Relevant and even prescient commentary on news, politics and the economy.

Link worth noting is at Tax Prof Blog

by Linda Beale
(cross posted from ataxingmatter)

(Rdan: The link worth noting is Susan Altmeyer’s…the Journal opinion is simply misleading)

Link worth noting : Wall St.Journal and Golf Carts

Tax Prof noted the Wall Street Journal editorial titled Cash for Clubbers(Oct. 17, 2009), which suggests that “thanks to President Obama’s stimulus plan”, the government is now “paying Americans” to buy golf carts. The Journal notes that golf cart dealerships are enticing people in with the credit (which only applies to certain road-worthy carts) and that this “golf-cart fiasco perfectly illustrates tax policy in the age of Obama” when “politicians dole out credits” and “Democrats then insist that to pay for these absurdities they have no choice but to raise tax rates on other things.”

The Journal is playing somewhat fast and loose with the credit and with who is responsible. As to responsibility, it was passed before Obama took office, so surely it cannot “perfectly illustrate” Obama’s policy. And the “politicians [who] dole out credits” have been members of the GOP during its majority control, because they argue for tax cuts of all kinds, including credits that are clearly unnecessary (the R&D credit, for example, that I think the Wall St. Journal has defended as one of those “extension” provisions that it claims is vital to competitiveness). The Republicans passed many of these boondoggle loopholes during the time they had control between Reagan and Bush with the underlying premise that tax cuts generate more tax revenues, while at the same time they had to raise the debt limit so that the government could borrow money to fund the tax cuts and the deficit grew by unprecedented amounts. While the Democrats have been far from perfect on these matters (e.g., including many more tax provisions than I think they should have in the stimulus bill, compared to direct spending on good projects in the public interest), at the same time Democrats have, to their credit, at least acknowledged that there is a cost to doling out credits–that tax cuts do not magically deliver more money instead of less and that we likely will need some tax increases after this long gorging on tax cut after tax cut that hasn’t delivered either new jogs or high government revenues.

Tax Prof has a well thought out piece by Sue Altmeyer on the Journal piece. She notes that the IRS ruling that golf carts may qualify if they are street-legal dates to 2000 (put out in the early months, that is, of the George W. Bush administration by the business friendly Bush IRS). Similarly, the credit (section 30D) was enacted in 2008 (and doesn’t permit the vehicle to be bought for resale, thus undoing the scheme discussed in the Journal whereby a Floridian self-styled “the Golf Cart Man” promises a special boon by combining purchases with his repurchases. Further, she notes that Notice 2009-54 (that’s under Obama) states that the motor vehicles covered are supposed to be manufactured for primarily street use. And that notice also suggests that you should make sure that the credit being advertised by golf cart salesmen really applies by asking them for an IRS acknowledgement. The 2009 stimulus bill did make some changes (at whose urging?).

Hat tip to Tax Prof and thanks to Sue Altmeyer for a cogent piece.

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Showdown in chicago


Dean Baker suggests some action in the form of a demonstration at the Chicago Bankers Association meeting October 25-26, 2009.

Yves at Naked Capistalism recommends going, and Slate open forum contains comments.

Several readers who live in the region have indicated they will be going. Perhaps we will get reports. Do you think they have sonic cannons in Chicago, even if demonstators are older and wear business casual?

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Wobegone Finance

Robert Waldmann

The average person thinks he has higher than average intelligence. This is an empirical fact [citation needed]. It is not incorporated into standard finance theory, but it matters a lot. It has been argued that the high volume of transactions on financial markets can be understood easily. If two people with equal quality information each think they have better information than the other, each will think that he or she benefits when they take bets against each other [citation needed plus why didn’t I think of this].

This psychological fact can also explain bubbles. A bubble can grow and burst if people don’t recognise that it is a bubble. A bubble can also grow and burst even if people recognise there is a bubble, but each thinks that he or she will be the first to detect the peak. This theory of bubbles fits the sort of things traders say during bubbles. The standard phrase for this sort of reasoning is the greater fool hypothesis.

Human overconfidence makes us very tempted by the greater fool hypothesis, even if we are the greatest fool. Given the risks, overconfident people self select into finance. Given personel management at financial firms, people who have been lucky will have power over lots of money — there is no way to tell luck from skill. They will also tend to be overconfident — there is no way to tell luck from skill.

It is trivially easy to write a model in which it is very important that everyone thinks they will detect something sooner than everyone else. It doesn’t even matter much what that something is.

This model is unusually pointless. The point should be obvious given the discussion above. In fact, I think the point was obvious to many people long before I wrote this post. The model clarifies nothing. If you understand the point it is supposed to illustrate, you might be able to follow it and gain nothing.

A very simple model of bubbles. Time is discrete. Agents are risk neutral. There are two assets. One is a risk free asset which pays interest rate r. The risk free asset is a storage technology, so the amount of risk free asset is not in fixed supply. There is one share which pays dividend r each period. Population is a continuum normalized to one (each agent is infinitesimal compared to the market). Agents are not allowed to hold short positions (borrowing is shorting the storage technology). The last assumption is just needed to keep each agent’s demand bounded given risk neutrality.

There is a random variable X_t which is equal to 0 with proability a(t) and equal to zero with probability 1-a_t. I am going to be very vague about a(t) but just note that it grows so there is some big T such that a(T)=1. This will amount to saying that everyone knows the bubble must burst by T+2.

Agents do not see this variable instantly. If the variable is 0 at period t, then agents perceive that it is zero in period t+2. Agents know this is true of all other agents and was true of him in the past, but each thinks that he has extra alertness and perceives X_t in period t+1. For the moment agents don’t understand that other agents are over confident. They think the other agents know that the other agents detect X_t in period t+2.

What can happen to the price P_t of the share in this model ? It is easier to ask what can’t happen, since many things can happen.

One possibility is that P_1 = 1 all the time. Both assets are, in practice, riskless paying return r with certainty.

It is alos possible that there will be an unsustainable speculative bubble. P_t can be greater than one when X_t-2 = 1 and fall to one when X_t-2 = 0.

First the standard assumption. All agents are rational. No agent is over confident. Each knows he sees X_t after the same 2 period lag as everyone else.
There can be a sunspot equilibrium only if P can go to infinity.

X_t-3 = 0
X_t = 1

1)x_(t-3) = 0, P_t-1=0
2) X_(t-2)= 1 P_t= P_t
3) if X_(t-1) = 0, P_(t+1) = 1
if X_(t-1)= 0 P_(t+1) = (P_t(1+r)-a(t-1)P_(t-1) + r)/(1-a(t-1))

Formula 3 also gives P_(t+1) conditional on P_(t+2) and X_t=1 and etc.
This would work fine except for the assumption that there is a T such that a(T) = 1. That assumption amounts to the assumption that everyone knows the bubble must burst by period T+2 at the latest. There will be a zero in the denominator of the formula for X_(T+1).

So by backwards induction, there can be no bubble.
Ignoring that, imagine an overcondent agent. An overconfident agent is sure that in period t+1 the price will be greater than one so long as X_(t-2) = 1. An overconfident agent thinks he is seeing the signal one period before he really sees it, so he thinks this means X_(t-1)=1. This means an overconfident agent will put any amount of his money (up to all of it) in the risky asset in period t so long as equation 4 holds

4) X_(t-2)= 1 P_(t+1) = (P_t(1+r) – r)

Uh oh. There is no a in that equation. An overconfindent agent thinks the probability of the bubble bursting has nothing to do with his choice in period t, since he is sure that the bubble won’t burst in period t+1.

Actually even if agents know all other agents are overconfident, it doesn’t matter. It is enough that I think that the other guys definitely won’t see the sunspot that says “bubble bursting now” for 2 periods.

Finally, it is not necessary for agents to over estimate the spead at which they detect the signal. If agents actually see the signal after one period, but each thinks that all other agents see it after two periods, then everything works the same except that the subscripts on X are a little less irritating.

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Weak Dollar

By Spencer

In 1971 when Nixon imposed price controls he did not do it because the on-going domestic inflation rate was about to accelerate. Rather, he imposed price controls because he expected the planned dollar devaluation to be very inflationary.

But his actions just reflected the economic consensus that the dollar devaluation would be highly inflationary. But since 1971 we have learned that this basic attitude — based largely on the old two commodity two country model widely taught in introductory economic courses — just did not reflect the reality of a 180 country and infinite product world. What we have learned in the 31 years since the Nixon devaluation is that business is much more flexible and adaptable than this simple model implies. As a consequence the inflationary impact of a weak dollar is much smaller than generally believed.

Actually, if you look at the historic data the correlation between the change in the dollar and the change in inflation is plus 0.2. That is not very powerful, but even more important it is the wrong sign. The positive correlation implies that a weak dollar is deflationary and we were all taught in introductory economics that this can not be true.

Moreover, if you look at the historic record the dollar has fallen in 23 of the last 31 years since
Nixon first devalued the dollar in 1971, or almost two-thirds of the time. This implies that a weak dollar is more the norm for the US than a strong dollar.

Another example of how the economy is much more flexible than theory implies is to look at what happened when the Chinese Yuan appreciated about 21% from 2004 to 2007. As the chart shows the price index of US imports from China rose after a lag from around 97 (2003=100) to almost 104 in 2007, a gain of about 7%, or one third of the Yuan appreciation. Moreover, after the Yuan quit appreciating the price of US imports from China fell back to about 100, so the net result of the 21% change in the $/yuan exchange rate was about a net 3% rise in the price of US imports from China. Note that the two scales in the chart are on a 3 to 1 ratio.

The other argument around is that a weak dollar cause commodity inflation, and as evidence the tight correlation between the dollar and oil since around 2000 is shown. However, from the 1970s through the 1990s the correlation between the dollar and oil was positive. Around 1980 one of the CFA exam economic questions was how did higher oil prices impact the dollar. The correct answer was that since oil was denominated in dollars higher oil prices meant that Europeans, the Japanese and others had to buy more dollars to buy the same amount of oil.
So higher oil prices caused the dollar to appreciate. I guess this is just another example of the old line that economist do not change their exam questions, they just change the answers.

Now it looks like a weak dollar means that the price of oil in Euros and/or Yen, etc, does not rise as much so that the negative price elasticity of demand from higher oil prices is dampened and a weak dollar causes oil and/or commodity prices to rise more than they would with a flat dollar.

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Consumer protection and bank regulation

(cross posted from Roosevelt Institution)

Rdan here…’Opt in’ or ‘opt out’ is one basic profit strategy device for use of a ‘service’. A personal example comes in the form of my son with Chase Bank checking account. Because a transfer of funds was late (our fault) of $240, he received a penalty of $29 for three checks of $80 each, plus the overdraft fees as each check penalty took him over his balance (of $70) for $35 each, for a penalty total $192 in a day or two. The bank rejected a request to eliminate the overdraft fees.

If you have experienced the $29 fee on a debit card for a $1.75 cup of coffee, the irritation factor is high, as the opt out portion of overdraft was not available at the time, not until June 2010 I believe.

The sins of the son will haunt the father. That was the last straw for me too in this profits game…I canceled both of my Chase credit cards (one held since 1992) and told them why.

Banks Must Protect Consumers to Protect Themselves by Richard H. Neiman and Jonathan Mintz

Jonathan Mintz, the Commissioner of the New York City Department of Consumer Affairs, and Richard H. Neiman, the Superintendent of Banks for the State of New York, argue that consumer protection and prudent bank regulation are not in conflict.

For over a year, most of us have agreed that reform of our financial regulatory system is essential to our future financial stability and economic growth. Yet further consensus has been difficult to achieve.

With House committee debate and markup of Congress’s reform bills underway we, a bank regulator and a consumer protection official write to unify two perspectives that have created more conflict than necessary in this debate. We reject the myth, as many have unfortunately framed it, that consumer protection and prudent bank regulation are in conflict. Risky or deceptive financial products hurt the economy as a whole as much as they hurt the consumer. The public deserves — and our economy requires — that we concentrate on a strengthened system of financial oversight that demands clear, fair, and prudent banking and lending products and practices.

More important than the discourse over whether it would be better to combine or separate bank regulatory and consumer protection agencies is the idea that we first collectively agree that the solution must leverage and strengthen the resources of both disciplines. The New York State Banking Department (NYSBD) is the oldest bank regulatory agency in the nation, regulating state-licensed and state-chartered financial entities. New York City’s Department of Consumer Affairs (DCA) is the first municipal consumer protection agency in the nation, enforcing a fair and vibrant consumer marketplace. Through our cooperation in developing consumer products and financial education programs, we have experienced firsthand the benefits of combining our perspectives and offer three observations based on that experience.

Update: Rdan here….Yves weighs in on the issue as well.

First, smart consumer protections enhance choice and encourage a more competitive and more stable marketplace. Consumer protection at its core is about a clear offer that can be meaningfully accepted; it is a red herring to suggest that consumer protection leads to limitations on consumer choice. Excessive latitude toward overly complex, aggressive and deceptive marketing created a robust but short-term recipe for profit, but sacrificed sustained profitability, a stable customer base and ultimately the entire economy. And it decimated millions of individual families’ financial stability, primarily those least able to afford having their modest resources plundered.

Second, while expanding financial literacy is critical, it is insufficient alone to protect consumers. Deceptive practices must be banned and truly effective disclosures for complex products must be required. The vast bulk of consumers who avoid mainstream banking do so because of well-founded fears of unexpected and destabilizing fees and hidden product features, not a lack of education. Overdraft protection plan fees are the prime example. The Federal Deposit Insurance Corporation reports that overdraft fees on debit transactions-which average $27 on overdrafts averaging just $20-represents a staggering annual percentage rate of 3,540 percent. According to a recent Moebs Study, bank revenues from these fees may total $38.5 billion this year alone. Credit products offer more of the same: hidden disclosures, costly fees and imposed surprises. In addition to prohibiting unacceptably unsafe financial products and services, we need to empower consumers to distinguish between safe and potentially dangerous products, for their benefit and the stability of our economic system.

Third, we therefore propose the development of a nationally recognized rating system that would clearly communicate product safety and complexity. With advice from diverse stakeholders, this rating function would be enforced across the spectrum of banking regulators. These product ratings would aid consumers in selecting suitable products, and would provide a useful tool for evaluating Community Reinvestment Act (CRA) compliance in a qualitative way, reforming the program’s stifling “check-the-box” mentality which fails to bring meaningful banking services to many communities.

For example, simple and transparent products would be appropriate for many consumers and could receive green light safety ratings. Product features that add complexity or riskiness for those with lower incomes could be given a yellow light designation. And products with features that are inherently dangerous or expensive to the majority of such consumers could be labeled with a red warning, alerting consumers to high risk. Think of skiing. Who would ever venture down a mountain without first knowing if the trail was rated for beginners or was a double black diamond, for experts only?

Approaches such as this ratings system wouldn’t constrain financial institutions to anything other than free market competition, while at the same time empowering consumers to choose the most appropriate financial products and services for their individual needs. If this idea can unite these two regulators, perhaps it can unite the two sides of the debate as well.

Richard H. Neiman is the Superintendent of Banks for the State of New York and Jonathan Mintz is the Commissioner of Consumer Affairs for the City of New York.

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Supersize Me, Doctor Rat

I think we may have suspected this for quite some time now … yet we keep handing out Happy Meal vouchers as prizes and rewards for school kids. “Happy” indeed.

Junk food turns rats into addicts
Bacon, cheesecake and Ho Hos alter pleasure centers in rats’ brains
By Laura Sanders
Science News Online

CHICAGO — Junk food elicits addictive behavior in rats similar to the behaviors of rats addicted to heroin, a new study finds. Pleasure centers in the brains of rats addicted to high-fat, high-calorie diets became less responsive as the binging wore on, making the rats consume more and more food. The results, presented October 20 at the Society for Neuroscience’s annual meeting, may help explain the changes in the brain that lead people to overeat.

“This is the most complete evidence to date that suggests obesity and drug addiction have common neurobiological underpinnings,” says study coauthor Paul Johnson of the Scripps Research Institute in Jupiter, Fla.


These reward pathway deficits persisted for weeks after the rats stopped eating the junk food, the researchers found. “It’s almost as if you break these things, it’s very, very hard to go back to the way things were before,” Kenny says. When the junk food was taken away and the rats had access only to nutritious chow (what Kenny calls the “salad option”), the obese rats refused to eat. “They starve themselves for two weeks afterward,” Kenny says. “Their dietary preferences are dramatically shifted.”

Scientists are interested in determining the long-term effect of altering the reward system. “We might not see it when we look at the animal,” says obesity expert Ralph DiLeone of Yale University School of Medicine. “They might be a normal weight, but how they respond to food in the future may be permanently altered.”
complete article here

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The Magna Carta: What it is and what it isn’t.

by Bruce Webb

(Somehow I got caught in HTML hell and can’t get this post to render correctly, not only did the read more not work it took out a paragraph with it. So I moved the post over to my site: The Magna Carta: What it is and what it isn’t It does feed into the Kennedy-Webb discussion below. But if you are interested you will have to take it on over to the Bruce Web, because I can’t figure out what went wrong)

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The Kennedy-Webb Colloquoy on Liberty and Private Property: Want to make it a Seminar?

by Bruce Webb

Scottish Professor Gavin Kennedy is the blog-proprietor of ADAM SMITH’S LOST LEGACY and a new (and continuing?) contributer to Angry Bear, most recently with Spare Us From the Invisible Hand. In an earlier post by Gavin Adam Smith in a Broader Legacy I responded to one of our regular Angry Bear glibertarians and rather than disrupting Prof. Kennedy’s thread further took it to my own post at the Bruce Web Adam Smith and Glibertarianism which in turn led to some back and forth between Prof. Kennedy and me on ASLL and the Bruce Web with two posts from Gavin and two from me including Marx, Smith and the Ages of Man.

The discussion was initially about the development of private property and its relation to both liberty and rising consumption/population levels as that is seen developed in the works of Adam Smith. In the course of the discussion it appears that Prof. Kennedy and I have radically diverging views not only on the underlying nature of pre-historic, ancient and some current economic modes of production but also on how those resolve themselves in the conceptual conflict of ‘liberty’ vs ‘democracy’.

It is all rather a departure from the more numeric analysis typical of Angry Bear, but for those interested in history, economic history in relation to modes of production, the economic and philosophical thought of Adam Smith feel free to jump in at either or both sites. In an upcoming post I am going to add some discussion of ‘democracy’ as it relates to the development of English Land Law, where the latter was marked in large part by its suppression of the former. Hints so far are that Prof. Kennedy and I are coming at this last question from totally different perspectives. Which may reflect fundamental differences between the British historical view of democracy and that expressed in the American Declaration of Independence. We’ll have to see how it goes.

Got ideas to share?

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More on Dubner and Levitt II

It has long been a standard claim of economics—iirc, Robert Lucas was the first to say it aloud, though it may have been Gary Becker*—that a man who marries his housekeeper lowers GDP.

Apparently, Dubner and Levitt have taken this claim—along with their Rick James title**—to heart. Echidne has the details. A short sample:

There is one labour market women have always dominated: prostitution. Its business model is built upon a simple premise. Since time immemorial and all over the world, men have wanted more sex than they could get for free. So what inevitably emerges is a supply of women who, for the right price, are willing to satisfy this demand. But what is the right price?…

It turns out that the typical street prostitute in Chicago works 13 hours a week, performing 10 sex acts during that period, and earns an hourly wage of approximately $27. So her weekly take-home pay is roughly $350. This includes an average of $20 that a prostitute steals from her customers and drugs accepted in lieu of cash.

If I didn’t know that Levitt has done some research on prostitution, I would think he left this section solely to Dubner. As it is, the skewed perspective (supply-side only) wouldn’t even pass muster in a basic neoclassical labor market model, and that the authors are trying to sell this as “economics” is, to extend a recent note from Brad DeLong that “Levitt and Dubner today appear to no longer be thinking like economists”, going to do Levitt much more harm than good.

Perhaps the difference between prostitutes and economists is that only the former have to worry about their reputation.

*Google indicates that the source is Pigou (1932). Does this explain the popularity of the Pigou Club?

**At this point, I’m betting they chose the title because of Abigail Breslin.

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