Category Economics

A Problem With Negative Income Tax Proposals

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Posted by on October 13, 2016

I frequently hear it proposed that we should institute a negative income tax or similar form of guaranteed minimum income, funded by removing parts of the existing welfare and social services system. Simple economic analysis suggests that the welfare system is spectacularly wasteful, compared to simple cash transfers, and that tearing it down is obviously correct.

It isn’t.

Consider the food-stamp programs run by most states. People whose income is low enough receive funds whose use is restricted, so that it can be used to purchase food – but not to purchase anything else. Trading food stamps for regular dollars or inedible goods and services is illegal for both the buyer and the seller. A naive economic model suggests that this is bad: people know what they need better than bureaucrats do, and if someone would rather spend less on food and more on housing or car maintenance or something, they’re probably right about that being the right thing to do. So food-stamp dollars are worth less than regular dollars, and by giving people food-stamp dollars instead of regular dollars, value is destroyed. This is backed up by studies analyzing poor peoples’ purchases when given unrestricted funds; those purchases tend to be reasonable.

This is a Chesterton Fence. Tearing it down would be a terrible mistake, because it has a non-obvious purpose:

The reason you give poor people food-stamp dollars instead of regular dollars is because they’re resistant to debt collection, both legal and illegal, resistant to theft and resistant to scams.

There are organizations and economic forces that are precisely calibrated to take all of the money poor people have, but not more. If you give one person unrestricted money, that person is better off. But if you give everyone in a poor community extra money, then in the long run rents, drug prices, extortion demands and everything else will rise, compensating almost exactly.

We have a government which says to its poor people: you may be scammed out of your money, your access to every luxury, and even your home, by anyone who can trick you into signing the wrong piece of paper. But we draw the line at letting you be scammed out of your access to food.

A negative income tax would erase that line. I haven’t heard anyone raise this as a problem, which sets an upper bound on how carefully people (that I’ve read) have thought about the issue. This worries me greatly. Can this issue be patched? And, thinking about it from this angle, are there more issues lurking?

(Cross-posted on Facebook)

Technological Unemployment

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Posted by on June 3, 2015

Will automation displace workers and eliminate jobs? For many jobs, yes. Whether this will cause unemployment, however, is a controversial and open question. When technology automates away jobs, there are several possibilities for what happens to the people who would otherwise have been in those jobs. The total number of jobs worked might drop, or they might just shift to doing jobs that are hard to automate. If the number of jobs worked does go down, this could lead to people being unemployment and impoverished, or it could instead result in people entering the work force later, retiring earlier, working part time, and taking more long vacations.

Predicting what will happen is hard. Noticing what already happened, however, is more straightforward. Automation is not a new force in the world, and technology-driven unemployment has been a concern at least as far back as the Luddite movement in 1811. With the benefit of hindsight, nineteenth century Luddism was clearly incorrect; there was a massive amount of important work left undone for lack of people to do it. But what about more recent trends? Here from the Bureau of Labor Statistics is the United States unemployment rate, for everyone aged 16+.

Bureau of Labor Statistics Unemployment Rate, 1948-2014

This graph displays a pattern best described as “glaringly absent”. It’s basically noise. Why? It turns out that the definition of unemployment is fairly complicated. Unemployed refers to people who are jobless, available for work, and looking for work; it excludes people who have tried to find work recently but aren’t currently trying (marginally attached workers), people who have given up on finding work (discouraged workers), students not looking for work, and people unable to work because they are ill or disabled. The “discouraged workers” category is particularly unfortunate; it means that the unemployment rate is measuring a sort of residual, the people who can’t find work but haven’t realized it yet. A much more straightforward number is the employment-population ratio. This is simply the number of employed people divided by the population. So here, also from the Bureau of Labor Statistics, is the United States Employment-Population Ratio, for the civilian noninstutitional population, age 16+. (Excludes people on active duty in the armed services and prisons, nursing homes, and mental hospitals.)

Bureau of Labor Statistics graph of employment-population ratio, 16+, 1948-2014

This graph gyrates a little less wildly. If you squint hard enough, you might fool yourself into seeing a pattern. It turns out there is one more confounder to separate out.

Paul Samuelson famously criticized GDP by observing that, if a man married his maid, GDP would fall. In fact, it’s not just GDP that would fall; employment would fall, too. Employment only counts work that is done for wages; there is a separate category, “household activities”, for the rest. This includes things like cooking, laundry and child care. Unfortunately, this time the BLS doesn’t have a nice graph to give us, but we can get a few point estimates. The American Time Use Survey estimates that household take an average of 9.5 hours per week for men, 15.5 hours per week for women. By contrast, Valerie Ramie in the Journal of Economic History reviews twelve estimates from 1924-1953 and finds that in that time period, homemakers spent 47-63 hours per week on household production – a time expenditure comparable to or greater than that of full-time employment. This household labor fell primarily on women, and has now been substantially reduced by inventions such as laundry machines, microwaves, and robotic vacuum cleaners, as well as by declining fertility. This combined with changing social norms caused many more women to enter the labor force, as shown by the employment-population ratio for women:

Bureau of Labor Statistics graph of employment-population ratio for women 16+, 1948-2014

Here we see womens’ employment increases until some time around 1990-2000, then either stops changing or starts falling. This comes partially at the expense of mens’ employment, but I think it’s mostly at the expense of household activities. Meanwhile, the employment-population ratio for men looks like this:

Bureau of Labor Statistics graph of employment-population ratio for men 16+, 1948-2014

This is a steady decline of about 2.7% per decade. To see whether this trend extends past the time range covered by the BLS time series, I also checked the 1910 census and found that the employment-population ratio (male 16+) was 91% (Final Report Vol. 4 Ch. 1 Pg 69).

Based on this data, I expect both the US male and female employment-population ratios to decline at about this rate in the future. This will manifest as a mix of people entering the work force later, retiring earlier, working less, being declared legally disabled at a lower threshold, and sharing income within families. Depending on policy and social norms, we could have more leisure for everyone, or more poverty, or some mix of the two. It’s up to us to choose wisely.

The Failed Economics of Devtools and Code Reuse

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Posted by on June 2, 2015

Why do so many people and so many projects use PHP? Why is there so little code reuse, so few high-quality libraries and development tools to build on? There are several reasons, but one that hasn’t received attention is a problem in the economics.

When starting a new project, the creator picks a programming language and a set of software libraries. Consider the case of a developer starting an open source project, and choosing between an inferior tool with low up-front cost, and an overall-superior superior tool with higher up-front cost. The better tool might cost money, or it might just have a learning curve. Which will they choose?

Developers of open source projects hope to attract collaborators in the future. Unfortunately, most of the costs of a development tool or library are borne not by the person who chooses it; they are borne by the future collaborators who they hope will materialize later. While an existing collaborator might agree to learn a new programming language or pay for a new tool, a hypothetical future contributor can’t do that. Attracting volunteers to work on an open source project is very difficult to begin with, so developers are strongly averse to imposing costs on them. The perceived impact of these externalized costs is magnified many times over, so people don’t accept them.

You would think a company building a team to work on a software project wouldn’t have this problem, because it can internalize the future costs: it pays for the software and it pays employees for the time they spend getting up to speed. But there’s another problem. The quality of a software library is hard to judge until you’ve used it in a project; it’s risky to try an unfamiliar library in a big company-funded project with a team. So developers try out new libraries in smaller, less-important projects where they can take risks — and these tend to be open-source projects, where trying new libraries is a low-ranked side-goal.

This results in an equilibrium where people reject tools, not because they themselves are deterred by the up-front cost, but because they expect other people to be deterred by that cost. This means that if you write a better IDE, a good library, a better compiler, or some other piece of superior software, you’ll have a much harder time charging money for it than the direct economic proposition would suggest, and a much harder time getting people to try it and learn how to use it than the direct economic proposition would suggest.