More on Strategic Defaults on mortgages

Seventeen percent of mortgage defaults are strategic defaults. and is going up to a third Mortgage defaults and mortgage squeezes is exactly what the share economy is good for.

Thanks to Rick Ungar and his policy page for linking to the new article from the Los Angeles Times.

Small Excise Taxes and Fees in Europe

The States are not the only entities that are looking into small excise taxes and fees to balance their budgets. European governments are as well, often clothing them as badness taxes. They include Finland and Denmark taxing junk food. And governments are finding they have to refund taxes on business; France is taxing sea food (invertebrates) so as to give a rebate on fuel tax for fisherpersons. The V.A.T. tax is 19.8 percent in Britain this year and slaighted to go beyond 20 ercnet.

And France is introducing a carbon tax, Britain is taxing airline tickets, billing it as good for the environment.

Reference

Saltmarsh, Matthew, "Nicked at Every Turn" The New York Times, Thursday March Eighteenth, Volume CLIX, No 54,983, Page B1,B4

Thoughtful Thursday, Conitzer

I was planning to write a Thoughtful Thursday piece on the Combinatorial Auctions (1) book. But Dr. Conitzer beat me to it and did a better job than I possibly could have done. I was pleased to see "Making Preferences Based on the Preferences of Multiple Agents" in the latest issue of Communications of ACM, March 2010, Volume 53, Number Three, Pages 84 to 94.

A combinatorial auction allows one to say that they value a set of objects that are being offered for auction. Imagine that Ms. Smith was browsing on eBay and saw a set of chairs and a table that she liked and she wanted to buy together for her dining room. However, she doesn't want the table without the chairs or the chairs without the table. There is no way she could do this now. If eBay would implement a combinatorial auction, then Ms. Smith could say or bid that she would pay $150 for both the table and chairs. Assume that Mr. Johnston bids $75.00 for just the table and Mr. Nixon bids $59.00 for just the set of chairs. The combinatorial auction system would realize that the best use (and the most money for the auction company) would happen if the pair of items were given to Ms. Smith. Had Mr. Johnston bid $75.00 and Mr. Nixon bid $76.00 for the set of chairs, the auction system would give each of these to the individual bidders and Ms. Smith would not win anything.

A lot of time in public choice is spent on dealing with multi-candidate elections. How do we deal with an election involving N, B and G and we want to allow people to say I really like N, but if it is a choice between B and G, then give me G? How do people specify their preferences. How does the election system computer decide who won? And how can we make the system strategy-proof? That is, we don't want a person who really prefers N to feel that if they rank N belong B or G, they are more likely to get N elected. One of the impressive things in Dr. Conitzer's article is the Kemeny Rule for elections. Let each person simply give each ranking. The election computer would compute a complete set of ranks that minimizes the total number of disagreements. One "disagreement" occurs when one voter ranking candidate i above candidate j and the election system ranks candidate j above candidate i. It would be great if we could do this for all kinds of things, like which bridge design do the members of the region prefer or what tax code do we prefer. Computing this is NP-complete. That means (I won't go into all the provisos here) any computer algorithm purporting to solve it for all possible sets of rankings will take time proportional to some power of the number of alternatives. In other words, for modest size problems, it is impossible to solve this generally even with computers much faster than the impressive ones that are available today. However, getting a problem proved NP-complete does not mean that an algorithm might not solve it efficiently most of the time or for most practical cases. And Dr. Conitzer reported they use CPLEX for ranking one hundred Ph.D. candidates to their Computer Science department by the Kemeny method. Dr. Conitzer analyzed many voting systems in a masterful Journal of the ACM article. In particular, although he showed that many schemes are NP-compatible to manipulate, that does not mean that one could not find an algorithm that will manipulate most practical elections as he demonstrated with an algorithm at the end of the article.

However, there are many who advocate for simply having each voter assigning a score within a range. say -1 to 1 or 0 to 100, to each candidate and the one with the highest average wins. (I will do a Thoughtful Thursday Post on Wally Smith's simulation and theorems.)

And I was impressed by the work on kidney exchanges. Assume A wants to donate a kidney to B and C wants to donate a kidney to D. Unfortunately A is not compatible with B, C is not compatable with D, but A is compatible with D and C is compatible with B. The computer system at Carnegie Mellon finds the proper matching and constructs a chain out of a set of all the people who would like to exchange kidneys with each other. However, it tries to minimize the chains.

These are examples of choice problems that don't use money. I sometimes wonder, and I will talk about this in another posting, whether this kind of technique could be used to minimize the necessity of money. As a poster on The Oil Drum put it, "Money is the lubricant in the economic engine and without enough of it that engine will seize up as it did in the 1930's when farmers dumped milk they couldn't sell into ditches while others were starving for want of the money to buy food." Could a program such this find the chains between the person working at Intel building parts for computers and the farmer without using a currencies or a numeraire?

Personal Note

Dr. Conitzer is a personal hero of mine since I read his dissertation. Last century, I read Robert Tilove's Disertation on Constructive Solid Geometry that was impressed me for being extremely clear and building up a whole research area. This century, I was amazed at the breadth in Dr. Conitzer's dissertation handling a whole area of combinatorial auctions and the remarkable clarity of his writing. I see the same quality of writing in the Communications of the ACM article on which I reported and his Journal of ACM(2) article!

Reference

1. Combinatorial Auctions edited by Peter Cramton, Yoav Shoham and Richard Steinberg, 2006 Massachusetts Institute of Technology Press
2. Conitzer, Vincent, Sandholm, Tuomas and Lang, Jerome, "When are Elections Hard to Manipulate" Journal of the ACM Volume 54, Number Three, Article 14, June 2007, 1 to 33.

Mechanical Engineering Magazine article on environmental assessment of products

Jean Thilmany, "Green Decisons" Mechanical Engineering Volume 132, Number Three, Pages 40 to 42

This blog's first article talked about a badness tax, applied by sortition, to each product. Engineers are developing software and data collections track the energy, cadmium, lead and other hazardous substances in the components of the things they build. This includes accounting for the energy/carbon/etc. in transporting the goods. As I am sure everyone knows, we now have sophisticated supply chain management systems. As the article says, when companies buy a product, they will be paying for the supply chain records of everything that went into it. The standards for a product to be "green" are less advanced than for a building to get certified. However, te Europeans do have standards for hazardous materials in automotive parts and disposing of electronic waste (Restriction of Hazardous Substances Directive and Waste Electrical and Electronic Equipment Directive) which is the impetus for some of this software development. Carnegie Mellon's Green Design Institute uses Input-output analysis to estimate the energy and other inputs into any product. Thus, one can look at a car, and it tracks the energy and knows how energy is used in the major parts, and transportation of each of these parts.

A sortition-based consumption tax system would allow different firms to compete on information collection and the jury can be reasonable in what it demands. unlike a regulatory agency. Toyota wold be expected to do more research on the energy costs of its cars and the components therein, than a small company making a small run of a specialized tool.

Public Finance in Democratic Processes by Buchanan

James P. Buchanan, Public Finance in Democratic Processes: Fiscal Institutions and Indvidual Choice, The University of North Carolina Press, Chapel Hill, 1967.

Earmarking

The public can vote on the budget and tax rates, independently, or in the aggregate. That is, they can vote on a budget in one section of the web screen, how much to be spent on each item. Separately, they can come up with the taxing algorithm.

I proposed such a solution a while ago when many States were confronting (and now are) facing red ink and difficulties in achieving the political will to confront their budget problem. One can vote for the taxes to support all public goods combined. One also votes independently on how the money is to be spent.

However, another option is for the voting system to have the voters vote separately for each public good and for the taxes to carry them out. This was implicit in the discussion of Lindahl Equilibrium Dr. Buchanan has some graphical and algebraic models of the differences. I will create my own set for this group.(But I will probably do it during a break when I am not teaching.) In 1963, 41 per cent of state tax collections to specific functions and it was over fifty percent in the 1950's. Buchanan showed that the general fund mechanism gave a suboptimal voting and people would be more likely to get the amount of expenditures they wanted if they could vote independently for the taxes for each of two public goods. The Libertarian Right believes that having taxes earmarked for specific expenditures would better inform voters of what each public benefit from government truly costs. (This reminds me of "Every one wants to live at the expense of the state. They forget that the state counts to live at the expense of everyone" Frederic Bastiat 1801-1850 which is the essay for the 2010 Sir John W. Templeton Fellowship.) In fact, it would lead to more of a participatory democracy. And, from a participatory democracy approach, feminist, green and Catholic Social Thinkers also advocating more earmarking with specific voting for each category or type of expenditure.

Way back in 1963, Mueller surveyed individuals whether the government should spend more on various programs. Separately, they survry whether more should spent on the same programs, "even if taxes must be raises." The latter had a dramatic decrease in expenditures. Help for older people dropped by half from 70 percent to 34 percent Highways dropped from 29 to 10 percent. We see the same thing in health care today 67% of Americans said that everyone should have at least some health insurance yet 64% are opposed to a tax penalty.

James Q. Wilson and Edward Banfield looked at votes for spending in municipalities. Both low and high-income people voted for public spending--the middle income group tended to vote against taxes and spending.

Tax Knowledge

People's Knowledge of their taxes is somewhat limited. When asked what they paid in their tax, seventy percent can name a number within twenty-five percent of their true liability. Of course, now people would have better access. I would propose that they bring up their Turbo Tax or whatever tax program they use when they vote. Researchers found that lower-income tax payers tended to overestimate the bite from taxation. A study in Germany found that people had even less of a knowledge of excise taxes. And a study in Britain found that the public had a very poor knowledge of how much was spent by the government on each area and overestimated the percentage of government paid by user fees, e. g. Medicare Recipient's pay some copays as well as some of the cost of Medicare Part B. How much of the total Medicare expenditures do these fees cover?

Fiscal Constitutionalism

Dr. Buchanan talks about fiscal constitutionalism, the tendency to keep the same tax mechanisms. One would not expect country A to tax by property taxes and a VAT tax in 2010 and then switch to a personal income tax and an income tax in 2011 and then switch again in 2012. The rates may change, and of course, loopholes and "tax expenditures" or new credits will be added from year to year.

Thus, there are two levels of choices in participatory democracy. A month-to-month or year-to-year choice on the levels of things: should the income tax rate on those earning $70,000 to $80,000 be fifteen percent or eighteen percent, should a retiree on social security under these circumstances earn $13,000.00 per year or $13,473.00 per year? And there might be bigger choices when a country is being formed--should we have an income tax at all, how should the big decisons be made. How do we structure a participatory democracy Constitutional Convention?

Equal Preference Models

Chapter Eleven, particular its appendix, looks at Duncan Black's Committee models . Assume a bunch of people are voting on a tax rate or expenditure rate. Proposals to change tax or expenditure rate are accepted or rejected based on a majority basis. Duncan Black showed that the tax rate would tend to be the median of the preferred rate for each of the voters assuming that the preferences were single peaked. How can we ensure that the voters would not change their relative positions based upon a proporational distribution. Buchanan shows that the rate of increase from the tax be enough to outweight the income distribution. Individuals earning more would probably want more of the public good, let's say education or public support of culture. A good tax system would not make a higher income person more likely to vote for a higher tax for culture relative to a lower income person than they would be under a general system.

Proportional Taxation Over Time and Excise Taxation

Are excise taxes better than income taxes? Are progressive income taxes better than a proportional or flat tax. Dr. Buchanan looks at an individual who expects a different income at one time than another, e. g., less income during retirement or more income Or what about the individual who is uncertaint of how much they will make, e. g. a business owner in a cyclical feel.

Classical Economists view a tax on a specific product as a distortion as individuals will change their choices of which goods to buy independent of the purchase. (I saw this argument in my Intermediate Economics textbook "The Deadweight Loss of Excise Taxation" in Edward K. Browning and Mark A. Zupan, MicroEconomics 8/e, page 273 to 275) They would argue that an excise tax or consumption tax might create distortions while an income or direct tax would less. Alternatives are

1. lump-sum payment (like a poll tax)
2. Proportional income tax
3. A Progresive tax
4. A general consumption tax
5. or excise taxes

But, individuals expenditure needs are different over time; they might need to spend more some years on necessities in some years. An excise tax is a better method in this case as the taxation could fall heavier on luxuries (he terms these "residual needs") than on things that whose expenditures are likely to vary such as college education for children or medical care. But, of course, the American taxation system does allow us to save for our children's education, our retirement and gives a deduction for medical taxes. And to some extent, the sortition based consumption tax does this, as each item is taxed not only on its badness but whether it is a basic good or a luxury. In other words, the tax rate on fine wines and caviar is higher than that on healthy food staples. Of course this is true because individuals pay more interest than the government does.

Now, let us look at intertemporal distribution. Individuals can always lend to the government at the government rate--they can buy treasury bills. However, if they need to borrow, they will pay more interest. In this situation, a person woudl prefer a proportional rate when they expect their income to vary more than their spending.

To be looked at for for Future Thoughtful Thursdays

1. Duncan Black The Theory of Committees and Elections Cambridge: Cambridge University Press 1958
2. James Q. Wilson and Edward C. Banfield " Voting Behavior on Municipal Public Expenditures" in the Public Economy of Urban Communities edited by J. Margolis, 1965, also "Public-regardingness as a Value Premise in Voting Behavior" American Political Science Review LVIII December 1964, 876 to 887.
3. James H. Buchanan, "Public Choice: The Origins and Development of a Research Program"

Sortition Consumption Tax versus Corporate Tax and Export competitiveness

My very first article was on a sortition based consumption tax. One of its advantages was that it did not favor imports the way a carbon tax or cap and trade system does.

A corporate tax that covers profits made abroad discourages exports as shown in two articles on the new corporate tax proposals that President Obama proposed. In particular, it adds twelve billion in taxes on businesses' overseas income.

1. Matthew J. Slaughter, "How to Destroy American Jobs" Wall Street JournalM February 3 2010, Page A17
2. John D. McKinnon "Plan would Raise Taxes on Business" Wall Street Journal Volume CCLV Number 26, Page Six, Thursday February 2, 2010

Embodied Energy and Exports

1. ONe quarter of World Wide Emissions are due to imports and exports
2. Same percentage for China
3. If the US carbon dioxide were done on a net basis, our emissions would be eleven percent higher than our current rate

Story argues that carbon dioxide should be applied to imports and exports, something I have argued here in the sortition-based badness tax. (Suprisingly , China and India argued vociferously for this at Copenhagen.)