Tuesday, January 16, 2018

Is Legal Pot Crippling Mexican Drug Trafficking Organisations?

From Tyler Cowen.
"Yes, it would seem.  The subtitle is “The Effect of Medical Marijuana Laws on US Crime,” the authors are Evelina Gavrilova, Takuma Kamada, and Floris Zoutman, and the outlet is The Economic Journal.  Here is the abstract:
We show that the introduction of medical marijuana laws (MMLs) leads to a decrease in violent crime in states that border Mexico. The reduction in crime is strongest for counties close to the border (less than 350 kilometres) and for crimes that relate to drug trafficking. In addition, we find that MMLs in inland states lead to a reduction in crime in the nearest border state. Our results are consistent with the theory that decriminalisation of the production and distribution of marijuana leads to a reduction in violent crime in markets that are traditionally controlled by Mexican drug trafficking organisations.
Here is the link to the paper, here are earlier versions."


By Philipp Ager and Markus Brueckner.


This paper examines the relationship between immigrants' genetic diversity and economic development in the United States during the late nineteenth and the beginning of the twentieth centuries, a period commonly referred to as the age of mass migration from Europe to the New World. Our panel model estimates show that during this period, immigrants' genetic diversity is significantly positively correlated with measures of U.S. counties' economic development. There exists also a significant positive relationship between immigrants' genetic diversity in 1870 and contemporaneous measures of U.S. counties' average income."

The most disadvantaged people have gained the most from the reduction in violent crime

By Alex Tabarrok.
"…the most disadvantaged people have gained the most from the reduction in violent crime.
Though homicide is not a common cause of death for most of the United States population, for African-American men between the ages of 15 and 34 it is the leading cause, which means that any change in the homicide rate has a disproportionate impact on them. The sociologist Michael Friedson and I calculated what the life expectancy would be today for blacks and whites had the homicide rate never shifted from its level in 1991. We found that the national decline in the homicide rate since then has increased the life expectancy of black men by roughly nine months.
…The everyday lived experience of urban poverty has also been transformed. Analyzing rates of violent victimization over time, I found that the poorest Americans today are victimized at about the same rate as the richest Americans were at the start of the 1990s. That means that a poor, unemployed city resident walking the streets of an average city today has about the same chance of being robbed, beaten up, stabbed or shot as a well-off urbanite in 1993. Living in poverty used to mean living with the constant threat of violence. In most of the country, that is no longer true.
That’s Patrick Sharkey writing in the New York Times.

More police on the street is one cause, among many, of lower crime. It’s important in the debate over better policing that we not lose sight of the value of policing. Given the benefits of reduced crime and the cost of police, it’s clear that U.S. cities are under policed (e.g. here and here). We need better policing–including changes in laws–so that we can all be comfortable with more policing."

Monday, January 15, 2018

Cigarette Tax Hike: Smuggling Up, Revenue Down

By MICHAEL LAFAIVE & TODD NESBIT. Michael LaFaive is senior director of fiscal policy with the Mackinac Center for Public Policy in Michigan. Todd Nesbit is an assistant professor of economics at Ball State University. Excerpt:
"There is a clear and obvious link between taxes — specifically, tax differentials between states — and illicit behavior, including tax evasion and avoidance, theft, violence and public corruption. These were all hallmarks of the profitable trade in alcohol during Prohibition, and some states are still making similar mistakes with tobacco.

Cigarettes aren't illegal, but governments have artificially raised the price of the product to such a degree that their sale and purchase now is tinged with many of the consequences of full alcohol prohibition. Thanks to "prohibition by price," people commonly smuggle cigarettes across borders, usually illegally, to evade excise taxes.

In writing several academic studies on cigarette taxes, we have built a statistical model to measure cigarette smuggling between states, as well as to and from Mexico and Canada. Through 2015, Connecticut had the 15th highest smuggling rate in the nation at 16.7 percent. That is, of all the cigarettes consumed in Connecticut in 2015, almost 17 percent were transported, sold or bought illegally.

That estimate is from a time when Connecticut's cigarette taxes were only $3.40 per pack. They have since been raised to $4.35, and would jump to $4.60 if the state adopts Malloy's proposed hike. Our model indicates that at that price, Connecticut's smuggling rate would leap to more than 38 percent of the total market. That would rank fifth in the nation in smuggled smokes.

But at the very least, won't the tax revenue help with Connecticut's state budget? Don't count on it.
Officials think they will get as much as $6.6 million in fiscal 2018 from such a tax hike. But the new cigarette tax rate would be so high that our model predicts a very small decline in revenue — 0.8 percent in the first year — as a direct result of tax evasion. The tax increase is unlikely to impact the rate of smoking because, at current tax rates, those who still smoke have a very strong preference for doing so. In other words, the state may harm consumers without solving its budget problems.

We are not the only scholars to recognize America's cigarette smuggling problem. In our 2016 study, titled "Cigarette Taxes and Smuggling," we described more than 20 cigarette smuggling estimates made by professors, consultants and others. Most found the problem of smuggling to be significant, and some estimated smuggling to be an even larger phenomenon than we did.

If more smuggling was the only problem with raising cigarette taxes, it might be tolerable. But it is not. The Massachusetts arrest only happened because police thought they might nab a suspect in an unrelated incident of stolen cigarettes but instead found a cigarette smuggler.

A quick internet search will reveal plenty of odd and sad stories. With high excise taxes, cigarettes have become like little gold bars for criminals everywhere.

Retailers are not the only victims. Wholesalers and warehouses have been robbed, truckloads hijacked and people arrested in murder-for-hire cases involving smuggled cigarettes. Public corruption is also part of the trade. One Maryland police officer was busted for participating in a smuggling ring where he used his official police cruiser to escort contraband to its destination."

Why is liberal California the poverty capital of America?

By Kerry Jackson of the Pacific Research Institute. Excerpts:

California has the highest poverty rate in the country.
"That’s according to the Census Bureau’s Supplemental Poverty Measure, which factors in the cost of housing, food, utilities and clothing, and which includes noncash government assistance as a form of income."

"It’s not as though California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause. Several state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200% above the poverty line receive benefits. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs, including cash-assistance payments, vendor payments and “other public welfare,” according to the Census Bureau. California, with 12% of the American population, is home today to about one in three of the nation’s welfare recipients.

In the late 1980s and early 1990s, some states — principally Wisconsin, Michigan, and Virginia — initiated welfare reform, as did the federal government under President Clinton and a Republican Congress. Tied together by a common thread of strong work requirements, these overhauls were a big success: Welfare rolls plummeted and millions of former aid recipients entered the labor force.

The state and local bureaucracies that implement California’s antipoverty programs, however, resisted pro-work reforms. In fact, California recipients of state aid receive a disproportionately large share of it in no-strings-attached cash disbursements. It’s as though welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: 55% of immigrant families in the state get some kind of means-tested benefits, compared with just 30% of natives.

Self-interest in the social-services community may be at fault. As economist William A. Niskanen explained back in 1971, public agencies seek to maximize their budgets, through which they acquire increased power, status, comfort and security. To keep growing its budget, and hence its power, a welfare bureaucracy has an incentive to expand its “customer” base. With 883,000 full-time-equivalent state and local employees in 2014, California has an enormous bureaucracy. Many work in social services, and many would lose their jobs if the typical welfare client were to move off the welfare rolls.

Further contributing to the poverty problem is California’s housing crisis. More than four in 10 households spent more than 30% of their income on housing in 2015. A shortage of available units has driven prices ever higher, far above income increases. And that shortage is a direct outgrowth of misguided policies.

“Counties and local governments have imposed restrictive land-use regulations that drove up the price of land and dwellings,” explains analyst Wendell Cox. “Middle-income households have been forced to accept lower standards of living while the less fortunate have been driven into poverty by the high cost of housing.” The California Environmental Quality Act, passed in 1971, is one example; it can add $1 million to the cost of completing a housing development, says Todd Williams, an Oakland attorney who chairs the Wendel Rosen Black & Dean land-use group. CEQA costs have been known to shut down entire homebuilding projects. CEQA reform would help increase housing supply, but there’s no real movement to change the law.

Extensive environmental regulations aimed at reducing carbon dioxide emissions make energy more expensive, also hurting the poor. By some estimates, California energy costs are as much as 50% higher than the national average. Jonathan A. Lesser of Continental Economics, author of a 2015 Manhattan Institute study, “Less Carbon, Higher Prices,” found that “in 2012, nearly 1 million California households faced … energy expenditures exceeding 10% of household income. In certain California counties, the rate of energy poverty was as high as 15% of all households.” A Pacific Research Institute study by Wayne Winegarden found that the rate could exceed 17% of median income in some areas.

Looking to help poor and low-income residents, California lawmakers recently passed a measure raising the minimum wage from $10 an hour to $15 an hour by 2022 — but a higher minimum wage will do nothing for the 60% of Californians who live in poverty and don’t have jobs. And research indicates that it could cause many who do have jobs to lose them. A Harvard University study found evidence that “higher minimum wages increase overall exit rates for restaurants” in the Bay Area, where more than a dozen cities and counties, including San Francisco, have changed their minimum-wage ordinances in the last five years. “Estimates suggest that a one-dollar increase in the minimum wage leads to a 14% increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating),” the report says. These restaurants are a significant source of employment for low-skilled and entry-level workers."

Sunday, January 14, 2018

Income inequality isn’t as bad as you may think

By Aparna Mathur of AEI.
"There are as many narratives about income inequality as there are papers. Over the last few days, two reports have appeared in stark contrast with one another. An 80-page note by Deutsche Bank sheds light on dramatically increasing income inequality in the U.S. and other Organization for Economic Cooperation and Development (OECD) economies.

In line with several earlier academic studies, it shows that the share of income going to the top 10 percent in the United States now exceeds 50 percent, and the top 1 percent receives about 23 percent of all income.

While all income groups have seen an increase in average real (after-tax) incomes, the largest increases have been at the top of the income distribution, where incomes have grown by more than 200 percent since 1979. In contrast, for low- and middle-income households, incomes have increased by less than 50 percent.

However, a more in-depth academic research paper by economists Gerald Auten and David Splinter finds little evidence of widening income inequality and questions the methodology used in earlier papers that find the opposite. So what narrative do we believe?

On the face of it, it is easy to accept the story that those with high incomes are doing much better than before, more so than middle- and low-income households. There is no denying that globalization and automation have hit low-skill, low-wage work more than they have affected better educated, skilled and high-wage workers.

Workers at the lower end struggle to keep up with changes in the labor market that they are less equipped to handle, as some specialized skills become obsolete and workers lack the skills to transition to new sectors.

But the reality is not that simple. A growing literature in economics has identified problems with measuring income accurately and completely in various datasets. If income is under-reported, particularly for low-income workers, then we may overstate the rise in inequality.

Moreover, income does not fully capture a household’s standard of living. Among other issues, at very young or very old ages, individuals may borrow or rely on lifetime savings to maintain their standard of living. Income may not perfectly capture how well off people are at different points in the life cycle.

Let’s begin with the measurement issues. Research in economics has shown that when households are surveyed, individuals don’t always accurately report benefits and transfer payments such as Medicare, Medicaid and Food Stamps.

However, such programs have grown in importance over the last several decades precisely to supplement incomes at the bottom of the distribution. Economists Bruce Meyer and James Sullivan show that when comparing data from the Current Population Survey to administrative data aggregates (the most accurate data), the ratio of reported benefits to actual benefits is 0.6 for Food Stamps and 0.5 for TANF.

In other words, receipts reported on household surveys are more than 40- to 50-percent lower than those in administrative data. Hence, measurement issues explain much of why trends in income inequality vary widely across different studies.

Using tax return data, Piketty and Saez show that between 1960 and 2015, the income share of those at the top increased by 11 percentage points. However, the recent paper by Auten and Splinter finds serious flaws with this analysis because tax return data similarly misses government transfer payments and non-taxable employer-provided benefits.

To overcome this challenge, Auten and Splinter use a broader measure of income, which they term “consistent market income,” that includes employer-paid payroll taxes and insurance. After adjusting for differential marriage rates between high- and low-income households and under-reported incomes, this paper finds that the income share of the top 1 percent increased by less than 4 percentage points over the same period.

The after-tax income share for the top 1 percent has grown even less, from 8.5 percent in 1960 to 10.2 percent in 2015. Hence, measurement issues can significantly complicate our understanding of trends in income inequality.

A second reason not to rely exclusively on income data is that income is not a great measure of welfare for most households. For one, it underrepresents the ability of households to rely on assets or savings in times of low income and the ability to save when incomes are high.

In other words, people may be better off than their incomes would suggest because their standard of living is propped up and smoothed over time by their assets and savings. More importantly, in light of the fact that income data often miss households’ ability to access the government safety net, consumption may better reflect households’ overall access to cash and benefits.

Meyer and Sullivan show that while overall income inequality has risen 29 percent over the past five decades, the increase in consumption inequality has been far more modest at 7 percent. Since 2005, the two inequality measures have moved in opposite directions, with income inequality rising and consumption inequality falling.

An earlier paper that I co-authored with Kevin Hassett also finds that consumption inequality showed little change through the entire period between 1984 and 2010, even though income inequality rose significantly over the same time frame.

In addition, using data from the Residential Energy Consumption Survey, we show that since the 1980s, many more low-income households now have access to air-conditioning and heating within their homes, internet, computers and printing facilities, microwaves, dishwashers and other household appliances.

In other words, access to material goods has increased significantly for the lowest income households, and the gap in access to these goods between high and low income households has narrowed over time.

While some may have already hit the panic button on widening income inequality narratives, serious research has yet to credibly confirm this view. Instead, the increasingly more prevalent view is that measuring household incomes accurately, and studying income inequality trends, is fraught with problems. Perhaps, if we truly care about capturing household well-being, consumption may be a better measure of standards of living.

But I think the narrative needs to move beyond the static concept of income and consumption inequality to the more dynamic concept of economic mobility. Are low-income people today able to access opportunities to move up the income ladder?

Can they access good schools for their children and good jobs for themselves? How do we make single-parent families more upwardly mobile? Our energies should be focused not, as they too often are, on why incomes are growing rapidly at the top and ways to constrain that growth, but on improving wage growth and mobility at the bottom of the distribution.

If we are successful at that, we may remain an unequal society, but inequality may not be as much of a dilemma as it appears today."

Federal Gas Tax Increase Misguided

By Chris Edwards of Cato.
"The Trump administration will release its long-waited infrastructure plan in coming weeks. The plan is expected to include $200 billion over 10 years of federal funding. Where will the money come from? The president has pondered raising the federal gas tax.

Revenues from the 18.4 cent-per-gallon federal gas tax go into the Highway Trust Fund, and then are dished out to the states. But 98 percent of U.S. streets and highways are owned by state and local governments, and the owners should do the funding. States that need to improve their highways can increase their own gas taxes, sales taxes, issue debt, add user charges, or pursue public-private partnerships.

There is no advantage in raising federal highway revenues rather than the states raising their own. The states can tackle their own infrastructure challenges, and about half of them have raised their transportation taxes in the past five years.

Supporters of a federal gas tax hike say that the tax has not been raised since 1993, and its real value has been eroded by inflation. That is true. But the federal gas tax rate more than quadrupled between 1983 and 1993 from 4 cents to 18.4 cents, as shown in the chart below. The 4-cent rate would be 9.8 cents in today’s dollars, so the real gas tax rate has risen substantially since the early 1980s.

The chart shows that the states have steadily raised their own gas taxes in recent years. API discusses state gas taxes here, and they emailed me data back to 1994. (I’ve interpolated a few missing years). The state average—currently 33 cents—includes both gasoline excise taxes and other taxes on gasoline.

I hope Trump does not go down the road of gas tax increases. Pumping more money through the federal bureaucracies would fuel more top-down planning and inefficiency. Funding for highways and other infrastructure should be handled by state and local governments and the private sector.

More on infrastructure here and here.