Tag Archives: New Yorker

New Levels of Paternalism Promoted in New York

Image via Flickr user freedryk

Earlier this week, New York City Mayor Michael Bloomberg introduced a proposal to ban the sale of sodas larger than 20 ounces by any retailers regulated by the city’s health department. This proposal has many New Yorkers upset, and even the New York Times says this would be a step too far toward paternalism.

While many agree that banning a product goes beyond the bounds of what we can tolerate from the nanny state, writers including Matt Yglesias support additional soda taxes instead. Yglesias suggests that a soda excise tax is a good idea primarily because it will raise revenue and that one good use of this revenue would be increased welfare payments.

The problem with suggesting excise taxes as revenue raisers to support welfare programs is that low-income people are those who are disproportionately hurt by these taxes. Yglesias suggests that the tax will fall in large part on tourists, but I’m not convinced that tourists drink a large percentage of sodas sold throughout the city. Further, a study of soda consumption in New York shows that people in a household at 200% of the poverty or below drink more soda than the average New Yorker. If this statistic were adjusted for the percent of income spend on soda, the results would be even more striking. This tax will also fall the hardest on those who have the strongest preferences for soda over other drinks, the same people who are the least likely to change their behavior as a result of the tax.

Paternalists may suggest that low income soda drinkers are behaving irrationally and that a higher soda tax will help them make better choices. However, it’s impossible for regulators or supporters of paternalistic policies to understand consumers’ preferences better than consumers themselves. While increased health outcomes may be an objective for policymakers, this is not to say that it is or should be everyone’s objective. Almost none of us acts in accordance with seeking the lowest risk choices in diet or any other area of life, and trying to enforce healthy choices with tax policy is going to make some people worse off with the highest burden falling on those at the low end of the income distribution.

However, a policy choice is available to policy makers not in New York but at the federal level that would decrease the deficit, make soda a little more expensive, and likely lead consumers to make healthier choices at the grocery store. Corn subsidies totaled an estimated $3.5 billion in 2010, making food made with corn products relatively cheaper than food that is less heavily subsidized. Rather than targeting a specific product, large sodas, Bloomberg should put his efforts toward advocating a more fair national food policy in which food prices more accurately reflect their true costs.

Florida Senate Votes against Privatizing Prisons

Yesterday, the Florida state senate voted down a bill that would have privatized 27 of the state’s prisons. The shift was projected to save $16.5 million in a state with a $2 billion budget deficit. Theoretically, private prisons are projected to save money because they operate under a profit motive, putting them in a better place to find operating efficiencies compared to state run prisons.

While from a budgetary perspective prison privatization may make sense, the issue is not straightforward. Privatizing prisons creates an interest group that stands to profit from higher incarceration rates. The case of two Pennsylvania judges who accepted bribes from private prison interests in exchange for incarcerating 5,000 juvenile offenders, many of whom appeared in court for minor offenses without attorneys, brought light to this issue. Of course this illegal corruption does not represent the typical interaction between the justice system and private prisons, but does demonstrate the danger of crony capitalism in the industry.

In a paper for the Reason Foundation, Adrian Moore points out that prison interest groups are by no means exclusive to private prisons. Public sector employee unions also have incentives to grow their bureaucracy and protect their jobs by seeking harsher prison sentences. In Florida, the International Brotherhood of Teamsters, a union representing public sector prison workers, played an important role in the defeat of the privatization bill. The California Correctional Peace Officers Association is perhaps the most studied public prison lobby. The CCPOA has made extensive contributions to both political campaigns and to groups that fight for harsher sentencing laws.

Aside from the complicated issues that special interests bring to the US prison system, it’s important to take a critical look at the alleged budget savings that private prisons provide. While these prisons are privately run, they of course are not really private businesses, but rather government contractors. This means a layer of bureaucracy separates them from their consumers (taxpayers) and the market process is not in play as it is in a competitive industry. Rather than having an incentive to provide the best service at the least cost, private prisons face incentives to fulfill the most lucrative government contracts at least cost.

Some studies, including Moore’s, have attributed substantial cost savings to prison privatization, but other studies have found the opposite. In Arizona, private prisons actually cost more per inmate than public prisons, according to state data, even though they do not typically house the highest security, most expensive inmates that state-run prisons do.

Florida Governor Rick Scott still has the opportunity to use his executive power to increase the role of private prisons in Florida but said he had wanted legislative support for the measure. While the budgetary and policy impacts of privatizing prisons are ambiguous, one policy change would bring certain cost savings to Florida taxpayers. By some measures, Florida currently has the strictest laws against marijuana possession in the country, including potential jail time for possession of misdemeanor quantities of the drug. By reducing sentencing for victimless crimes including possession and distribution of marijuana, the state could certainly save money and potentially improve outcomes for the states youth who face drug charges.

Why Are Cell Phone Taxes So High?

Nationwide, combined federal, state, and local taxes on cell phone services average more than 16 percent. That makes a cell phone one of the highest taxed goods around. Cell phone taxes are even higher than beer taxes.

Why?

Image by Carlos Porto

My colleague, Thomas Stratmann, and I attempt to answer that question in our latest working paper. Most of the conventional rationales for above-average taxation just don’t apply: cell phones don’t have obvious negative externality characteristics, they are no longer luxury goods, and consumers are not particularly insensitive to price changes.

So why would policy makers choose to tax them so much? Part of the answer is that no single politician does choose to tax them that much. Instead, the high taxes that we pay on our cell phones are the sum of lots of little taxes imposed by several different political entities. Consider, for example, the tax bill of a typical New Yorker. It includes a federal USF fee, four state taxes, five city taxes, and a local 9-1-1 fee. Each of these is relatively small, but when you add it all up, the combined rate is over 22 percent.

We believe that this pattern of taxation is characteristic of what Columbia Law School Professor Michael Heller has called a “tragedy of the anticommons.”

In the better-known tragedy of the commons multiple parties have the right to use one resource and tend to over-use it since they fail to account for the way that their use harms others (think of the ocean; it’s owned by everyone and is over-fished). In a tragedy of the anticommons, however, multiple parties have the right to exclude others from using a resource by taxing or somehow regulating its use.

Heller points to the Rhine river as a classic example. Under the Holy Roman Empire only one party–the Empire–had the right to tax trade on the river. The government was careful, then, not to over-tax (over-exclude) trade. But once the Empire fell, multiple barons gained the right to tax trade (p. 3):

The growing gauntlet of “robber baron” tollbooths made shipping impracticable. The river continued to flow, but boatmen would no longer bother making the journey. . . . For hundreds of years, everyone suffered—even the barons. The European economic pie shrank. Wealth disappeared. Too many tolls meant too little trade.

Like the barons on the Rhine, multiple parties have the power to tax cell phones: Federal, state, county, city, and special district coffers all tax the base. In many cases, multiple taxes apply even at one level of government (e.g. five taxes levied by the city of New York).

We test the anticommons theory using variation in tax rates and taxing entities across the states. We write:

The anticommons problem has two dimensions. First, the mobile-service tax base funds numerous distinct projects at each level of government. Second, the base is taxed by numerous overlapping levels of government. We use state-level data from three years to examine the possible economic, demographic, and political factors that might explain the variation in these rates. We find that wireless tax rates increase with the number of overlapping tax bases.

Property Rights and Coffee in El Salvador

In this week’s New Yorker,  Kelefa Sanneh details the work of Aida Batlle, a Salvadoran entrepreneur. (Unfortunately only part of the article is available online, but the entire story is a great read). Batlle is a pioneer in the world of high end coffee, growing beans that eventually go into cups of coffee that retail for up to $7 in Brooklyn. From an economics perspective, her story is interesting because she succeeds as an entrepreneur in the face of very poorly defined property rights.

Batlle grew up in the United States where she worked as a restaurant manager and caterer, developing insight into the demands of American foodies. Upon returning to El Salvador as an adult, she used this perspective to see the potential for a coffee crop that is treated with care typically reserved for heirloom tomatoes. Most coffee farmers send their entire harvest to be roasted and mixed in with other farmers’ yields, but she treated her crop more selectively. She accepts only properly ripened fruit and keeps the beans from all of her farms separate to preserve their unique flavors.

Sanneh explains the tacit knowledge that facilitates Batlle’s entrepreneurial awareness:

Plenty of farmers have great land and great cherry, but almost none of them share Batlle’s keen understanding of what her customers want to drink, what they want to hear, and what they’re willing to pay.

As she travels between her farms, Battle brings along two armed bodyguards at all times. This expense is a waste of resources; in an environment where Rule of Law prevails, spending money to protect against crime is unnecessary. An anecdote about one of Batlle’s farms brings to light the conditions under which entrepreneurs work in El Salvador:

The rising [price of coffee] has also made coffee more valuable to thieves. One day this spring, armed pickers arrived at Finca Kilimanjaro: they held the farm manager at gunpoint while they cleaned out the plants. “Kilimanjaro had the highest yield this year,” Batlle says. “But it turned out to be the lowest, because we had two days of non-stop theft. It was awful!” No doubt her beans were blended and sold as generic high-elevation coffee. To Batlle, the thought of this adulteration is more painful than the theft.

If Batlle and coffee farmers like her could focus their energies into their business rather than loss prevention, high end coffee could perhaps be available to those of us who would never spend $7 on a cup of coffee. While trade is a positive-sum game for everyone involved, this type of plunder is a negative-sum game because it diverts productive resources toward defending against theft.

 

Less Living for your Dollar: Cost of Living also Drives Migration

People want to live where they can maximize their standard of living.  But it’s not just the high taxes driving residents out of states like California, New York, and New Jersey.

According to Eamon Moniyhan, director of The Cost of Living Project (COLP) in New York, states with the largest population growth are those with a low cost of living, in particular the South and Mountain West states. The reverse is true in the high cost of living Northeastern states — Massacussets, Connecticut, and New Jersey.

According to the U.S. Census, New Jersey has  the second highest median income in the nation at $67,142, but once the cost of living is factored in, that shrinks to $56,147. Not coincidentally, New Jersey has been experiencing a steady loss of residents for lower tax (and lower cost of living) locales such as North Carolina.

As Rutgers economists Joseph Seneca and Richard Hughes find in  “Where Have All the Dollars Gone?”, between 2000 and 2005, over one million people left New Jersey. Among the top ten destination states, some are high tax and high cost of living (New York, California, and Massachusetts). Others are low-tax and/or low cost of living states in the South and West (North Carolina, Virginia, Texas, Georgia, and Florida).

What drives the high cost of living? According to COLP, excessive regulations. This is why the average metro New Yorker’s income doesn’t stretch that far. A person earning $50,789 in Chicago has the same standard of living of someone earning of $100,000 in New York City. For more, read here.

Overhauling Health Insurance from the Bottom Up

Over the weekend, following a town-hall meeting in Grand Junction, Colorado, President Obama broadened his rhetoric on health care reform, saying that a government insurance policy was not the only option available to lawmakers.  However, a New York Times article reports:

Speaker Nancy Pelosi said Monday that House Democrats, rather than backing down, strongly supported giving people the choice of a new government health insurance plan. “A public option is the best option to lower costs, improve the quality of health care, ensure choice and expand coverage,” said Ms. Pelosi, Democrat of California.

Grand Junction was selected as a location for one of the President’s town-hall meetings because it was recently profiled in a New Yorker article as an example of a region that successfully manages health costs. The presidential interest in Grand Junction’s system, however, seems strange, because the area’s cost-saving practices have not come about by the sort of top-down overhaul that his administration is promoting for the country. Rather, area doctors developed a grassroots solution:

Years ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients. They also agreed, at the behest of the main health plan in town, an H.M.O., to meet regularly on small peer-review committees to go over their patient charts together. They focussed on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates. Problems went down. Quality went up. Then, in 2004, the doctors’ group and the local H.M.O. jointly created a regional information network—a community-wide electronic-record system that shared office notes, test results, and hospital data for patients across the area. Again, problems went down. Quality went up. And costs ended up lower than just about anywhere else in the United States.

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