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Tuesday, August 19, 2014

Some facts about Ferguson, Missouri

Ferguson, MO is the site of a recent police shooting that has drawn national attention. I have been reading some statistics in the news about Ferguson and I wanted to check them out for myself and compare them to St. Louis county as a whole. Ferguson is located within St. Louis county.

Below is a chart that lists statistics for Ferguson and St. Louis county so that readers can see how Ferguson compares to its surroundings. (click on the chart to enlarge)


As noted in the news, Ferguson residents are primarily black, much more than St. Louis county as a whole. Residents of Ferguson are also poorer, less educated, and more likely to be unemployed on average than the county as a whole. Ferguson is a slightly younger city. Ferguson residents also have a lower home-ownership rate than the county, though it is not much lower than the national average of approximately 65%

Many economists, including Thomas Sowell and Walter Williams (see here, here, and here), often point out that the unemployment rate for black youth is much higher than that for white youth and the statistics here support that. The unemployment rate for people aged 16 - 24 is 35.24% in Ferguson, which is primarily black, and only 23.08% in St. Louis county, which is primarily white. Employment is a good way for young people to learn about responsibility, how to interact with others, punctuality, etc. 

Michael Brown, the person who was shot and killed, was 18. I am not sure if he was employed or not, but based on these statistics I would not be surprised if he was not. I am not taking a stance on the justification of the shooting until all of the facts are out, but I feel confident in saying that if there were more job opportunities for youth in Ferguson, MO then the chances of a deadly interaction between teenagers and police would decrease simply because time is scarce and people at work are not walking in the middle of the street. It is my opinion based on my experiences that idle youth of any skin color tend to get in more trouble than employed youth, but this is just my observation and not intended to be a statement of causality. Regardless, the high unemployment rate of black youths and inner city youth in general is a tragedy.

Another thing worth pointing out is that even when controlling for education, which is done in the bottom most portion of the chart, Ferguson residents have lower median earnings. Median earnings of a person with a bachelor's degree in Ferguson are only $38,757 vs. $50,545 in St. Louis county. The gap is even wider for a graduate or professional degree, $51,916 vs. $67,949. Of course the type of degree earned, occupation type, and the actual ability of the individuals are not controlled for in this simple statistic, but it is still interesting in my opinion.

Sunday, August 17, 2014

Corporate inversions are a good thing

Recently politicians on the left have been up in arms over corporate inversions. A corporate inversion is when a company, for example Walgreens, buys a company located in another country in order to lower their tax burden by reincorporating in that country. Many people view this practice as "unpatriotic" including AFL-CIO president Richard Trumka, Senator Elizabeth Warren, and President Obama among others.

Let me first say that in my opinion there is nothing patriotic about paying taxes. Company executives have a duty to maximize value for their shareholders. A lower tax burden means that companies will have more money to either distribute to shareholders as dividends or to reinvest in the business. This is a good thing, not a bad thing. Almost everyone today owns stock in some large, international companies, either in an account that they actively monitor and trade on or in an investment like a Roth IRA or 401 K.

Despite what politicians on the left say it is not at all clear that sending corporate profits to Washington D.C. via taxes is better than keeping that money in the hands of shareholders or reinvesting in the business. In fact, I find it hard to believe that anyone who monitors D.C. spending habits with an unbiased eye would argue that the government spends money in a value maximizing way. It is important to remember that the primary opportunity cost of tax dollars is the purchase that would have been made had the person taxed been able to spend that money as they desired. Even if one believes that the government spends tax dollars on goods and services that people want, this does not mean that the purchases the government makes maximize the utility of the individuals that the money was taken from. A person may want the government to hire a new IRS call center worker, but they may way want a new car more.

In addition to the commonly made opportunity cost argument, the problem with labeling corporate inversions unpatriotic and trying to stop them is that it stifles cross jurisdiction competition for scarce resources. Why shouldn't Ireland or Estonia be able to compete with the U.S. for scarce tax dollars? If another country offers Walgreens a better overall deal than the U.S. then the U.S. should counter with an even better offer, not use force to eliminate the first offer.

Inter-country tax competition ensures that countries stay vigilant about attracting scarce resources rather than become complacent behind nationalistic walls. Like competition at all levels, tax competition and varying corporate rules and regulations allow policy makers to see what systems work best and maximize real value to shareholders, consumers, and workers. It is just like inter-state and inter-city competition within the U.S. If it is not a good idea to put all states under one corporate tax and regulation umbrella why would it be a good idea to put all countries under one? But in effect that is exactly what stopping corporate inversion would be doing. There would be no incentive for countries to implement the most economically efficient corporate tax structure if company movement was forbidden.

Far too often politicians resort to force to stop something they don't like rather than view it as an opportunity to learn about what people want. Competition sorts out the good ideas from the bad and restricting competition will ensure that bad ideas stay around much longer than necessary.

Thursday, August 14, 2014

Immigration and inductive reasoning

Immigration reform is a hot topic and has been for at least the last 10 years, which covers the time that I have been paying attention to it. One of the things I have noticed when I discuss immigration with other people is their desire to make general statements about immigrants, particularly immigrants from Mexico, based on their own experiences. This type of reasoning is inductive reasoning as opposed to deductive reasoning.

Inductive reasoning can be useful. Drawing on personal experiences when discussing larger topics is something that we all do and often is useful for moving a discussion forward. But inductive reasoning does not establish truth. It can only provide evidence that the more general statement that follows from the premise is possible with varying degrees of certainty. The degree of certainty depends on the strength of the premise and other evidence.

In the context of immigration, an inductive argument I hear a lot is of the type:

"All illegal Mexican immigrants I have heard of or have interacted with are only in the U.S. to mooch off of our social safety net. Therefore, all illegal Mexican immigrants are probably here to mooch off of our safety net rather than work."

The premise, that Mexican immigrants are in the U.S. to take advantage of our welfare programs, is based on a limited sample size, namely what the person has read about or seen. The conclusion, that all Mexican immigrants are probably identical to the sample in the premise, extrapolates what the person has experienced into a general statement about an entire group of people. Note that the conclusion may or may not be true; the argument itself does not establish truth.

Deductive reasoning starts from a principle that has been established as truth (or is at least widely believed to be true) and then logically works towards a second truth. A conclusion based on a correctly specified and coherent deductive argument is necessarily true.

For example, a deductive reasoning example of thinking about Mexican immigrants could be:

"People want to obtain the things that they desire at the least possible cost, where costs include not only pecuniary costs but also time, effort, and hardship. Therefore, illegal Mexican immigrants that come to the U.S. and take advantage of our welfare program will only do so if it is the least costly way of obtaining the goods and services that they desire."

Rather than assume that Mexican immigrants are here to mooch off of U.S. taxpayers, the argument above assumes that they respond to incentives, which is more certain. When the argument is presented this way it is more clear where solutions to the welfare problem may be found.

If we raise the relative cost or lower the benefit of being on welfare, less Mexican immigrants would see it as the solution to their economic problem. One way to do this is to make it easier to obtain a green card so that more immigrants can work legally. This lowers the cost of work relative to that of hiding out illegally and mooching off the system. If illegal Mexican immigrants could come out of the shadow economy and get legal permission to work they would be more likely do so. As it stands now, to the extent that they mooch of the system, it is because it is less costly for them to hide underground, draining local resources such as public schools, local hospitals, food banks, churches, local welfare programs, etc. without contributing any tax dollars or donations to the upkeep of such services.

I try to avoid inductive reasoning when possible but like anyone I rely on my own experiences and observations to make sense of the world. Inductive reasoning is not bad, but when a person uses it they should be sure to acknowledge to both themselves and others that their conclusion is only a possibility rather than a certainty. If it is truth that is being sought, deductive reasoning is the only way to get there. And even if the truth proves difficult to get at, deductive reasoning often provides a better framework for analyzing the situation.

Friday, August 1, 2014

Greenville's and Dayton's housing stock

A blog post on a blog I read, Urbanophile, analyzed the housing stock of some Midwestern cities. The author pointed out the uniqueness of Detroit's housing stock, particularly its relatively high amount of older units and detached single family homes. The author argues that older homes are more difficult to renovate and that having a large proportion of single family detached homes in a city limits the ability of developers to construct newer housing that meets the preferences of today's would be city dwellers e.g. areas zoned for single family detached housing make it difficult to construct lofts, apartments, etc.

With this in mind I decided to analyze the housing stocks of Dayton and Greenville. Below is a chart showing occupied housing units grouped by the age they were built for both cities. This data is at the city level, not the MSA level.


As the graph shows Dayton has a much older housing stock than Greenville. This is not surprising considering the Greenville MSA's population, which includes the city itself, has been growing since 1970 while Dayton's has declined. A growing population means new housing has to be built, while a declining or stagnant population means that old houses built in the past when the population was larger are still around.

Roughly 90% of Dayton's housing was built prior to 1979, compared to approximately 67% for Greenville. The real difference is in the amount of housing built prior to 1950; roughly 50% for Dayton compared to only 21% for Greenville. If older housing is truly more difficult and thus costly to renovate or rebuild, Dayton has a larger financial hurdle to clear than Greenville in the coming years.

Below is a graph showing they types of housing units in each city.


Greenville actually has relatively more 1 unit detached housing units occupied than Dayton. Dayton has relatively more occupied large housing complexes consisting of 5 to 20 or more units. I was a little surprised to see that Dayton has a larger percentage of large housing complexes. Having walked around Greenville quite a bit over the last 4 years, especially the downtown,  they appear to have a lot of large complexes compared to Dayton's downtown, though I admit my familiarity with Dayton's downtown is not particularly high.

Based on the criteria laid out in the blog post it appears that the outlook for Dayton is mixed. On the one hand they have a relatively large amount of older housing; on the other hand they also have a relatively good mix of unit types. It is worth mentioning that the numbers used for these charts are occupied housing units, which means Dayton could have a lot of newer unoccupied housing (if developers over built) or a lot of empty 1 unit detached homes (people have left and no one has bought the property). Both of those scenarios seem more likely to be the case in Dayton relative to Greenville, and both would be bad signs for Dayton.

When I have more time I might try to get data on total housing units by age and type. This data was easy to grab so I started here. Here is a link to the tool I used to get the data. It is fairly easy to use and has a lot of data on various geographies, including cities, counties, census tracts, and blocks.

Tuesday, July 29, 2014

Speaking of the drug war....

From the Washington Post. Just another mistaken identity that resulted in the beating of an innocent bystander.
"Josue Gonzalez, 27, fled from police away from Loop 410 along the Highway 151 access road before he exited at Westover Hills and ditched his car in the parking lot of a restaurant. The restaurant is a few hundred feet from where Carlos was standing.
“All three of them started beating me on the head,” said Carlos, who still showed visible signs of the beating when he spoke with KENS 5 weeks after the incident.
“It was unbelievable. I couldn’t believe it was happening to me.”
Carlos said he was struck about 50 times, even though he complied with the officers’ instructions and did not fight back.
Shortly after being handcuffed and explaining to officers that he owned the property, a fourth officer approached and said the suspect was in custody nearby."
And here is an important website from the Cato Institute that tracks police misconduct nationwide.

Discouraging drug use: prohibition or taxes?

Marijuana has been legalized in several states in the U.S. recently, including Colorado and Washington. So fare there have been no major problems with drug use and Colorado officials project to take in $30.6 million in revenue for the first fiscal year. This is not as much as previously projected, however, and one possible reason mentioned in the article is that medical marijuana is a cheaper alternative due to the insurance subsidies and thus people who should be buying retail are getting prescriptions instead. But that is a separate issue that does not change the fact that the Colorado government is making money taxing marijuana.

In my opinion the result in Colorado from legalizing marijuana would hold for harder drugs as well, and I will explain why. Let's take heroin for example. Many heroin uses are addicted to the drug or at the very least really enjoy the effects the drug has on them. If that is true, this means that their demand for the drug is price inelastic, meaning that if the price rises they will not drastically reduce their consumption of the good. Below is a diagram portraying a market for a drug like heroin. Price is on the vertical axis, quantity is on the horizontal axis.


The demand curve is relatively vertical, which portrays the inelastic demand for a drug like heroin. The point Q1*, P1*, where supply curve S1 intersects demand curve D, is the initial equilibrium quantity and price for heroin. The U.S.'s current method for decreasing drug use is largely based on attacking the supply side; the DEA goes after large drug dealers and tries to prevent drugs from crossing the border. They also raid poppy fields in places like Afghanistan to reduce the supply. This can be shown in the graph by shifting supply from S1 back to S2. When this happens the equilibrium quantity decreases from Q1* to Q2* and the price rises from P1* to P2*.

What the diagram shows is that the equilibrium price for heroin increases by more than the equilibrium quantity for heroin decreases. If that is the case, total revenue from selling heroin will actually increase when the supply is reduced from S1 to S2. This is because the increase in the price more than offsets the decrease in the quantity, and since total revenue is price times quantity the total revenue will increase. Depending on a dealers cost structure, their risk aversion, and the penalties for being caught, it is possible that the higher price makes dealing heroin even more lucrative than before the reduction in supply. A relatively high price would induce more dealers to enter the heroin market. In fact, there is evidence that drugs like heroin are more available than ever. The article also claims the drugs are cheaper too, which could happen if the government is unable to reduce supply (shift back to S2) as fast as the dealers increase it (shift S1 to the right), either by expanding existing capacity or from new dealers entering the market.

So if the war on drugs isn't working, what is an alternative? One option is to treat drugs such as heroin like cigarettes and marijuana; legalize them, tax them and regulate them. Below is a graph similar to the one above, only it portrays what an excise tax on heroin would look like.


In this scenario, instead of targeting the supply side governments would tax the demand side. An excise tax would be placed on heroin, like the tax on cigarettes or marijuana. This would shift the demand curve left from D1 to D2. Consumers would pay the high price labeled Pc* and producers of heroin would receive the low price Ps*. The gap between them, the tax, would go to the government.

This policy has some advantages over the first scenario. First, it lowers the price producers receive instead of raising it. Second, governments take in tax revenue equal to the TAX times Q2*. This revenue can be used to fund rehabilitation and education programs for heroin users. Third, the money used to fund the DEA and to care for prisoners convicted of non-violent drug offenses could be used on other things society values, such as infrastructure, education, etc.

The analysis presented here is certainly not complete; some details and dynamics were omitted. But as a first approximation I think it makes a case for legalizing, regulating, and taxing drugs instead of criminalizing them.

Thursday, July 24, 2014

The worker shortage myth leads to crony capitalism

In my inbox on July 22nd was an email from VP Joe Biden. The title is "Good for business, good for workers, good for the economy". In the email he talks about the importance of job training programs:

"During his State of the Union address, the President asked me to lead an across-the-board review of our nation's job-training programs.
It's a top priority for the President, and it is absolutely critical to our economy's success."

The VP states in the email that businesses have told him they can't find workers:

"We’ve heard from businesses that many jobs in today's brightest sectors go unfilled because there simply aren't enough people with the skills to do them. " 

But as I explained in an earlier post, a shortage of workers only exists at a non-equilibrium price. If firms want more workers all they have to do is increase the wage they are willing to pay them. We don't need to use taxpayer money to subsidize worker training for firms. But that is what VP Biden wants to do:

"Some of our country's businesses, community colleges, and state and local training programs -- often supported with federal dollars -- have found ways to successfully prepare Americans for these jobs. " 

The worker shortage myth has led to taxpayers footing some of the bill to train workers for profitable firms. This is crony capitalism, or as John Stossel calls it, crapitalism. Job training programs may be good for businesses and good for the workers who get trained, but they are not good for the economy as a whole and certainly not good for the taxpayers.