the unique economics of firearms.

The problem with guns is that they last too long. The typical gun, properly maintained, will outlive the typical gun owner (here, here). The IKEAs and H&Ms of this world ensure themselves a steady stream of repeat customers by making cheap products that do not last; reducing product longevity, as well as manufacturing costs, by substituting low-cost components for more expensive longer-lasting ones. But a gun must be robust and well built in order to fire bullets accurately, and at minimal risk to the shooter. Hence gun manufacturers cannot build in obsolescence. They also cannot change the demographic trends, such as urbanization, which take people away from a hunting and fishing lifestyle. Gun manufacturers can only sell substantial numbers of new weapons by persuading people who already possess guns to want more and more of them.

The Devil You Know vs The Market For Lemons

I told my friend Mike I was thinking of trading my car in for one that used less gas. Nowadays I would talk about the Market for Lemons as a reason against doing what I was thinking of doing. But in 1974 I didn't know about Akerlof's famous paper, and neither did Mike, who was majoring in music. "Better to stick with the devil you know" he said.

"The Devil you know" and "the Market for Lemons" are similar: both use asymmetric information (the seller knows more about the car than the prospective buyer) to explain a low volume of trade. But they are not the same. A thought-experiment can explain the difference.

Suppose the government made a surprise announcement: everybody who owns a used car must sell it next week to the highest bidder. If you still want a car you must sell yours and buy someone else's.

Making sales compulsory solves the Market for Lemons problem. The sample of cars offered for sale represents the whole population of cars; those who know their own car is a cream puff can't hold it back from the market. If the Market for Lemons was the only problem in the used car market, then the compulsory universal sale would improve efficiency in the allocation of cars. People who found themselves needing to drive more miles could sell their gas guzzlers to the people who found themselves driving fewer miles.

But universal compulsory sales of cars does not solve the Devil You Know problem.

First there's simple risk aversion. Suppose everyone knows that half the cars need a $1,000 repair and the other half don't, but only the seller knows if his own car needs that repair. Sellers of lemons have a 50% chance of winning $1,000, which is worth less than a certain $500 if they are risk-averse. Sellers of cream puffs know they have a 50% chance of losing $1,000, which is worth more than a certain $500 loss if they are risk-averse. (Remember that everyone buys a car for the same price they sell their car, so price is a wash, if this is the only difference.) The value of the expected gains to the expected gainers are worth less than the value of the expected losses to the expected losers.

Second, even if everyone is risk-neutral, there's the problem of not knowing what particular repairs are needed. If your car needs to have the brake pads replaced soon, it's better to know that fact before they wear down too much and you need to replace the rotors too (or worse). And if your car won't start on a cold morning, or overheats on hot days, it's better to know that fact in advance, so you can plan accordingly.

[And if the government's surprise announcement is not a surprise, but is announced well in advance, there's an additional problem. Nobody will change the oil if they know they are going to sell the car anyway. But that's the standard Moral Hazard problem, which is distinct from the Devil You Know problem.]

I wonder which problem matters more, in the used car market. Or in finance?

I started to think about the Devil You Know when thinking about the choice of textbook for Intro Economics. You never really know the flaws in a textbook until you have taught from it. Changing textbooks is always risky; and the flaws catch the teacher unprepared. Most of our switches have gone OK, but one didn't.

Milk is mind-bogglingly cheap.

The Canadian Cook Book was first published in 1923. My copy is the twentieth edition, published in 1949.

It dates from the heyday of home economics, a time when scientific principles were being applied to domestic life. Recipes are mixed in with nutritional information, guidance on the finer points of etiquette, and what we could call today "financial literacy".

Below the fold I have reproduced a recommended food budget for the 20th century homemaker:

Economists making spectacularly bad forecasts, 1961 edition.

Back in the 1960s, the Ontario government's Department of Economics dutifully cranked out annual population forecasts. What is remarkable about these forecasts is how far wrong they were. The economists completely failed to predict the demographic changes that were about to hit Ontario.

Here are the 1961 projections side by side with the actual 1976 population numbers for Ontario, downloaded from Statistics Canada's CANSIM table 051-0001. (An image taken from the Ontario Economic Survey can be found at the end of the post):

The Mary Tyler Moore Effect

In 1970, every Justice on the Supreme Court of Canada was male. Prime Minister Pierre Elliott Trudeau had an all-male cabinet. Canada had never had a female premier - or even a female television newsreader. Little girls across the country were starting to feel the faint stirrings of ambition, often encouraged by mothers who wanted their daughters to live life to the fullest. But they had no idea - how does one be a "career woman"? What does a professional woman even look like?

Then the Mary Tyler Moore Show came along. It showed a woman who was smart, and independent, and made mistakes - and won out in the end. She was successful. She was likeable. She opened up a world of possibilities.

The Mary Tyler Moore Show first aired in 1970, and went off the air in 1977. This is what happened to US female labour force participation rates during this period.

Will legalization reduce youth marijuana use?

Rates of teen marijuana use in Canada are among the highest in the world. Legalization advocates blame high use on criminalization: "the ready availability from dealers with no scruples about targeting youth, and the cachet of forbidden fruit—or rather, buds." Indeed, the first objective of the Canadian federal government's marijuana legalization agenda is to "Protect young Canadians by keeping marijuana out of the hands of children and youth.

Yet can legalization actually reduce youth marijuana use?

Help! The senior guy in my field acts like a total jerk sometimes. What should I do?

I wrote myself a letter, and answered it:

Dear WCI,

The senior guy in my field acts like a total jerk sometimes.  He's working in an area I care deeply about - gender and taxation. But he trivializes and sensationalizes critically important issues. For example, I just heard him give a talk about the optimal tax treatment of goods primarily consumed by women, and he repeatedly used  Coco Chanel perfume as an example. That makes it seem like gender-based taxation is about frivolous, unnecessary luxuries. It's not. O.k., he mentioned "tampon taxes" too, but that's not an interesting economic issue either. Because feminine paper is a small but absolutely essential purchase, taxing tampons is like imposing a lump-sum tax of about $1 a month on menstruating women. It's a salient political issue, and a sensational one too, but it's not economically meaningful.

The big issues in gender and taxation are gender-based income taxes (as opposed to gender-based consumption taxes), and empirical public policy questions, like which parent to target with benefits if you want more money spent on children. There is good work out there - but this guy didn't reference it once!

As well, his model assumed that all time spent outside the labour market was "leisure" and thus welfare-enhancing. So any policy that reduced the amount of time women had to work made women better off (though reducing women's hourly wage rate made women worse off, because they had less power within the household.) That's just ridiculous. Especially when people have young children, time at home is hardly leisure. Plus the model "black-boxed" the division of power within the household. 

The icing on the cake was that the talk was sprinkled with gratuitous remarks about Chinese people. I've heard him speak before, and he does this every time. 

What should I do? He's a journal editor, and highly likely to be refereeing my papers for the foreseeable future. I frequently encounter him at conferences. Directly confronting him would be career suicide. But at the same time, his influence is moving an entire field of research in an unproductive direction. A model of the household without children, household production, or any kind of bargaining is a fundamentally flawed way of understanding gender and taxation. What should I do?

Yours,

Quietly Seething.

A Grave Problem

Ontario has no eerie, overgrown church graveyards. There are no dangerously angled tombstones, no grave markers obscured by rambling vines, nor ancient trees with branches sweeping the ground.

In Ontario, cemetery operators are required to maintain graveyards properly. There must be an accessible entrance. Grave markers must be stabilized. Section 29 of the Funeral, Burial and Cremation Services Act, 2002, states: "An operator that has an interest in a cemetery shall maintain the cemetery if the registrar is of the opinion that the cemetery appears to be abandoned or neglected."

The law is a response to a grave moral hazard problem.  It is more profitable to sell burial plots than to maintain them. Cemetery operators have an incentive to promise their clients an idyllic and well-tended eternal resting place, and then renege on their commitment. After all, the dead are unlikely to complain.

Another Foray into Data: New Macro-Financial Data

I think Stephen Gordon's Project Link and its piecing together of fragments of Statistics Canada data is a solid step in the right direction.  If our national statistical agency is not going to provide long-term consistent data series, then I suppose its up to the researchers to lead the way.  Another case in point is the recent public release of a no-cost open access macro-financial data set by Òscar Jordà (Federal Reserve Bank of San Francisco, UC Davis), Moritz Schularick (University of Bonn, CEPR) and Alan M. Taylor (UC Davis, NBER, CEPR).