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Monthly Archives: September 2013

Probably not. A commenter recently got upset with me for saying:

Don’t subsidize long-distance rail (unless it’s Hyperloop). I don’t, unlike many other progressive wonk types, have any passion for really nice, high-speed transport between urban hubs. That’s a lie I personally do, but I depart from liberal ideology that it’s a social benefit. Think about it, the people who most intensely travel the Northeast Corridor – or between San Francisco and Los Angeles – are affluent professionals that take many more flights than the average American, are more likely the fly in environmentally-shitty business class setups, and all around typify the East Coast Elite Liberal stereotype. That it’s treated as some sort of environmentalist’s dream is a joke. (In fact, a 100% tax on business class, 200% tax on first class, and 50% tax on all economy flights after your first two in a year is a great idea).

He (or she) noted:

About rail: the population you observe is a selected sample. With rail, more people are likely to transport themselves; how do you account for this? The answer is far trickier than what you make it out to be.

I think this criticism is very fair. I made a rather blanket generalization from anecdotal evidence and it is possible, even probable, that my sample is itself highly biased. (For example, though I think the government should be helping many people, I personally do not know anyone that should fall into this category). Maybe the Northeast Regional is a lifesaver for much of America’s poor and lower-middle and I’ve misjudged the program completely.

So I decided to do a bit of research. But first, let me state the theoretical reasons why high-speed rail should never be at the top of a liberal’s agenda. By “theoretical” I do not mean abstruse mathematics or Euler Equations, but simple logic. Let me also say this is an important post, personally, because it marks a rather strong shift from my previous prior that we should encourage massive spending on high-speed rail across the country. I have some good things to say about rail, and I’ll get to that in the end, but I’ll first outline the case against.

Sometimes anecdotes can be generalized – especially those of broad economic judgement – and, as it happens, this weekend is a good time for me to write this post. I’m planning a trip from Philadelphia to Princeton tomorrow evening and I have two good options: a local connector via Trenton or Amtrak’s Northeast Regional. The former takes roughly four times as long (two hours to Amtrak’s half), requires a connection, but comes about $50 dollars cheaper.

There’s no reason for me – or most of America – to take the Amtrak. And that’s the problem with the high-speed emphasis of the conversation. Time is money but, for most of us, it isn’t much. Moreover, with smartphones, books, and sufficiently comfortable seats, the extra hour isn’t even time wasted as it once may have been. Of course, for America’s liberal, particularly coastal, elite – it is. Daily readers of the New York Times earn way more than most people, and their fodder, like Tom Friedman, work and play in circles where than hour is worth a lot of money.

This, by itself, doesn’t mean high-speed rail is ineffective. For example, slower speeds aren’t too bad for relatively short distances – say between Philadelphia and Princeton – but become a pain when we’re talking transnational services. Wouldn’t it be nice to get from Brooklyn to the Beltway in thirty?

Unfortunately, the usage of these services are almost exclusively beneficial to the somewhat upper middle class, if not only affluent. Flying JetBlue (as anyone not yet a millionaire should be doing, without whining) is, and in all likelihood will continue to be, a cheaper option. At this point, the high-speed rail activist points out that flying is shitty for the environment.

This is a concern that I sympathize with deeply. In fact, as Christie Aschwanden writes in Slate, the best thing you can do for the environment isn’t to become vegetarian, drive a Prius, or shop at Whole Foods but to stay within a hundred miles of your home and avoid flying to the extent possible.

But I am, and you should be, concerned about an argument to socially guarantee a rail service to clear the conscience of the rather select group that will use it. I would rather institute draconian airline fuel surcharges with annual exemptions. That is, most Americans barely fly, and when they do it’s probably for an important reason. Therefore, tax the first flight at 15%, and all subsequent flights in increasing intervals of 30%. Tax business class at 100% and first at 200%. Or something similarly aggressive.

As Aschwanden points out, telling an educated professional not to go to a conference or important business meeting is difficult. It’s why flying isn’t stigmatized like driving a hummer – it’s too important an action for the would-be stigmatizers. The tax system, in this case, is our friend.

And, by the way, some might say a “carbon tax will fix it all” but this isn’t the case for flying. Because the emissions are at a very sensitive part of the Earth’s atmosphere, the marginally emitted unit can be about four times as bad. More importantly, the worst part of a carbon tax is its regressive nature, and tilting the incidence to the wealthy is a good way to stem the welfare losses.

Ultimately, the data back my story up. The liberal argument for high-speed rail derives, primarily, from perceived environmental benefits, and subsidies for the poor. The environmental benefits can obviously be extracted in a more efficient manner (which the frequent fliers will hate, but so be it). But what of the poor? Well this is from a paper by Nevine Geroggi at the Center for Urban Transportation Research and Ram Pendyala at the Department for Civil and Environmental Engineering at the University of South Florida:

It was found that nearly half of the low income and elderly made no long-distance trips in the 1-year survey period. In addition, it was found that long-distance trips made by these groups were more likely to be undertaken by bus and geared towards social and personal business activities. The paper discusses the implications of these findings in the context of transportation service provision and policy formulation.

Now, half of the low income made no long-distance trips in the sampled year. Contrast that with the average of seven long-distance trips made by the “average” American. Of course, I scare quote “average” because statistically speaking average quantities do not reflect the median American. Since long-distane travel follows a power law relationship, the large handful of affluent (or busy working class) people making weekly trips heavily skews the picture.

Liberals generally talk about high-speed rail as a way of replacing airplane traffic, but the social welfare point of their argument somewhat more evaporates when you realize  air travel is used for business purposes at over twice the rate of all other transportation methods.

You’ll find even more important data here. Usage of intercity rail services is correlated positively with education and income, and very negatively with those who haven’t completed college. In fact, the correlation continues quite steeply not just at the “mildly affluent” income level of $100-150k but well beyond. If the conversation were limited to Amtrak, the divide would likely be even worse.

A subtly of the pro-rail argument is that we as a country should replace airplane traffic with more rail traffic, and use the government to achieve this outcome, rather than just use less airplane traffic to begin with. This wouldn’t bother most of America – which uses the interstate highway system to travel – but it certainly would cost the affluent. The conservative political establishment generally doesn’t seem to give a shit about the environment, so they don’t begin the argument at all. But that’s not much better than using the whole country’s purse for the betterment of a small group of people.

In fact, the liberal argument might be worse in that the fact that so many of us (unfortunately, I may not write “you”) even fly to begin with undermines our environmentalist credo. It’s like a watered down version of the joke where a Hollywood star drives a Prius to his private jet.

Note that while it is true that rail is environmentally healthier than using a car, it would be too expensive – and not socially efficient – to build high speed rail across all of the country. It would only be smart to link major commercial hubs – and this won’t help most people.

The driving assumption of this argument is that what does not help the poor should not be the government’s objective. That’s a dangerous line of thinking. In all likelihood, considering our record low interest rates and need to employ the unemployed, a large-scale project that doesn’t help the poor may not even be a bad idea. But I’m not convinced rail would help even the middle class as much as the affluent in general and select members of the middle or poor. We can expand two-year educational opportunities and make healthful eating options available to the poor; we can expand the EITC and cut payroll taxes. I do not see why we should build a railway given these tradeoffs.

If high-speed rail is such a great idea, it should be privately financed by those interested. My guess is America won’t get its own TGV even if we institute aggressive airplane taxes. And that in and of itself speaks to the meek social utility thereof.

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A lot of people are skeptical of the idea that a Ricardian tax program on land and natural resources can finance the kind of government we need. I’ve outlined – in some detail – why this isn’t the case but some prominent voices, like Paul Krugman, disagree:

But [Henry George – late champion of land taxes – has] been out of favor for decades, especially in graduate schools. Economists are trained to ignore him. Paul Krugman came to Berlin in 2008, right when the subprime crisis had started to rumble, and I asked his opinion of Henry George. He squinted and tried to remember the name of the book. “Uh — Progress and Poverty I think is the [main text]?”

“That’s right.”

“Well, look. Believe it or not, urban economics models actually do suggest that Georgist taxation would be the right approach at least to finance city growth. But I would just say: I don’t think you can raise nearly enough money to run a modern welfare state by taxing land. It’s just not a big enough thing.”

The context was health care. “We’re having enough trouble trying to make sure we repeal the Bush tax cuts,” Krugman added, “and trying to shift to a completely different base of taxation is just not going to be on the table.”

When we’re talking about revenue positive tax reform, it’s useful to understand a) from what activity and b) from what individual the marginal tax dollar is generated. In a welfare maximizing system, the answer to (a) would probably be something very bad for the world like carbon and the answer to (b) would be Bill Gates. More generally, we should first tax activities that harm the world – like global warming – before we tax activities that help the world – like working. Similarly, we extracting a marginal dollar from the rich is vastly less welfare inefficient than doing so from the poor.

Most of the time, these guiding principles are in tension with each other. A tax on externality-generating activities – like a levy on gas, carbon, or natural gas – tend to disproportionately hit the poor. Likewise, a tax on the rich usually comes from what we would usually consider “good” – like returns on human or capital investment.

Land is a big exception*. Land – like almost any other store of value – is disproportionately owned by the rich. (Remember, land excludes value added property, so democratic ownership of houses across flyover country doesn’t make as big a difference as you might imagine). And while land isn’t “bad”, per se, because its ultimate supply is perfectly inelastic there is no welfare loss in its taxation (granted, there are no welfare gains either, unless it offsets an even worse tax).

(*Another notable exception might be congestion taxes in cities which fall on the people who take cabs or private cars instead of public transportation. In other words affluent tourists and the local elite).

Some people I’ve talked to don’t grasp the idea that land is inelastic. They tell me that companies will stop “improving” land for more productive use. It’s always surprising how confused people are about the idea of land. By definition land is unimprovedI don’t want to tax people who’ve built nice buildings on land or, for that matter, even deforested dense areas for efficient development (though I’d support anti-deforestation laws for entirely different reasons). That’s why property taxes are dumb.

But I want to disarm some misconceptions. When Paul Krugman says “Land is just not a big enough thing” he’s echoing a broadly held, and to some extent true, belief. In 1980, Paul Samuelson wrote:

Historically, pure land rent has become a declining fraction of GNP and NNP.

Ironically, 1980 was an important, if gradual, turning point:

Image

These figures – land rent share of income – are, for reasons I’ll get to later, quite a bit underestimated. But for now I’m more interested in the rate of change. After secular decline during the postwar expansion, land rents have increased not just in value, but in proportion, to the incomes of the wealthiest.

The biggest reason for this is, I think, the steep rise in inequality over the same time period. Conceptually, this is a pretty sensible argument. As mass affluence increases, as it did between 1940 and 1970, demand for consumer luxuries – like fridges, air conditioners, and garments – grows quickly. But as incomes of the median workers stagnate, while those of the rich grow precipitously you see a shift in demand to zero sum goods – or land.

Think about it, beachfront property, Manhattan penthouses overlooking Central Park, and second homes in Aspen have all increased rapidly in value in the Inequality Era. That’s because as the number of people who can afford luxury products has grown substantially, so too has the dollars chasing said land.

This is a pretty informative thought experiment. Land plays a big role in all of the products in the set of goods exclusively afforded to the affluent, and especially rich. While second homes and penthouses are a great example at the primary level, think about Ski Resort owners. If you want to Ski properly – that is on the Alps or in Colorado – those fake, manmade hills won’t cut it. You need a real mountain. The former is capital, and the latter is land. And boy do rich people love their Winter Chalets on the Swiss Alps.

Once you realize that land value is the most pristine of luxury goods – fake beaches are below the rich – the potential of land taxes becomes immediately apparent.

Now, you might be wondering after all this, if only 3-4% of the richest 1%’s income is land, there’s no way a total reform can include land values only. This is correct insofar as its ambiguity. The moral and logical extension of a land value tax would include similar levies on minerals, Internet domain names from common language words, and imputed rents from “middle America”. More importantly, there’s reason to believe this figure is understated, as discussed here. The last paragraph here is conspiratorial nonsense, but Fred Foldavary gives some pretty good reasons to believe that land rents are underestimated.

Part of the problem is because the United States pursued a program of broad home ownership – along with the fact that many affluent people own only one, expensive home without renting a second one out – so-called “imputed rents” become an important part of the picture. To calculate GDP, the government uses all kinds of tricks to estimate what you would have paid to live in your house had you not owned it. Even an average of $700 a month for everyone taxed at 50% yields a very significant sum. (Especially noting that the rich are easily paying the equivalent of $5,000 a month).

Granted, going back to the tradeoff between objectives of an optimal tax system, this would also “hit” many middle-class Americans.

There’s another critical point about taxing minerals. Many think about this from the point of profit from production without considering the consumer surplus from cheap consumption. That is, because most of us – especially the rich – would (if we had to) pay way, way, way more for a gallon of gas than we do, we’re rentiers each time we pay at the pump less than we would have. Because otherwise it would have been the company’s profit which is clearly rent.

Now, it’s important to note that a disproportionate amount of fossil fuel consumption should be attributed to the rich (just look at how much they fly, and in fancy business class configurations too!) That means their rent extraction from cheap fuel is orders of magnitude worse than the average American’s.

Note this argument has nothing to do with the environmentally-efficient price of carbon: we only note that minerals are a scarce, primary resource whose rents should be treated as land, and correct for the fact that most people would pay more for the average unit than we do. This is a very non-trivial point. Once you stipulate that not only the taxes, but consumer surplus, from minerals can be taxed under Ricardian principles, there is a gold mine of untapped tax revenue. Just look at the sales of America’s oil and gas sector. Along with land, and maybe a small levy on income earned above $1M we can finance a big government (25% G/GDP) with sensible tax policies.

Here we tease an important tension. A minerals tax (in reality what should be a carbon tax, but I’ll refrain from using that language here to divorce this conversation from environmental concerns) would disproportionately hurt the poor, as it is regressive, even if the rich disproportionately abuse the cheap fuel. This is a classic case where p(a|b) is very different from p(b|a). The best way to deal with this is to still heavily tax minerals – coal, oil, natural gas, etc. – but to provide a very progressive government spending system.

I want to summarize the most important part of this post as treating consumption of minerals as crucial a component of rents as profiting from the sale thereof. This adds another inefficiency beyond the environmental cost to even just innocently buying a gallon of gas. If we all used gas equally this wouldn’t be a problem, but we don’t, so our collective benefit should be socialized.

This is a particularly shocking problem if you think about how much the rich would actually pay for a gallon of gas (or unit of coal and natural gas burned if you’re of the Elon Musk class). For someone earning $500,000 a year or more, $20 a gallon would hardly seem like too high a reservation price. (After all, people in Europe earning well below that figure pay over half that). And what of air transport? This can’t be replaced with efficient, clean travel anytime soon.

The conversation on rents from land and minerals in this time of inequality has to begin. We might not be able to achieve all of our progressive goals with only a land value tax, but once we implement taxes on that principle the revenue is not trivial. Paul Krugman is unfortunately correct that this has all but disappeared from the Neoclassical, mainstream graduate schools. But I would expect the average consumer microeconomist to understand the rent from simple consumption better than anyone else. 

People like Paul Krugman can make this debate real in a matter of minutes. There is nothing utopian, idealistic, or useless about doing what Hal Varian’s Intermediate Microeconomics would tell you to do.

P.S. The name for this post comes, of course, from David Ricardo who first (or at least most prominently) advanced this argument:

It was from this difference in costs [between productive and unproductive land] that rent springs. For if the demand is high enough to warrant tilling the soil on the less productive farm, it will certainly be profitable to raise grain on the more productive farm. The greater the difference, the greater the rent. 

P.P.S. I plan to write some more on the evolution of economic thought regarding land. Some of the crispest writing on land rents comes from the classical greats like Ricardo or Henry George years after that. In any case, the modern arguments for land taxes usually come from the extremely utopian libertarian wing which makes a great argument but does alienate support from the “mainstream”. A lot of what Ricardo wrote doesn’t apply today, and mechanism of rent-seeking certainly manifests itself in subtler ways than before. But it is time to bring land and mineral taxes back into the heart of mainstream progressive discussion: something even the wonkiest seem hesitant to do.

The recent emerging markets crisis – one a long time coming, depending on who you ask – started on cue from Ben Bernanke that the Fed would “taper” its unprecedented injection of liquidity into international markets. That emerging markets responded so poorly tells us something important: they expect the taper to come much too soon.

In principle, the Fed wants to continue with its “expansionary” program until the United States is growing quickly again. The “Evans Rule” ensures we will keep a zero interest rate policy until unemployment has fallen below 6.5%, though no such forward guidance exists for QE. 

In reality, if emerging markets expected QE to come only after the US economy was healthy again, this kind of depreciation of currency and fall of stock would be very unlikely. A robust US economy implies a growing demand for exports denominated in EM currencies: boosting both the currency and stock market. While the expectation of future growth probably wouldn’t offset entirely the effect of curtailed liquidity, it would have likely contained much of the depreciation.

Emerging markets are a more informative tool to this effect than American stocks. While  we can infer the same conclusion – that tightening will be premature – from our stocks’ sensitivity to QE, US markets are too closely connected with QE’s direct wealth effect, obscuring observation of expectations.

Of course, the massive liquidity from QE also plays a direct effect on emerging market currencies, but it’s fair to guess the relative sensitivity of EM currencies is lower than that of American stocks. (For example, a good jobs report might actually freak Wall Street out, whereas emerging markets are relatively insulated from that).

This is a somewhat contrived argument, still, the magnitude of currency deterioration across Asia should somewhat revise our beliefs that tapering is coming sooner than it should.