Eric Rasmusen’s Weblog

Maybe I will write a book inspired by reading Albert Speer’s Inside the Third Reich and by fussing with MS Windows, a book about leaders with giant blind spots. Speer’s book is very good on the principal-agent problem and how to manage organizations.

May 1, 2008: This post is obsolete and wrong in places. For something better, go to:
http://rasmusen.org/t/2008/04/illegal-immigrants-cause-21-of-crime.html

How much does crime by illegal immigrants cost America each year? My estimate is $84 billion per year.

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Is this a way to stop block spam? My published address is smith2@indiana.com. All emails sent there go to a garbagecan, but first stimulate a reply to sender that says,”Your email went to a spamblocker. The true address may be found by adding 3 to any numeral in the email address, so that, for example if the address you first sent to were

jones24@indiana.com

Then you would resend the message to

jones26@indiana.com.

Please resend your email to the corrected address.

May 1, 2008: This post is obsolete and wrong in places. For something better, go to:
http://rasmusen.org/t/2008/04/illegal-immigrants-cause-21-of-crime.html

I just ran the numbers to see how much crime is caused by illegal immigrants. I conclude that they cause about 21% of it, a crime rate 6 time that of legal residents, meaning that illegal immigrants cause 3,360 murders, 19,950 rapes, 450,000 burglaries, and 1.45 million serious thefts, besides other categories of crimes.

Here’s my methodology, since this kind of data, despite its obvious importance, isn’t available readily from the government, no doubt as part of the general policy of nonenforcement of immigration laws. My source notes are at the end of this post.

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Instapundit points us to yet another example of FBI incompetence,
this time in the area of HREF="http://www.networkworld.com/news/2007/052407-gao-slams-fbi-
network-security.html">securing data in its computers. I was just
reading a bio of Hanssen, the spy. What he did was sneak a look at
lots of secret files he shouldn’t have been allowed to see on the FBI
computers, downloaded them, and gave them to the Russians. It sounds
like they haven’t improved since then.

The reason, I expect, is that in a civil service system nobody ever
gets fired. In our civil service system, I wouldn’t be surprised if
nobody ever gets demoted or even loses their grade’s pay increase
either. That’s a big advantage of academia. We don’t demote
professors, but we do give them tiny salary increases if they are
incompetent (secretaries, etc. are a different matter).

The major purpose of the civil service system– to prevent
experienced workers from being fired and replaced with party hacks–
would be served if we merely protected workers’ current salaries, and
allowed flexible pay and postings otherwise. Then the FBI computer
security man could be put to sweeping floors, though on his current
salary. This would, of course, allow for punishment of civil servants
who don’t do what the President (Attorney General, FBI director, etc.
) wants, but we *do* want that kind of punishment– the voters should
be in charge, not the bureaucracy. And when a new President came in,
he could grant the punished civil servant back pay if he thought it
was deserved.

At the law lunch today we discussed reasons for tenure. MA advanced this idea. Suppose that you need to invest X to become expert in research. If you do, you will be able to do research your entire life with probability .9, but with probability .1 you will be able to do it for 10 years and then lose the ability. This means that to get people to make this investment, we need to guarantee them a job even if they lose their ability, not because of risk aversion, but merely to make the investment profitable.

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The NYT
had a long story on the Chinese cough syrup poisoning. Antifreeze was labelled as glycerine in China and used in cough medicine in Panama. This is a great example for my article on trust and trade with the Third World. It’s also a good warning. I think I’ll stop eating canned food from China. (more…)

One dimension of ecclesiology is whether to put power in individual congregations, groups of congregations, or th top of a hierarchy of the entire denomination. A separate one is whether to give laymen power. It seems that both presbyterians and episcopalians do this. It is one of the defining features of presbyterianism. Anglicans have the Sovereign at the top of the church, and at one time at least, had laymen (lords of the manor) appointing ministers. American Episcopalians have laymen on church committees that have power.

This last came up when a conservative candidate for a bishopric was denied the position by the veto of the laymen’s committees. Is it odd that he got past the liberal pastors but was stopped by the laymen? No. It makes sense that the lay leaders would be more extreme than the professionals. The professionals have made church leadership their career. They went into it influenced by career concerns, and their success in their careers is influenced by how much they make themselves disliked. Thus, both the carrot and the stick make them less likely to want to purge the church of what they view as heresy. Lay leaders, on the other hand, become lay leaders because they either don’t care at all but were asked, or because they are passionate in how the church should be run. And if they do make enemies, it doesn’t matter much, because they can turn to some other effort in life easily enough.

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It is widely recognized that CEO’s, being rich, are expensive to motivate with money. What do they have in more limited quantities? The esteem of their peers. “Money is just a way to keep score”. This has at least two big implications:

1. Past and present CEO’s make good directors. If a CEO knows he will be scrutinized by them, he will be ashamed to do badly and eager to do well. A professor or a politician’s opinion matters less, partly because they are too easy to fool.

2. Formulaic pay and options are worse incentives than bonuses and increases in base salary. If the CEO gets high pay just because the Return on Equity is high this year, where is the glory? He’ll get the high pay even if the directors don’t notice the great job he did. If the CEO has high income just because the stock price rose and he could cash in his options for millions, where’s the glory? He could do that even if the directors thought he had done a bad job and just got lucky. A subjective bonus, on the other hand, freely given, shows appreciation. Moreover, a bonus can be based on something subtle, like the hiring of a new marketing head or the decision to pursue a new project, that has no current effect on profits and that is unappreciated by the market analysts.

i was just reading a paper by Winston and Crandall on lawyer licensing. Here’s how I would model it.

Without regulation, a person would need to spend, say, 1 year of his time to become a lawyers. With regulation, he needs to spend 3 years, and he needs to pay the market price for tuition, P. That market price is determined by the marginal cost of the education and by the number of law schools operating. There is free entry into the law school business, but initially there are few enough law schools that P exceeds MC. We can assume constant MC and that MC=AC. Denote the pre- and post-regulation quantities y Q_0 and Q_1. What happens?

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The Treasury, I read in Forbes recently, has proposed requiring businesses to report any purchases over $600, so the IRS can check that the seller reported the revenue. That is quite an administrative burden. What could we do instead?

How about saying that if a business reports a purchase to the IRS and it turns out that the seller didn’t report it, then the business gets a payment from the IRS for helping catch a tax cheat? We could at the same time use the stick as well as the carrot. If the IRS finds a tax cheat seller, and then finds that the purchaser did not report the purchase, then the purchaser is fined.

I’m thinking a lot about sampling these days. The idea of classical hypothesis testing is that we choose a null hypothesis and a testing scheme, and ask how often we would accidentally reject the null hypothesis if we took repeated samples and if the null were actually true. The null might be that the mean of the population is 0. The testing scheme might be that we take a sample of N=100 observations and we reject the null if the mean of that sample is less than -1 or greater than +1. The significance level of the test, the probability that we falsely reject the null, might be 14%. That means that if we took 10,000 100-observation samples, and the true mean is M=0, we would expect about 1,400 sample means to be outside of the [-1,+1] interval.

Any null hypothesis takes some set of background facts as given, as assumptions that aren’t tested. In the case above, these assumptions might include that (a) the population is distributed according to some shape f(x) around the mean M, and we know the entire shape, just not the value of M, (b) the observations are chosen independently (which also means they are chosen with replacement, I think), and (c) the shape f(x) does not change during the course of our sampling. If we wanted, we could instead take M=0 as an assumption and test statement (b) instead, or use some other combination of assumptions and null.

Well, I haven’t even gotten to asymptotics yet, but I’m out of time. I’ll have to continue this another day. Asymptotics concern the properties of a testing scheme when the sample size N is large enough that the Central Limit Theorem can be called into play and estimator errors are close to being normal even if the underlying distribution shapes are not.

A good way to reform taxes would be to eliminate the tax deduction for donations of property to charities. This is much abused, and requires difficult record-keeping if the value is to be accurately determined. Instead, however, if I have property that I wish to donate, I should be allowed to sell it and then give the money to the charity without having to report the capital gains part of it as income. Here’s how it would work.

Under current law, if I buy a painting for $10,000 and its value rises to $15,000 and I donate it to a charity, I get a deduction of $15,000 from this year’s income. If, instead, I sold the painting for $15,000 and gave the money to the charity, I would still get the $15,000 deduction, but I would also have to report a $5,000 capital gain and pay tax on that. I would pay more tax than if I donated the painting directly, and I would have to show how much I paid for the painting, the basis, which can be awkward sometimes (suppose I had inherited it instead, or received it as a gift).

Under my proposal, if I donated the painting, I would get no deduction. If I sold it and gave the $15,000, though I would get the deduction for $15,000 without any need to report the $5,000 income or to find out what the tax basis was.

Of course, my proposal isn’t perfect. The person who wanted to give his painting away to his alma mater would be discouraged from doing so under it. Maybe some special provision could be made, some costly and conservative valuation process for property gifts– say, the requirement that $2,000 be paid to cover the cost of an IRS valuation, and no possibility of doing your own valuation.

I was looking for IQ, height, and income data. The PSID has height and weight and income, and the data is here. The Children of the National Longitudinal Study of Youth (CNLSY) has test scores, but the kids are just up to teenage years now. Their parents, the National Longitudinal Study of Youth (NLSY) have scores and incomes. Professor David Armor of George Mason tells me that “The original NLSY sample was used for norming the military ASVAB test in 1980, and then starting in 1986 they began following children of the female sample.”

I wonder if IQ at age 5 is a better, or independent, predictor of income, compared to IQ are age 16.

Also, are height and IQ correlated? How about height and criminality, etc.?

One way to look at the quality of schools is to look at the test scores of the students. This is unsatisfactory because some schools have students who are smarter.

A second way is to compare the national-percentile levels of the students in 1st grade at that school with those at the 6th grade. This is a value-added measure. In this case, a school with students in the 99th percentile at 1st grade has nowhere to go but down– but it might go down, so the measure is still valuable for those schools. Also, we could measure either number of percentiles gained or lost, or fraction of the possible percentile gain or loss (that is, going from 90 to 95 the school either gains (a) 5%, or (b) 50%).

A third way is to compare a school only with schools with the same 1st grade percentile.

All three ways have their independent value.

THE FILIBUSTER is an example of the kind of lovable tradition that is so much a part of the English and American political systems, like the New Hampshire primary being first and the Democratic and Republican parties alternating whose convention comes first. This kind of tradition depends on fair play and reciprocity, though. The Democrats have innovated by using the filibuster to establish a veto on routine appellate court nominations. As many have noted, including Professor Eastman in National Review, the filibuster is not only not in the Constitution; it pretty clearly can be overturned by a majority of senators at any time. Just as the Senate of 2000 cannot pass a law that says that future Senates cannot ever pass a tax increase, so no Senate can pass a law saying that future Senates cannot end debate except by a 60% vote.

The filibuster, like the New Hampshire primary, has survived because it has been tolerated–as part of “playing fair”. Now the Democrats have stopped playing fair. The obvious response is for the Republicans to retaliate by adhering to the letter of the Constitution, especially since that will also preserve its spirit, and to go further by ending the filibuster for everything, not just for nominations.

The Democrats would not have done this if they had foreseen that response. Rather, they expect the Republicans to either (a) acquiesce, or (b) return to the status quo, by passing a rule that nominations are not subject to filibuster. In case (a), the Democrats have succeeded marvelously. In case (b), they are no worse off than before. Thus, this was probably a smart, if immoral, move.

It is curious that the Democrats pursue this strategy in domestic politics, while eschewing it for foreign policy; and the Republicans do the opposite. Saddam Hussein tossed out the weapons inspectors in the hope that either (a) Clinton would acquiesce, or (b) Clinton would threaten war, and Saddam could back down and be no worse off than before. Clinton’s response was to acquiesce.

I’m coming to think more and more highly of the Baye-Morgan (2001,AER) article on Information Gatekeepers. Those are firms which report the prices and terms of other firms that actually sell the product. The gatekeeper firms thus are selling information to the consumer– though maybe they are paid for this by the ultimate sellers, not by the consumers directly.

This is an example of a solution to a modern predicament: the multitude of products and of sellers for each product. Our consumer choice problem is getting more and more complicated. This problem much precedes the Internet– even the Yellow Pages shows it graphically– but the Internet is intensifying it. Also, the problem is not just for prices of goods, but for information generally. In Googling, the great problem is to know which sites are most worth checking out. Google are Wikipedia are doing good jobs, but the institutions are still evolving.

“Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets” Michael R. Baye; John Morgan The American Economic Review, Vol. 91, No. 3. (Jun., 2001), pp. 454-474.

Greg Mankiw has a post on a NYTimes op-ed by Austan Goolsbee on why the very rich do not spend more on consumption or donation. It is easy to see that more consumption isn’t worth the trouble. Mankiw and Goolsbee focus on bequests. Something I think might be the key is the timing of donation. (more…)

I wonder if a carbon tax might not be a good idea even if it has absolutely no effect on global warming. The reason is that it is a flat tax rather than a progressive tax.

If taxes simply increase, that is of course more distortionary than our present system, but presumably if we imposed a carbon tax we would reduce the income tax to keep revenue constant. Then the two questions are (a) how distortionary is a carbon tax compared to a tax on labor, rents, and capital income, and (b) if the carbon tax is more distortionary in general, does its lack of progressivity and loopholes nonetheless make it less distortionary?

Of course, it could be that carbon is a luxury good, in which case a carbon tax is progressive in effect even if it is flat as applied. Or, it could be regressive in effect, which would increase its efficiency even more by reducing the tax effect on the marginal dollar.

Larry Samuelson’s “Modelling Knowledge…” in JEL 2004 is a very good article about common knowledge, no trade theorems, and such. (more…)