Monday, April 13, 2015

Malcolm Forgot Who Stands In The Middle: Why American Taxpayers Don't Cheat

Malcolm Galdwell hit the Sunday TV circuit this week in preparation for dreaded Tax Day.  In this video from CNN, he reiterates his standard trope about legitimacy.  He tells us that cheating on our income taxes carries little risk because the IRS audits so few, and the penalties lack teeth.  But, we pay anyway because we think the system is legitimate.



Gladwell needs to read some economics.  Seriously.  Tirole.  Milgrom.  Holstrom.  Something on principal agent problems?!?  Unless you follow the Wesley Snipes strategy and just don't pay, (which lands you in jail,) cheating on your taxes is pretty darn hard.

The United States taxpayer faces a uniquely complex, arcane and ridiculous system.  Gladwell has that one right.  Knowing little about the (vast number of) readers of this blog, I suspect only my mother prepares her taxes unassisted by anything more than IRS instruction documents and a sharp pencil.  No software.  No accountant.

Even minor complications cause the average American to toss her hands up and hire a professional.  Given the vast sums spent advertising by low cost tax prep companies, I'd imagine the vast majority of even "simple" returns have professional help.

(Yes, refund anticipation loans may drive the profits of these shops, but that tells us people have decided that the value of the loan is worth more than the expected value of their ability to cheat successfully.)

So, why is Gladwell delusional?  He ignores the principal-agent problem the tax code manufactures.  We Americans cannot file our own taxes.  Therefore, we cannot cheat without a colluding professional.  That professional's entire career depends on a working relationship with the IRS.  Your tax gal will not let you cheat.  She monitors you, on behalf of the IRS.  And, for this you willingly pay her!

An early Happy April 15!


Monday, February 9, 2015

Sam Peltzman on World Cup Skiing

That's Bode Miller last week in Beaver Creek, CO, not me.  Looks like he could use an airbag.  The thing is, skiing airbags exist, but no one will wear one.

In this New York Times story, Marco Sullivan, U.S. Olympic skier notes "If you're the only guy wearing it, it's probably a disadvantage as far as speed goes."  In fact, the author notes less than a second separated gold from 12th place.  Six one-hundredths of a second separated gold from silver.

Sam Peltzman earned his fame demonstrating that seat belts made drivers faster and more reckless. They compensate for their increased safety.

I am far from a skiing expert, but I have to imagine that the marginally faster/more reckless skiing due to wearing the airbag more than makes up for the weight differential, and just might make up for that 0.06 seconds for second place.

Thursday, May 29, 2014

The Ultimate Short Volatility Trade

My mother-in-law has a magic nose.  She diagnosed a gas leak in our main feed into the house in 2009 that the "electronic nose" the PSE&G guy carries took an hour to find.  So, when she arrived tonight and announced she smelled gas, I called the emergency hotline.


Tuesday, April 22, 2014

Flash Bubbes: An Ebay Revolt

My mother-in-law (or Bubbe, to my kids,) takes ebay very seriously.  Anyone in the family needing to sell must run the gauntlet for her to consider risking her reputation on an item.  She won't let you photograph it yourself.  She won't let you ship it yourself.  But, if you sell with her username, you have instant credibility.

However, when it comes time to buy, what does she advise? Turn to Michael Lewis' villains, the high frequency traders.  The guys who throw massive computing power and light speed technology at their trades.  She never buys without a "sniper"--that's ebay lingo for a high frequency trading operation.  You tell them your limit price.  They take care of the bidding.  They place orders for you, at the tail end of auctions.  The more you pay, the longer they'll wait.  They virtually guarantee shaving a few bucks off that singing fish.

Friday, February 7, 2014

Doctor Sends Economist To ER With Heart Attack!

In this Op-Ed in the New York Times, Robert Hoffman of NYU's Langone Center writes in support of easy access to Naloxone, the antidote to heroin overdose. I'm inclined to agree with him, but his argument relies not on data, but on reductio ad absurdum, and the something isn't absurd.

Specifically, he writes:
Some people might argue that the widespread distribution of a safe, effective and inexpensive antidote might actually encourage drug use. But that’s like suggesting that air bags and seatbelts encourage unsafe driving. Naloxone is a public-health method of intervening when a life is in the balance. Its distribution is endorsed by the American Medical Association. (emphasis added.)
But, as ANY economist will tell you Sam Peltzman is famous for the way he dresses and demonstrating that seatbelts encourage unsafe behavior!!  As I too often say...you want safe cab drivers in New York City?  Replace the driver's airbag with an ice pick.

 I can almost guarantee Naloxone availability will lead to more heroine overdoses, but that's no longer fatal, so who cares?  Will Naloxone lead to more heroine use? Two issues here:

Will a current heroin user consume more?  Probably...the price of over-consumption drops dramatically from "death" to "nasal spray". But, that's the point! Hoffman wants to protect those consumers of heroin from accidental death.

Will non-heroin users become users? I have not used heroin.  I cannot say my risk of death from overdose has ever crossed my mind.  Is that risk what stops you from using heroin?