So there is a name for that!

I stumbled across a great little vocabulary lesson on Aid Watcher: Aid Fungibility:

Aid Fungibility is when the Donor gives the Government Aid for Good Thing A and refuses to fund Bad Thing B. The clever Government then reduces its own spending on Good Thing A one for one with the aid, so that total spending (Donor + Government) on Good Thing A is unchanged. The government uses its savings on A to spend more on Bad Thing B. So de facto (compared to the pre-aid situation) the Donor really has no effect on A and only has the effect of increasing total spending on Bad Thing B.

Fungibility is why giving homeless people food instead of money simply frees up the dollars they do have for alcohol, if they so choose. It's why a bond issue to make a state university more eco-friendly simply means the school doesn't have to pay for the "green" technology they were going to get and funnels that money into other boondoggles. It's why buying food for a poor nation is really an indirect purchase of AK-47s for the dictator's goons.

I was talking to a relative recently about why her support of casinos that give money to school departments are no different from casinos that give money to SWAT teams, and I failed to explain it as neatly and concisely as William Easterly did, or the World Bank economist who said "It’s when we think we’re financing a power plant, and we’re really financing a brothel."
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Not hearing much about LePage's innocence

Maine gubernatorial candidate Paul LePage was cleared on any wrongdoings this week. Earlier this summer his wife was investigated for applying for dual residency in Florida and Maine so her son could get lower tuition rates in Florida. LePage also drew a lot of negative attention after loudly storming out of a press conference after an obnoxious reporter kept pestering him about it.

From the Portland Press Herald this week:

Though an initial investigation by Florida tax officials determined that she was ineligible for the dual homestead exemptions, the Florida exemption was deemed legal on Monday.

My big problem is this story appeared on the front of the Local and State section - not the front page of the paper. But before I jump to the conclusions of liberal media bias, I also have to wonder about another type of bias: The guilty bias.

If a person if accused of a crime, it's front page news - often for a long time. However, if they are revealed to be innocent it's a mid-paper story and usually it's only news for a day before it's forgotten and the press moves on. Innocence just isn't newsworthy enough. A lot more people hear about the accusation than the clearly of the accusation, and thus the person's reputation is damaged.

I didn't hear this story once on the Maine news radio station I listen to. It's possible I just missed it when it was on, but they did play several weeks of accusations.

It doesn't even make sense as a scandal - sure the candidate and his wife are assumed to do their taxes together so if it was unjust he would have been in on it, but the point of giving lower tuition rates to residences is that their tax dollars go into the university system, while the taxes of a student from another state does not, so therefor the cost should be different. The LePage's own a house in Florida so they have put money into the college system and deserve the instate

With less than a week to election day, you'd think this story would be bigger news. The latest polls imply it won't matter - LePage has 40 percent of the vote while his two rivals are tied at 26 percent.

Whatever kind of bias is keeping LePage's innocence out of the news, I think it's clear that political bias is keeping it silent off the lefties I see on social media sites. They were so triumphant in posting the accusations, but they've been quiet this week.
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No choice but to vote for a pseudoscience believer

A letter I sent to the Portland Press Herald this morning

As a Paul LePage voter, a former Intelligent Design defender and co-organizer of the Southern Maine Skeptical Society - a science discussion group based in Portland - I'm in a unique position to respond to Les Dawson's Oct. 25 opinion piece encouraging creationism in public schools and defending LePage's belief in the idea.

I agree with Dawson that there is a place for creationism in a biology class. However, I feel the Intelligent Design criticisms of evolution should be addressed, not taught. For example, some people wonder why there are still monkeys if humans came from monkeys. The answer your biology teacher didn't have the opportunity to tell you is that humans do not come from modern monkeys, we simply share a common ancestor that branched off in different directions. It's like how Cherry Coke is a spin-off of Coca Cola, even though Coca Cola is still around.

Intelligent Design proponents repeat ancient fallacies like that one to cast doubt on evolution, but don’t present evidence for their own position. Normal, intelligent people like Dawson, LePage and at one point myself can be hoodwinked by this fallacious trick.

Dawson attempts to negate evolutionary science by saying that biologists have rapidly different spiritual beliefs than the general public. They do, but that's entirely irrelevant. This naked appeal to popularity ignores that scientists must base their beliefs on evidence. That's why they support evolution and don't pretend to know what caused the Big Bang. Their religious beliefs are irrelevant. Most engineers who design bridges are men, and the gender ratio is much greater than the ratio of men-to-women who drive on those bridges. That doesn't mean there is a flaw in bridges simply because engineers are not a representative sample of the driving public.

Liberal voters should not be smug about LePage’s creationist beliefs because all three major gubernatorial candidates publicly believe in some form of pseudoscience. LePage's creationist beliefs are an embarrassment, but not something he intends to put into policy, or could if he wanted to. Mitchell and Cutler, on the other hand, promise to put their protectionist "Buy Local" beliefs into state policy. As an economic blogger at YoungHipandConservative.com I often write about how local purchasing preferences are unanimously panned by economists, as they are based on Mercantalist theories disproved by Adam Smith in his 1776 book "The Wealth of Nations."

It's a matter of judgment to endorse a candidate who believes in an obvious myth like creationism or one who supports a popular movement like "Buy Local" that has yet to be publicly thrashed in any large capacity. The creationism is an indicator of a distrust of the scientific community, but as this election is to select a governor and not a state science education chairman, it will probably be benign. The worst it does is serve as a marker for possible bad judgment.

However, getting roped in by the "Buy Local" movement indicates a politician who does not understand economics - something entirely relevant to a governor - and a weakness for nonsense presented by social activists. Shouldn't support of useless policies trump irrelevant superstitions?

I'm not sure which is more frustrating, having to vote for politicians who in their private lives support ideas I know are wrong, or hearing supporters of doomed policies condescendingly talk about them.
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New documentary, same old ideas

Quick piece on the National Post about "Strange Fruit," the next "Buy Local" documentary I expect to hear breathlessly referenced again and again. It will stress that people grow their own food or purchase from local sources.

Back in those days, peasants basically ate what they could grow or kill. And many times they would starve to death. I am sure those emaciated peasants would have felt a lot better knowing they were dying in accordance with left wing principles.

Anyway, I wonder if Arellano thinks we should also slaughter our own pigs and butcher our own cows. That could get a little messy around the backyard. And I suppose we Canadians should forget all about eating European cheese or American oranges or drinking coffee and tea.

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Wal-Mart to sell local food

The retailer is jumping on the bandwagon for one reason: profits. Intellectually flawed as it is, it's a no-brainer way of attracting more customers. From Salon this week:

Last week, Walmart trumpeted a major new commitment to sustainable agriculture and supporting local small farms. Coupled with the enormous numbers -- training for 1 million farmers! Investing $1 billion to make its produce supply chain more efficient! -- there were nuggets of common-sense wisdom, the kind that is music to sustainability advocates' ears.

They're right about one thing, the entire mindset relies solely on common sense, which as I've said before, is a recipe for disaster.
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The economic argument against pseudoscience

From XKCD today:

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Who's allowed to oppose government support?

There's a brand of Ad Hominem dismissals against welfare state opponents that keeps coming up. It simply says the target's opinion is invalid because they belong to the wrong group, no matter how well-informed they are on the subject. Here's a typical example:

"Of course we should extend unemployment benefits. You have no idea what its like to be unemployed and poor so your position is irrelevant."

Now if the target is indeed outside the group the policy is supposed to help, the position stands. However, if the target reveals himself to be a member of the intended group, in this case the unemployed and poor, there is a quick follow-up: They are simply called a hypocrite.

I've gone over this one before, that it's logical for someone to oppose a scheme, be forced into it, but accept the rewards when offered them.

Imagine being forced to buy a lottery ticket. Say the ticket costs $5, the jackpot is exactly $100 but the chances of winning are a paltry one in 1,000. I would never choose to buy that ticket, but if I was forced to by the government, would it make sense to refuse to cash in a winning ticket? No it would not. I'm still opposed to the system and its misplacement of incentives.

To the opposition's credit, some of them stop there. However, some keep pushing. For example, I had one person tell me only the unemployed have the right to oppose unemployment benefits. I revealed myself to be one of them, and was then asked if I had any children. I do not, so in a very obvious move the goalpost was moved to say only unemployed parents can be in opposition.

But say someone is opposed to unemployment benefits becomes unemployed and changes there position to support the payments. They aren't a hypocrite anymore, but they are marginalized as an ignorant dimwit.

Anyone who is unemployed, opposes unemployment benefits and does not accept the payments would probably not be admired either. They would be dismissed as irrelevant because they had some other access to money, such as savings or a spouse, that separates them from most of the unemployed.

So please tell me, what group of people is allowed to oppose the social safety net?
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Economic ignorance in action: Cost of living edition

I listened in mild confusion this week as news stories about Social Security payments remaining stagnant were presented as some sort of folly for the elderly.

Here's the Washington Post in a typical story:

The Social Security Administration is expected to announce Friday that more than 58 million retirees and disabled Americans will go a second consecutive year without an increase in benefits...

Cost-of-living adjustments, or COLAs, are set automatically each year by an inflation measure that was adopted by Congress in the 1970s. Because consumer prices are still lower than they were two years ago, the last time a COLA was awarded, the trustees who oversee Social Security project that there will be no benefit increase for 2011.

So let me see if I understand this. The cost of living has not gone up, so there will be no cost of living adjustments. That seems pretty logical to me. In fact, if consumer prices are lower like the report said, then the adjustment should be to lower Social Security payments.

So what do the politicians do? The Democrats have introduced a bill to give a lump sum of $250 to everyone on Social Security.

Seniors who rely on their modest Social Security payments need these cost-of-living adjustments for their day-to-day survival," said [Rep. Earl] Pomeroy (D-North Dakota), who chairs the House Ways and Means subcommittee on Social Security. "Passing this bill will ensure that the lack of cost-of-living adjustment will not jeopardize seniors' ability to survive on their benefits.

I try not to get snobby because I know it's common to be ignorant on economic matters, but this issue should be obvious to anyone with zero prior knowledge. If these annual increases are really about the cost of living, then they should be able to rise, fall and stay static along with the value of the dollar.
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Console fanboyism as a coordination solution

A few months ago a friend's Xbox 360 broke and I heard instead of fixing it he was going to buy a Playstation 3. Instead of a neutral, ho-hum response, I was downright annoyed with him. Why?

I don't consider myself a fanboy. If you're lucky enough to be out of the loop of angry nerdom, console fanboys are consumers who go beyond brand loyalty and into brand nationalism. They hate the rival companies and the people who play them.

Growing up in the rural community, I've observed the same behavior with brands of snowmobiles and pickup trucks; such as GMC owners who badmouth Ford and Dodge. With New England sports, some of the Boston Red Sox fans hold actual contempt for people who like the New York Yankees.

So why would I have a negative response upon hearing a rumor that one of my friends plans to use a Playstation 3 instead of my brand, the Xbox 360?

It's a coordination problem.

In game theory, coordination games are where problems occur if people don't make the same arbitrary choice.

For example, when designing cars and roads it doesn't matter which side people drive on as long as they all drive on the same side. America has chosen the right side of the road while England has the left. As a result, the drivers seat is placed on the opposite side of the vehicle. Both systems run smoothly as long as people are coordinated together - the decision to coordinate to the left or right is completely arbitrary.

When I was in college my friends and I could talk online with instant messages. Two major programs were AOL Instant Messenger (AIM) and Windows Live Messenger. We all used AIM, not because it was a better program, but because we could only talk to each over the same program, and most people already used AIM.

The same coordination logic applies to dating websites, World of Warcraft realms and even the choice to play World of Warcraft over other MMOs. Imagine if a new social networking site came out that was slightly better than Facebook. It wouldn't steal the market because most people are already on Facebook and the whole point is to be on a system connected with everyone else. That doesn't make Facebook invincible, but look how long it took for it to take that market from the entrenched MySpace.

So while a lot of fanboyism is brand pride, there are some major benefits to a group of friends coordinated to one system. I play a lot of online games with my friends, and I can't play with my friends who only use Playstations. There are a lot of games that come out for both consoles, but both systems have some exclusive titles and I can lend, borrow, recommend or talk about games with my Xbox 360 friends that might not apply to the others.

The difference between my position and that of the fanboys is that I am not saying my console is better than the other. It doesn't matter if one is better than the other. I benefit by coordinating my console choice with my friends.
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Mankiw on deadweight losses

A great column in the New York Times today from Greg Mankiw on the destructive power of taxing the rich.

First, I have to acknowledge that the Democrats are right about one thing: I can afford to pay more in taxes. My income is not in the same league as superstar actors and hedge fund managers, but I have been very lucky nonetheless. Unlike many other Americans, I don’t have trouble making ends meet...

Nonetheless, as Republicans emphasize, taxes influence the decisions I make. I am regularly offered opportunities to earn extra money. It could be by talking to a business group, consulting on a legal case, giving a guest lecture, teaching summer school or writing an article. I turn down most but accept a few...

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding...

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

And the kicker?

HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered? ...

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.

Reasonable people can disagree about whether and how much the government should redistribute income. And, to be sure, the looming budget deficits require hard choices about spending and taxes. But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.

I'm not sure where I stand on the flat tax versus progressive tax issue. Perhaps there is something to having people with more leftover money paying a higher percentage. However, it's important to remember that taxes change the behavior of the rich just like they do to everyone else.
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Russ Roberts on localist studies

Econtalk host and George Mason University economics professor Russ Roberts wrote a post this week about the benefits from trade and the problems with the "Buy Local" movement:

There are of course many studies of “buy local” that find that the movement creates jobs, makes us richer and so on. These studies are poorly done. They leave out many factors that cannot be measured.They are done by advocates, sometimes misguided but sometimes trying to enrich themselves by making others think that buying local is good for everyone rather than just themselves.

I've been reading studies from Civic Economics and the Institute for Local Self-Reliance, the two sources for all of the studies I've seen referenced, and found some pretty dodgy errors. I plan to compile in a larger post at a future date.
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A sad tale of bad legislation

An illogical city ordinance to protect residents from space invaders and barrel-throwing apes has destroyed a novel business that brought happiness to the public - and with it money.

If that wasn't bad enough, listen to the justification from the zoning official:

“It’s unfortunate,” Mr. Dexter said, “but ignorance of the law is no excuse.”

When you're talking about a city ordinance that bans arcade games, then ignorance is a great excuse.
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A tax bracket question

I was listening to something Paul Krugman said over the weekend about putting more rungs in the tax ladder.



It occurred to me - why is the battle over what percent the existing tax brackets should pay, when it could be about how far apart the tax brackets are.

I do my best to understand the other side, and it occurred to me today that I never really added up everything I knew when I thought of historical top tax rates. I was aware that the top bracket has been absurdly high, but I never considered at what income those tax rates kick in. Combine that with how tax brackets work by sectioning ones income into different brackets, and how the very wealthy make a lot of money with very little additional effort and you should see a lot less elasticity if you simply raise the rate to get into the top bracket, say to $2 million instead of the $250,000 for families President Obama wants.

You will still have some loss of innovation as the loss in income from the tax discourages people from producing more, but the damage will be lessened as it becomes harder to into the tax bracket. The number of people helped is only less than 3 percent of the population, but keep in mind this is the most productive and innovative section of the population. It would be a much easier sell in Congress than dissolving the bracket, so I wonder why no one is trying it.
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Maine gubernatorial candidates on buying local

I have found several references to localist economics on the official webpages of the Maine gubernatorial candidates.

Democratic nominee Libby Mitchell:

The Mitchell Administration will work to assist local farms and fishermen and increase access to local markets through a Farm and Bait to Plate Program. The Program will require that at least 25% of food served in our schools, prisons, and state facilities, be locally grown or harvested. We will also encourage their use in daycares, hospitals, and nursing homes. This will mean more money going directly into local economies and the hands of Maine citizens while improving their nutrition and health.

Independent candidate Eliot Cutler reprinted a news story on his webpage:

Cutler [used] the opportunity to pitch some of his policy ideas, including a couple linked to Garten’s expertise. He said that Mainers buy only 4 percent of their food from local sources and if that figure was increased to 10 percent, it would produce thousands of jobs and put millions of dollars in Maine farmers’ pockets.

Republican nominee Paul LePage:

Nothing. I saw a few mentions of local control of schools, but that's an unrelated issue.

This is not an automatic endorsement of Paul LePage, as one-issue voting is foolish. I just have yet to find him peddling this branch of economic pseudoscience like the other two contenders.

LePage is himself a creationist and that reveals some flaws in his thinking. Still, his two major opponents have been caught red-handed demonstrating economic ignorance, and unlike LePage, they will probably act on it when shaping state policies.

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