The non-market time of the poor and cost-benefit analysis

I just learned about a new paper yesterday that makes a point that I think is quite important. Here is the abstract:

Benefit–cost analysis is used extensively in the evaluation of social programs. Often, the success or failure of these programs is judged on the basis of whether the calculated net benefits to society are positive or negative. Almost all existing benefit–cost studies of social programs count entire increases in income accruing to participants in a social program as net benefits to society. However, economic theory implies that the conceptually appropriate measure of the impact of a government program on any group of individuals is the net change in their surplus (or economic rent), rather than the net change in their income. For example, if a social program causes increases in income by increasing work hours, then the lost nonmarket time that accompanies these increases has value that needs to be counted as a cost when assessing the merits of that program. In this paper, we develop a methodology for incorporating lost nonmarket time into benefit–cost analyses of social programs. We apply our methodology to the Self-Sufficiency Project (SSP), an experimental welfare-to-work program tested on a pilot basis in two provinces in Canada during the 1990s. We find that if losses in nonmarket time are ignored, SSP yields a substantial positive net benefit to society. However, if losses in nonmarket time are taken into account, the net societal benefits are greatly reduced, even becoming negative in certain instances. We conclude that future benefit–cost analyses of social programs must take effects on nonmarket time into account in order to give a more accurate picture of the net benefits of the program.

The full citation is:

Greenberg, David and Philip Robins. 2008. Incorporating Non-market Time into Benefit-Cost Analyses of Social Programs: An Application to the Self-Sufficiency Project. Journal of Public Economics 92(3-4): 766-794.

You can find a gated version here.

Valuing the non-market time of the poor means taking the economics seriously in doing the cost-benefit analysis, but it also means that fewer programs will pass cost-benefit tests.

Heterogeneity and the moral case for progressive taxation

Reading the piece discussed in the preceding post led to another, more substantive, thought. The traditional view espoused by Piketty assumes that everyone shares the same utility function. In such a world, the marginal utility of income is lower for high income individuals than low income individuals.

Suppose, though, that utility functions exhibit heterogeneity rather than uniformity. Specifically, suppose that there are two arguments in the utility function - goods and leisure. For simplicity, make the cross partial zero, though mucking with the cross partial is interesting here too. Now suppose that individuals vary on the relative importance of the two arguments. Some individuals really like leisure - they are the ones we worry about when writing papers on optimal unemployment insurance - and some really like market goods. At an given income level, the individuals with a high taste for market goods will have higher marginal utilities of income than those with a high taste for leisure. They will also, in most any reasonable sort of model, have higher incomes because they will be more willing to trade of leisure for income.

In this model, individuals sort into income levels based on their marginal utility of income. As a result, the traditional rationale for progressive taxation that assumes a representative agent falls apart, or at least gets a bit woozy and stumbles around running into the walls and furniture.

Surely someone has already written this down, but it was a new thought for me.

Taxes over time and up and down the income distribution

A remarkably good piece from MSNBC that (not a coincidence?) features Michigan's own Joel Slemrod, as well as Emanuel Saez and Thomas Piketty.

Of course, I do have a few comments:

First, MSNBC neglects to note that tax rates impact the size of the economic pie. Top marginal rates were a lot higher in 1960 and it does not take much imagination to think that reducing them is part of what led to the increase in measured incomes in the top percentiles of the distrubtion.

Second, MSNBC forgets all the increases in future taxes that have been accumulating over the period in question in the form of government debt. Someone does have to pay these taxes eventually, whether via income taxes, payroll taxes, excise taxes or taxes on cash balances (i.e. inflation).

Third, I suspect that the relative decline in excise taxes has served to increase the progressivity of the system. Surely someone has considered this in the literature; it would have been nice to learn about that research in the article.

Fourth, the normative pitch (you missed the flashing "author's message" at that point?) for additoinal progressivity (or, if you prefer, disproportionality) did not fit well with the rest of the piece. It would have made the article stronger for the author to just stick to the facts.

Still, pretty useful stuff for MSNBC. Good for making clear how much of the burden is borne by those with high incomes and also at illustrating some of the basic patterns over time in what get taxed.

Legislative incompetence

The Nation (!) reports on truly astounding incompetence on the part of Congress in the writing of the tax provisions for alternative fuel use in the 2005 transportation bill. The result is distortions in the paper market and pointless, non-trivial transfers to some large paper companies.

The Nation, of course, blames not the legislature, but rather the companies:

Whether or not Congress gets around to turning off the spigot, the episode is a useful reminder of the persistently ingenious ways the private sector can exploit even well-intentioned legislation.

It is also a reminder that it is useful to think hard about legislation before passing it. The companies job is to maximize profits within the law, not to cut the legislature a break when it does something stupid.

And how come it has taken this long to fix? Yikes.

Hat tip: marginal revolution

Book: Targeting in Social Programs

A lawyer and an economist get together to write a book on how to make social programs work better. The book, called Targeting in Social Programs: Avoiding Bad Bets, Removing Bad Apples, is published by Brookings and includes blurbs on the back from Larry Summers, William Kristol, Robert Reischauer and Chrstopher Jencks. That's a lot for a book that only policy wonks can love, but it is a fine book for that group indeed. It is a book aimed at both intelligent non-specialists and at academics interested in a low-tech overview and introduction to ideas about how to better target social programs. One can think of this book as an economics book, a law book or a public administration book as it reflects influences from all three literatures.

As the second part of the title suggests, much of the focus is on avoiding bad bets, which means directing services at individuals likely to have large positive benefits at relatively low cost, rather than at other groups. Put differently, avoiding bad bets means choosing to treat those in the upper part of the net impact distribution. Of course, locating such people is not trivial as the literature on job training programs - see e.g. Heckman, Heinrich and Smith (2002) Journal of Human Resources or Bell and Orr (2002) Labour Economics - amply demonstrates. This is the goal that is treated in much of the scholarly literature on statistical treatment rules.

The other focus of the book is on bad apples, which the authors define as participants who impose negative externalities on other participants - think of the bomb-building public housing resident. This aspectof the problem looms larger in the legal literature than the economics one, though it is reminiscent of Ed Lazear's model of class size effects wherein smaller classes are better because they are less likely to contain a disruptive student and thereby limit the range of destruction brought about by such students. The authors make the case that even lefties should want to weed out the bad apples, subject of course to reasonable procedural safeguards and the provision in most cases of some sort of bad-apple-specific alternative treatment.

The one truly odd thing about the book is that the leading current examples of sophisticated statistical targeting systems - namely the Worker Profiling and Reemployment Services (WPRS) system embedded in the U.S. Unemployment Insurance system and various related systems used in a criminal justice context to help make prison versus probation decisions and also parole decisions - are nowhere mentioned in the book. Also missing are any references to the broader scholarly literature on targeting in active labor market programs by Manski and others (including yours truly), to the decades-0ld literature on "selective incapacitation" in criminology and to related literatures in education (on targeted curricula) and in mental health (on targeted treatment regimes).

Highly recommended, nonetheless.

Another new frontier in public finance

An intrepid Seattle Times reporter investigates the price effects of a proposed (by a democrat!) porn tax in Washington State by going to the Deja Vu store at 9 AM.

Too bad Nicole did not call one of my public finance colleagues, who could have explained to her that optimal taxation is all about elasticities of demand. Putting aside taxes whose point is to change behavior rather than raise revenue, such as cigarette taxes, you want to tax things with inelastic (not responsive to price) demand so that you do not change behavior. This minimizes the tax-induced distortions to individual choice.

I have no idea what the elasticity of demand might be for the products sold at the Deja Vu store (or the neighboring Deja Vu "club").

New directions in public finance

Denmark considers blazing a new trail in revenue generation and greenhouse gas reduction by taxing emissions of methane by farm animals.

Hat tip: Lars Skipper

Calling Dr. Tiebout

This Washington Post story has New Jersey governor John Corzine threatening small NJ towns with loss of state funds if they do not amalgamate. This type of municipal amalgamation in search of, presumably, economies in the provision of government services, was quite common in Ontario as well.

I always wondered if there was actually any solid evidence on the size of such economies. Technological economies have to be weighed, of course, against the salutary benefits of jurisditional competition for businesses and residents. The only evidence I am aware of is Caroline Hoxby's paper that uses school district size as a proxy for competition among school districts and finds that cities with many small districts have higher average test scores than cities with one or a few large school districts.

There is also the secondary question of why it makes sense to run tax dollars for local services through the state government. I can see having the state hand out, say, sales tax revenues but I do not see the value of having discretionary state handouts as New Jersey apparently does.

Hat tip: yahoo!