conversableeconomist

Parental Leave in Other Countries

Note:  On February 22, 2012, two  comments from readers added at the end of the post.
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The United States has far fewer laws that offer protections to parents with family responsibilities than do most other countries. Alison Earle, Zitha Mokomane, and Jody Heymann discuss \”International Perspectives on Work-Family Policies: Lessons from the World’s Most Competitive Economies,\” in the Fall 2011 issue of the Future of Children. Indeed, the issue is devoted to issues of \”Work and Family.\” From the \”Summary\” of the Earle, Mokomane, and Heymann article:

\”The United States does not guarantee families a wide range of supportive workplace policies such as paid maternity and paternity leave or paid leave to care for sick children. … Using indicators of competitiveness gathered by the World Economic Forum, the authors identify fifteen countries, including the United States, that have been among the top twenty countries in competitiveness rankings for at least eight of ten years. … They find that every one of these countries, except the United States, guarantees some form of paid leave for new mothers as well as annual leave. And all but Switzerland and the United States guarantee paid leave for new fathers. … The majority of these countries provide paid leave for new mothers, paid leave for new fathers, paid leave to care for children’s health care needs, breast-feeding breaks, paid vacation leave, and a weekly day of rest. Of these, the United States guarantees only breast-feeding breaks (part of the recently passed health care legislation).\”

Here are some illustrative tables showing policies in these countries. The U.S. does not have paid parental leaves. All of the 14 comparison countries in the table offer such paid leaves for mothers, lasting at least 18 weeks and in some cases more than a year, and replacing at least 25% of salary and up to 100% of salary. Thirteen of the 14 comparison countries offer paid parental leave, ranging at the low end from a few days or a couple of weeks up to more than a year, and replacing from 25% of pay up to 100%.

The next figure looks at  leave policies for attending to children\’s health care. U.S. law does have provisions for breast-feeding breaks, as do 7 of the 14 comparison countries. All of the countries, including the U.S., have provisions for leave to care for children\’s health needs–but unlike in the U.S., that leave is paid in 11 of the 14 comparison countries.

The final table looks at policies on paid annual leave, a weekly day of rest, or night work. These are not policies specifically aimed at parents, but at all workers. The United States has no law guaranteeing paid annual leave, while all 14 of the comparison countries do–often requiring four or five weeks of such leave. Thirteen of the 14 comparison countries also have legal guarantees of at least one day of rest each week.

Earle, Mokomane, and Heymann discuss evidence that paternal leave policies of various sorts are associated with improved infant health and lower infant mortality–in part by enabling more breastfeeding, in part by enabling parents to be more involved in preventive and other health care for their children.  They argue that parental leaves help to foster \”children’s social, psychological, behavioral, emotional, and cognitive functioning.\”

I\’m enough of an American at heart that some of these international comparisons open my eyes pretty widely. In Germany, you can have more than two years of paid leave for both mothers and fathers? In Austria, Denmark, Sweden, and the United Kingdom, there is a national legal guarantee of five weeks of paid vacation? I\’m enough of an economist to wonder about the incentives that such provisions give employers to avoid hiring women of child-bearing age, or to slot young people into into certain jobs where they can be replaced without too much fuss if they disappear for a couple of years. With workers who make middle-income salaries or higher, guarantees of paid vacation can be considered part of their overall compensation, but for low-paid, low-skill workers, such rules may discourage hiring them at all. I\’d want to know more about how such policies are designed and enforced before enacting them in the United States.

But it is just  a fact that the U.S. labor market is at the far end of the international spectrum of high-income countries in not offering these kinds of policies. Even with my born-in-America, economist-trained skepticism, I find myself thinking that experimenting with such policies at the firm level, the state level, and even the national level is worth a closer look. After all, the days when American society could count on nearly all mothers to exit the (paid) workforce and spend their time in childcare and homemaking are long behind us.

___________________

David Paul writes:

\”I happen to be a student from Germany and just had this topic in school, so I wanted to clarify the laws a bit. You wrote: \”I\’m enough of an American at heart that some of these international comparisons open my eyes pretty widely. In Germany, you can have more than two years of paid leave for both mothers and fathers?\”

\”It\’s actually not quite that extreme. 14 weeks vacation for the mother at 100% pay are standard (6 before birth and 8 after – the 8 after are mandatory – paid by the statutory health insurance). After that, either the mother or the father can stay at home for a year at ~66% previous pay (this is paid by the government). They can switch in that time, for instance mother half the time and father half the time – in that case it goes up to 14 months. Or alternatively one parent can stay at home for 2 years, but then at only ~33% of previous wages. This doesn\’t change the basic point on the difference between the US laws and those of the other countries of course.\”  David adds: \”The laws can be found in the MuSchG and the BEEG.\”

Michael Cain writes:

\”As I am inclined to say, the US, particularly over the last 30 years, has made policy on the basis of making the country be a good place to be a capitalist, while most of the other developed economies have made policy on the basis of making their countries be a good place to be a worker.  Personally, I tend to believe that the latter works out better for social outcomes, although it\’s possible to go overboard, of course.  Business owners, once forced into the corner where they must have and keep employees, and must pay a living wage, and must contribute as necessary to provide benefits such as universal health care access, are *very* good at finding ways to increase the efficiency of the employees so that the owners still make money: they demand better education, they invest in better equipment, they listen to their workers (eg, Japanese auto companies make their engineers design for easy construction as well as other attributes).  The US has let business owners take the easy way out: drop health insurance, relocate the factory to a different region or foreign country, and so forth.\”

conversableeconomist

Donald Shoup and the Economics of Parking

Los Angeles Magazine has a lively and well-informed article, \”Between the Lines\” written by Dave Gardetta about the history and present of parking in Los Angeles with frequent reference to one of my secret heroes, although I\’ve never met him,: the economist Donald Shoup. (Thanks to Alex Tabarrok at Marginal Revolution for the pointer here.) Here are a few excerpts:

\”In the United States hundreds of engineers make careers out of studying traffic. Entire freeway systems like L.A.’s have been hardwired with sensors connecting to computer banks that aggregate vehicle flow, monitor bottlenecks, explain congestion in complicated algorithms. Yet cars spend just 5 percent of their lives in motion, and until recently there was only one individual in the country devoting his academic career to studying parking lots and street meters: Donald Shoup.\”

\”Shoup is 73 years old. He drives a 1994 Infiniti but for the last three decades has steered a 1975 Raleigh bike two miles uphill daily in fair weather, from his home near the Mormon temple to the wooded highlands of UCLA’s north campus. … This year Shoup’s 765-page book, The High Cost of Free Parking, was rereleased to zero acclaim outside of the transportation monthlies, parking blogs, and corridor beyond his office door in UCLA’s School of Public Affairs building. He wasn’t surprised—“There’s not even a name for what I do,” he says. Shoup, however, does not lack for acolytes. His followers call themselves Shoupistas, like Sandinistas, and on a Facebook page they leave posts suggesting parking meters for prostitutes and equations that quantify the contradiction between time spent cruising for free parking versus the “assumed time-value” cited to justify expanding roadways. (The hooker stuff is more interesting.)\”

\”After 36 years, Shoup’s writings—usually found in obscure journals—can be reduced to a single question: What if the free and abundant parking drivers crave is about the worst thing for the life of cities? That sounds like a prescription for having the door slammed in your face; Shoup knows this too well. Parking makes people nuts. “I truly believe that when men and women think about parking, their mental capacity reverts to the reptilian cortex of the brain,” he says. “How to get food, ritual display, territorial dominance—all these things are part of parking, and we’ve assigned it to the most primitive part of the brain that makes snap fight-or-flight decisions. Our mental capacities just bottom out when we talk about parking. …”

\”L.A. has been a wellspring for a parking guru like Shoup to become self-realized. Our downtown contains more parking spaces per acre than any other city in the world and has been adding them at a rate of about 1,000 a year for a century. … Whereas a skyscraper of a million square feet in New York may be required to have 100 parking spaces, an equal-size structure in L.A., like the U.S. Bank Tower, is compelled by the city to provide closer to 1,300 spaces. The maxim is wrong: L.A. wasn’t built around the car. It was built around the parking lot….  L.A. sits on a mountain-size surplus of parking it doesn’t know what to do with. … San Francisco or New York might have ten times the parking each has now if they had buildings like 1100 Wilshire, where the first 15 floors are all garage. But the downtown areas of those cities won’t allow it.  L.A. mandates it. In Los Angeles we attend dinner parties and wish out loud for more pedestrian-friendly neighborhoods, increased urban density, more mass transportation, less congestion, less air pollution, less reliance on our cars—and cheap, abundant parking wherever we go.\” 

 For those who would like a taste of Shoup, but don\’t quite feel up to 765 pages on The High Cost of Free Parking, I recommend Shoup\’s lead essay in the April 2011 issue of Cato Unbound: Free Parking or Free Markets. Some excerpts follow, although for much more detail and vivid examples from specific cities you need to click through to the essay:

\”Cities should set the right price for curb parking, because the wrong prices produce bad results. Where curb parking is underpriced and overcrowded, a surprising share of traffic can be cruising in search of a place to park. Sixteen studies conducted between 1927 and 2001 found that, on average, 30 percent of the cars in congested traffic were cruising for parking. … Free curb parking in a congested city gives a small, temporary benefit to a few drivers who happen to be lucky on a particular day, but it creates large social costs for everyone else every day. To manage curb parking and avoid the problems caused by cruising, some cities have begun to adjust their curb parking prices by location and time of day to produce an 85 percent occupancy rate for curb parking, which corresponds to one vacant space on a typical block with eight curb spaces. …\”
\”Drivers want to park free, and that will never change. What can change, however, is that people can want to charge for curb parking. The simplest way to convince people to charge for curb parking in their neighborhood is to dedicate the resulting revenue to paying for added public services in the neighborhood, such as repairing sidewalks, planting street trees, and putting utility wires underground. That is, the city can offer each neighborhood a package that includes both performance-priced curb parking and the added public services financed by the meters. Performance pricing will improve the parking and the revenue will improve the neighborhood. …\”

\”Requiring ample parking does give us all the free parking we want, but it also distorts transportation choices, debases urban design, damages the economy, and degrades the environment. Some cities have begun to remove minimum parking requirements, at least in their downtowns, for two reasons. First, parking requirements prevent infill redevelopment on small lots, where fitting both a new building and the required parking is difficult and expensive. Second, parking requirements prevent new uses for many older buildings that lack the parking spaces required for the new uses. A search of newspaper articles about minimum parking requirements found 129 reports of cities that have removed off-street parking requirements in their downtowns since 2005. … Minimum parking requirements may be our most disastrous experiment ever in social engineering, and ceasing to require off-street parking is not social engineering…. If cities remove off-street parking requirements, they will have to charge performance prices for the curb spaces to prevent spillover, but this will produce another great benefit: All the money paid for curb parking will become a new revenue stream to pay for local public services. Curb parking will become too valuable not to meter. Removing the parking requirements for both housing and offices can produce a cascade of benefits: shorter commutes, less traffic, a healthier economy, a cleaner environment, and more affordable housing…. The upside of the mess we have made is that we have an accidental land bank readily available for job-adjacent housing. This land is now locked up in required parking, but if cities remove their unwise parking requirements we can reclaim land on a scale that will rival the Netherlands. … Some people assume that America has a freely chosen love affair with the car. I think it was really an arranged marriage. By recommending minimum parking requirements in zoning ordinances, the planning profession was both a matchmaker and a leading member of the wedding party.\”

conversableeconomist

Can Auctioning the Spectrum Go Too Far?

How should the scarce resource of the radio spectrum for communication be allocated? One of the classic triumphs of economic analysis has been that spectrum should be auctioned off, rather than being allocated by government. But some prominent economists are now raising the possibility that even if some spectrum should be auctioned off, another portion should be left simply unlicensed.

In the early days of broadcasting, back in the 1920s, one signal often struggled to overpower another. Legislation as early as 1912 sought to address this problem, and the eventual result was the creation of a government regulatory system for allocating spectrum in 1927, under the auspices of the Federal Radio Commission, which morphed into the Federal Communications Commission in 1934.

More than 50 years ago, that arrangement was famously challenged by Ronald Coase in an October 1959 article in the Journal of Law and Economics called \”The Federal Communications Commission.\” It\’s available a few places on the web (for example, here and here), and is also available through JSTOR. As Coase pointed out, the situation in which users might struggle over a common resource arises often enough–for example, in the case of shared farmland. However, in the case of farmland such conflicts are resolved through property rights and ownership, along with the possibility of selling the resource to others. Thus, Coase drew together the work of earlier writers and proposed that the FCC could auction off spectrum, keep records of who owned which frequencies, and keep track of future changes of ownership.

In the 1990s, Coase\’s advice, which seemed outrageous to many back in 1959, had been adopted. For a discussion of U.S. spectrum auctions in my own Journal of Economic Perspectives, see this 1994 article by John McMillan. For a follow-up article on spectrum auctions around the world, including some poorly designed auctions with embarrassingly bad results, see this 2002 article in my journal by Paul Klemperer.

But my theme here is not to review the design of spectrum auctions, but to explore a counterintuitive point.

Paul R. Milgrom, Jonathan Levin, and Assaf Eilat  published in October The Case for Unlicensed Spectrum. 
They write (footnotes, citations and paragraph numbers omitted): 

\”In the US, the most common approach to managing radio spectrum for commercial non-governmental use has been to assign licenses that give the licensee exclusive rights to a particular band of spectrum for a set period of time. The development of spectrum license auctions in the 1990s helped to pave the way for the growth of the mobile phone industry while generating billions in auction revenues for national governments. Yet some of the most valuable and important innovations in wireless communication, in particular the development of Wi-Fi, have taken place on bands of spectrum for which no exclusive licenses were issued. …

 
While selling exclusive licenses to radio spectrum has been a valuable tool for eliminating conflicting uses and encouraging related investments, it has also contributed to concentrated market structures in wireless telephony and created barriers to entry and innovation. Leaving portions of the radio spectrum unlicensed has created multiple benefits, including encouraging the development of complementary technologies that enhance the effectiveness of devices that use licensed spectrum, triggering the development of alternative technologies that compete with licensed uses, and promoting innovative business models and technologies that have brought unexpected benefits.
 
There is considerable evidence that unlicensed spectrum has huge economic value. Recent past estimates, which already look too conservative, place the value created by current applications of unlicensed spectrum at $16-37 billion dollars a year in the United States alone. However, the primary benefits of unlicensed spectrum may well come from innovations that cannot yet be foreseen. The reason, as we discuss below, is that unlicensed spectrum is an enabling resource. It provides a platform for innovation upon which innovators may face lower barriers to bringing wireless products to market, because they are freed from the need to negotiate with exclusive license holders. Indeed, allocating a mix of licensed and unlicensed spectrum is attractive precisely because the two approaches have diverse advantages in terms of triggering investment and innovation.
 They argue that auctions cannot work as a way of allocating unlicensed spectrum, because the future innovators who might experiment by using such spectrum (along with the consumers who would ultimately benefit from such experiments) can never be organized in advance in a way that would allow them to participate in such an auction. While Wi-Fi is to this point the most important innovation to make use of unlicensed spectrum, they point out that similar arguments apply to Bluetooth and other \”wireless personal area networks,\” to WirelessHD and WiGig which can transfer large amount of data over a distance of a few meters with a line-of-sight connection, and radio-frequency identification tags, the small tag that are attached to products or embedded in cards for tracking purposes. 
In juxtaposition to the work of the 1991 Nobel laureate Ronald Coase, Milgrom, Levin and Eilat point to the work of a 2009 Nobel laureate, Elinor Ostrom. \”The Nobel laureate Elinor Ostrom has written extensively on the diversity of governance systems for managing common pool resources. Her work identifies several key principles: the creation of clear rules that respond to local conditions; collective decision-making that allows the participation of most community members; effective monitoring, enforcement, and conflict-resolution mechanisms; and coordination between organizations that manage common-pool resources.  As she emphasizes, these principles do not necessarily imply the creation of exclusive property rights; in many cases, alternative systems can work better.\”

An intriguing commonality here is that these innovations all  happened in parts of the radio spectrum that were viewed as useless for larger-scale communication–which is why they were unlicensed and thus were available to innovators. What innovations might emerge if some spectrum suitable for long-range and far more reliable communication–like that which has for decades been used for broadcast television–was instead reserved for unlicensed use and innovation?
 
The Milgrom, Levin, and Eilat argument is also intriguing because it points out an inherent conflict between property rights and innovation. For example, those who invent something today and seek out a patent must often be concerned that they are potentially overlapping with other patents that have already been granted to others. In some cases, the property rights of already-existing patents can choke off innovation from new competitors. As another example, when many people own property rights to many different plots of land, it may be difficult for a new use of that land to arise–whether it be a nature preserve or a natural gas pipeline–because the existing splintered property rights make it difficult to negotiate for an alternative use of the land. Property rights and market exchange are excellent at finding efficient ways for existing uses, but when it comes to certain kinds of change and innovation, they can sometimes pose drawbacks. 

conversableeconomist

Horse Slaughter and Unintended Consequences

Buried in a U.S. Department of Agriculture bill that President Obama signed into law on November 18 is a provision that will probably lead to reopening horse slaughterhouses in the United States. The founder of the often-controversial People for the Ethical Treatment of Animals, Ingrid Newkirk, supported re-opening the slaughterhouses. She said in one interview:  “It\’s quite an unpopular position we\’ve taken. There was a rush to pass a bill that said you can\’t slaughter them anymore in the United States. But the reason we didn\’t support it, which sets us almost alone, is the amount of suffering that it created exceeded the amount of suffering it was designed to stop.”

What\’s the back-story here? Starting in 2006, Congress started placing provisions in the funding for the U.S. Department of Agriculture that prohibited government funding for inspecting horses destined for food. By 2007, this led to the shutdown of horse slaughterhouses in the United States. In June 2011, the GAO did a report on the aftereffects of the policy, and named the report: \”Horse Welfare: Action Needed to Address Unintended Consequences from Cessation of Domestic Slaughter.\”

Slaughtered in Mexico and Canada instead of the U.S.
The most obvious consequence is that instead of being slaughtered in the U.S., horses were shipped to Canada and especially to Mexico to be slaughtered instead. In 2006, about 100,000 horses were slaughtered in the U.S. By 2010, the number of horsed exported for slaughter had risen by about 100,000. Here\’s a graph of horses exported from the GAO report:



In other words, the policy didn\’t save horses.  A New York Times story reported in October: \”The closing of the country’s last meat processing plant that slaughtered horses for human consumption was hailed as a victory for equine welfare. But five years later just as many American horses are destined for dinner plates to satisfy the still robust appetites for their meat in Europe and Asia. Now they are carved into tartare de cheval or basashi sashimi in Mexico and Canada.\”

Indeed, the policy probably worsened the treatment of horses at the end of their lives. The horses needed to travel farther before being slaughtered. Their transit was no longer monitored by the USDA. And slaughterhouses in Mexico are not under USDA rules for humane slaughter. 


Indeed, in a few cases U.S. firms were re-importing horsemeat from Mexican and Canadian slaughterhouses for use in zoos. GAO writes that as of the end of 2010,  \”USDA identified at least three establishments—in Colorado, Nebraska, and New Jersey—that import horsemeat for repackaging and distribution to purchasers in the United States who feed the meat to animals at zoos and circuses.\”



Horse Abuse Expanded
As it has become logistically harder and less remunerative to send a horse to slaughter, the amount horse abuse has been rising. The GAO reported: \”Comprehensive, national data are lacking, but state, local government, and animal welfare organizations report a rise in investigations for horse neglect and more abandoned horses since 2007. For example, Colorado data showed that investigations for horse neglect and abuse increased more than 60 percent from 975 in 2005 to 1,588 in 2009. Also, California, Texas, and Florida reported more horses abandoned on private or state land since 2007. … [T]he Montana Association of Counties reported that the number of horses being abandoned by their owners has rapidly increased since horse slaughter for human consumption was halted in the United States, but the association did not have specific data. In addition, the National Association of Counties reported that the increasing abandonment problem is notexclusive to Montana or the West but is happening nationwide.\”

Although it was not possible to slaughter horses for human consumption in the U.S., it continued to be legal to bring the corpse of a horse to a rendering plant to be turned into pet food or glue. As GAO explained: \”Before 2007, horses were slaughtered in domestic slaughtering facilities only when the horsemeat was destined for consumption by humans or zoo animals. Currently, pet food and other products, including glue, may still be obtained from the corpses of horses that are hauled to rendering plants for disposal. The production of these products is not covered by the requirements of the Federal Meat Inspection Act …\” There doesn\’t seem to be evidence on this point, but one suspects that some horses that would have ended up in the slaughterhouse before were now ending up at rendering plants.

There are also concerns that wild horses might be being shipped to Mexican and Canadian slaughterhouses. USDA used to work with the Bureau of Land Management to prevent wild horses from being slaughtered in the U.S., but with USDA inspectors out of the picture, it\’s not clear

Return of the Horse Slaughterhouse
In the aftermath of the new law, the Christian Science Monitor reported: \”[M]eat processors are now considering opening facilities in at least a half-dozen states, including Georgia, North Dakota, Nebraska, Oregon, Wyoming, Montana, and possibly Idaho.\” A number of animal rights groups like the Society for Prevention of Cruelty to Animals are outraged. The president of the U.S. Humane Society, Wayne Pacelle, takes the view that all U.S. horse owners should be required to provide lifetime care for their animals. (Exercise for the reader: Consider some likely unintended consequences that would arise from such a rule.) But as Newkirk, the head of PETA, said about the end of the U.S.  horse slaughter ban: \”It\’s hard to call [the end of the horse slaughter ban] a victory, because it\’s all so unsavory. The [funding] bill didn\’t mean any horses were spared, but it does mean the amount of suffering is now reduced again.\”

conversableeconomist

Heavier Cars Kill

Michael Anderson and Maximilian Auffhammer from UC-Berkeley point out in NBER Working Paper #17170 released last June: \”The average weight of light vehicles sold in the United States has fluctuated substantially over the past 35 years. From 1975 to 1980, average weight dropped almost 1,000 pounds (from 4,060 pounds to 3,228 pounds), likely in response to rising gasoline prices and the passage of the Corporate Average Fuel Efficiency (CAFE) standard. As gasoline prices fell in the late-1980s, however, average vehicle weight began to rise, and by 2005 it had attained 1975 levels …\”

The trend is clearly visible in one of the annual reports from the EPA: Light-Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel Economy Trends: 1975 Through 2010.
Notice that as the weight of cars increased for most of the last 30 years, horsepower and acceleration have also risen–although all three of these trends have been disrupted by the higher gasoline prices in the last couple of years.

The trend toward heavier cars has two tradeoffs I\’ll mention here: 1) improvements in car technology have all been going to horsepower and acceleration, instead of improved miles-per-gallon; and 2) heavier cars are more likely to lead to deaths when accidents occur.

Christopher R. Knittel of MIT has examined what could have happened if technological progress in the auto industry had been focused on improved miles-per-gallon. He writes: \”This paper estimates the technological progress that has occurred since 1980 in the automobile industry and the trade-offs faced when choosing between fuel economy, weight, and engine power characteristics. The results suggest that if weight, horsepower, and torque were held at their 1980 levels, fuel economy could have increased by nearly 60 percent from 1980 to 2006. (Knittel\’s paper is called \”Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector.\” The paper is forthcoming in the American Economic Review: in the meantime, a PDF version is available at Knittel\’s website here.) Here\’s a figure from the EPA report showing the lack of progress in miles-per-gallon over most of the last three decades.

Another problem with heavier cars is that they are deadlier in accidents. The danger posed by heavier cars is the focus of the Anderson and Auffhamme working paper, which is titled \”Pounds that Kill: The External Costs of Vehicle Weight.\” The working paper is only available on-line by subscription, but a short summary written by Lester Picker is available here.

The authors write: \”We present robust evidence that increasing striking vehicle weight by 1,000 pounds increases the probability of a fatality in the struck vehicle by 40% to 50%. This finding is unchanged across different specifications, estimation methods, and different subsets of the sample. We show that there are also significant impacts on serious injuries.\” They find that when heavier vehicles collide with each other, the fatality rate is not higher. But when heavier vehicles collide with lighter vehicles, motorcycles, or pedestrians, the death rate is higher. They estimate the cost of increased fatalities alone–that is, not counting the costs of more serious injuries–at $93 billion per year.

Many U.S. consumers have clearly demonstrated their preference over the last three decades for heavier cars with more horsepower and acceleration. For at least some consumers, a larger car is a choice made in self-defense, given the dangers posed by a collision with all the other large cars on the roads. But while owners of large cars are engaging in their version of an arms race, the rest of us face greater risks of injury and death in an accident. In Knittel\’s paper, he points out that the Obama administration has been seeking to raise the average miles-per-gallon standard to 35.5 mpg by 2016. Knittel argues that the only way to accomplish this goal will be for the average car to get lighter–which should also save some lives.

conversableeconomist

The Federal Tanning Tax?

I had been blissfully unaware, until I saw an article about the federal tanning tax a few days ago in USA Today, that such a tax was part of President Obama\’s health care reform. The  Treasury Inspector General for Tax Administration tells the story in a report published on September 22, 2011: \”Affordable Care Act: The Number of Taxpayers Filing Tanning Excise Tax Returns Is Lower Than Expected.\”

The TIGTA report sets the stage: \”On March 23, 2010, the Patient Protection and Affordable Care Act (Affordable Care Act) was signed into law. Along with amendments in the Health Care and Education Reconciliation Act of 2010, which was signed on March 30, 2010, this legislation contains revenue provisions anticipated to generate $438 billion in the form of new taxes, fees, and penalties. One of these new taxes is an excise tax on indoor tanning services (referred to hereafter as the tanning tax).\”

Apparently this was a 10% excise tax on tanning services, to be paid by the customer, collected by the business, and the forwarded along to the U.S. government quarterly. \”According to IRS documents, in April 2010 the Indoor Tanning Association estimated that 25,000 businesses were providing indoor tanning services, including approximately 15,000 stand-alone tanning salons and approximately 10,000 other businesses that offer tanning services, such as spas, health clubs, and beauty salons.\” \”The Congressional Joint Committee on Taxation estimated this tax would raise less than $50 million in the last 3 months of Fiscal Year 2010 and raise $200 million for Fiscal Year 2011.\”

But the tax hasn\’t raised nearly that much. Instead of 25,000 businesses filing, only about 10,000 have been filing. Not surprisingly, the tax is likely to raise less than $100 million in 2011, less than half of what was predicted.

 I have never entered a tanning booth and hope never to do so. I can readily believe that if overused, they aren\’t great for your skin. But when the federal government starts trying to collect a small amounts of money from many small businesses, it\’s like an elephant standing on a ice rink trying to pick up peanuts. Sure, you get some peanuts. But the contortions and the effort seem hardly worth it. As you consider what the IRS has been going through to collect this tax, and the costs on businesses of record-keeping and dealing with the tax, remember that the $200 million that Congress hoped to raise with this tax represents about 1/20 of 1% of the $438 billion in total revenue-raisers in the health care reform bill. And consider the efforts needed to do this, laid out in dry detail in the TIGTA report:

Of course, the first step is to define which tanning services are covered and which are not: \”This new excise tax applies to indoor tanning services paid for on or after July 1, 2010, and is 10 percent of the amount paid for the tanning services. Indoor tanning services are defined as services using ultraviolet lamps to induce skin tanning. There are other services provided by tanning salons that are excluded from the tanning tax. It does not apply to ‘spray’ tans or topical creams or lotions. In addition, it does not apply to phototherapy services performed by licensed medical professionals, during which individuals are exposed to light for the treatment of certain medical conditions. Tanning services are not taxable when provided by qualified physical fitness facilities (such as a workout facility or gym). The fitness facility must meet various tests to be exempt.\”

This line of business had not owed federal excises before. \”[A]n IRS document describing compliance challenges states, “The tax is new and unusual for this industry, which has never experienced the imposition of a Federal excise tax on tanning services, and thus the overwhelming majority have never filed an excise tax return.\”

Thus, of course the IRS needed an an outreach program to let tanning booth owners know about the bill. This involved \”Hosting live webinars and uploading videos on the YouTube web site,\”  \”Outreach to industry associations,\” \”Contacting State licensing bureau,\” \”Issuing electronic bulletins to tax professionals,\” and \”Giving seminars at the Nationwide Tax Forums.\”  For the IRS page with its Frequently Asked Questions about the tax, see here.

 The new tax required reprogramming IRS computer systems. \”There was a relatively short time period to prepare for receipt and processing of returns reporting the tanning tax. Accordingly, the IRS had to immediately update the computer systems used for processing tax returns. The IRS receives both paper and electronically transmitted returns. … In general, the systems had to be updated to include a new abstract code for the tanning tax, which is a unique number assigned to each of the excise taxes.\”

And of course, now that only about half of those expected to pay are doing so, the IRS is needing to send thousands of follow-up letters, and then to follow up on those letters.

At the end of the day, the tanning tax probably collects more in revenue than the costs to the government and business of putting the tax into place and collecting it. But surely, the IRS resources could be better allocated (more audits on potentially large targets?). Indeed, given how little revenue the tanning tax corrects, it\’s probably misguided to think of it primarily as \”tax\” policy. It\’s some anonymous Congressman or staffer who doesn\’t like tanning booths sticking a tiny provision that almost no one hears about into an enormous bill. It\’s the sort of piddly annoying oddball regulation that gives the rest of government regulation a bad name.

conversableeconomist

Air Passenger Security: Tradeoffs in the Decade after 9 /11

K. Jack Riley of RAND has been thinking over the time and cost tradeoffs of airline passenger security. A short overview is here; a chapter-length discussion can be found in the RAND book, The Long Shadow of 9/11: America’s Response to Terrorism, which can be read as an e-book here. Riley points out how the costs of air security could be reduced–and how doing so could save hundreds or thousands of American lives each year by encouraging people to fly rather than drive. Here are a few excerpts (with footnotes deleted) from the book chapter:

The overall safety of air travel since 9/11:
\”In the ten years since 9/11, about 6 billion enplanements (instances of passengers boarding a commercial plane) have occurred in the United States, and perhaps an additional 14 billion have occurred worldwide. Among those 20 billion passengers, according to the Aviation Safety Network, 7,019 died in aviation accidents between 2001 and 2009. In addition, roughly 200 more have died on airplanes or at airports as a result of terrorism since 9/11…. And since 9/11, no passengers have died in terrorist acts from enplanements originating in the United States. In short, despite the tragedy and loss of life on 9/11, air transportation is overwhelmingly a secure means of transportation, especially in the United States. At least three factors contribute substantially to the improved security since 9/11. First, and perhaps most importantly, passengers know now that they must be vigilant. … Second, airlines have reinforced cockpit doors in a way that strictly limits access to the cockpit. Most crews have also modified their procedures to ensure that there is a barrier between the cockpit door and
the passengers when the cockpit door needs to be opened. … Third, changes to the visa approval process represent a relatively unheralded but important contribution to air transportation security.
All 19 of the terrorists involved in the 9/11 attacks were in the United States on legitimate visas.\”
What about inspecting air cargo and TSA employees?
\”Until recently, though, the starkest contrast of all to the treatment of U.S. airline passengers was the treatment of U.S. commercial cargo on those same flights boarded by the passengers. It was not
until August 2010 that all of the commercial cargo loaded onto domestic passenger planes was scanned or searched. Shipments on cargo jets from international destinations are not all currently screened, although the date for implementing the plan for screening them has been moved
up from 2013 to 2011. Another departure from the “inspect everyone and everything” approach involves TSA’s own workforce at the airports. TSA employees are not screened when they enter the secure area of an airport throughout the course of the day, because they are trusted employees who have had a background check. They are thought to be at particularly low risk for coercion or conversion to radicalism. At many airports, certain other employees also have all-access badges that allow them to bypass security. Thus, what is considered the “sterile area” of the airport is in fact
not sterile. Substantial volumes of people (and, until recently, cargo) have made it into the sterile area without inspection. There have been no terrorist incidents associated with these leakages, however, suggesting that the cargo and employee risks have been appropriately managed for years (even before full cargo screening began) and begging the question of what kinds of risk management improvements might be available for passengers.\”

The case for scaling back security checks for planes originating in the United States:
\”There is very little reason to be concerned about suicide bombers being present on flights originating in the United States. The security improvements noted above—passenger vigilance, cockpit security, and visa screening—go a long way toward preventing radical jihadists from entering the country or, having entered, from being able to commandeer a plane to conduct a spectacular attack. Moreover, the radical threat resident in and willing to conduct a suicide attack on the United States is extremely small. … Recognizing the security of flights originating in the United States and thus returning all passengers to the domestic procedures that existed before the recent additions would save, at minimum, about $1.2 billion annually. … It would also reduce the deadweight losses that domestic travelers incur from arriving at airports early, waiting in lines, and undergoing intensive scrutiny.\”

The case for a \”trusted traveller\” program:
\”The current security regime applies the same procedures to all 700 million passengers who board planes each year in the United States. That we have not developed a reasonable way to reduce that inspection workload is perhaps the biggest missed opportunity of the past decade. A trusted traveler program could be configured in a variety of ways. Recent conversations with airline industry executives suggest that a very small fraction of fliers account for a very large proportion of trips. In all likelihood, then, a trusted traveler program could be relatively small (with 5 million enrollees or less) and could still provide significant benefits. No program will be bulletproof, but such a program does not need to be given the extremely low odds of encountering a suicide terrorist on a flight originating in the United States. A trusted  traveler program could initially be organized around these characteristics or combinations of characteristics:
• Possession of a security clearance issued by a U.S. government agency. …
• A profile that involves frequent travel. An individual traveling
100,000 miles per year is, conservatively, spending 200 hours on airplanes a year. That is 10 percent of a standard 2,000-hour work year, suggesting that such travelers can be trusted with the basic screening that was in place prior to the deployment of WBI [whole body image] machines and pat-downs. …
• Willingness to submit to the equivalent of a security-clearance process. Some travelers would find it well worth the time and expense to obtain such a credential in exchange for the ability to move
through an airport more quickly. Several programs, including Global Entry, NEXUS, and SENTRI, already allow certain travelers to be pre-approved for expedited clearance for entry at U.S. borders. Global Entry members pay a fee, undergo an interview and background check, and provide fingerprints as part of seeking approval. SENTRI and NEXUS operate in a similar fashion at Mexican and Canadian ports of entry, respectively. The combined programs cover hundreds of thousands of frequent travelers. The marginal costs of implementing this approach would be relatively low, since more than a million travelers have already paid for these entry/exit credentials. Extending the privileges of these programs from entry into the United States to security at U.S.airports would be a relatively trivial and easily justified action.\”

The opportunity cost of not taking such measures is measured in preventable deaths: 
\”Researchers have estimated that the 9/11 attacks generated nearly 2,200 additional road traffic deaths in the United States through mid-2003 from a relative increase in driving and reduction in flying resulting from fear of additional terrorist attacks and associated reductions in the convenience of flying.20 If the new security measures are generating similar, or even smaller, substitutions and the driving risk has grown as hypothesized, the new methods could be contributing to more deaths  annually on U.S. roads than have been experienced cumulatively since 9/11 from terrorism against air transportation targets around the world.\”

conversableeconomist

Bruce Yandle on environmental economics

David A. Price of the Richmond Fed has an interview with Bruce Yandle.

On the difference between a “systems approach” and a “process approach” to environmental policy issues: 
\”A systems approach is where the “brightest and best” get together and look at a problem and come up with
what they believe to be the best solution. They describe the system that can be installed that will lead to a solution of the problem and so it tends to be top-down.  In a process approach, you identify goals and outcomes, develop some rules of the game, and then let the process take hold, holding accountability with respect to outcome. You don’t tell people how to do things; you say this is the outcome that must be achieved, or it’s going to be costly for you.\”

On problems of transactions costs:
\”Transaction costs are large under either approach. The transaction costs are high in a technology-based

systems approach on the input side. The difficulty is no one is keeping score on the output side and we literally
have rivers that come close to dying, even though every discharger is meeting the requirements of the law. So you have a community of legal polluters killing a river. You can say we saved a lot of transaction costs. Well, I would say, “But you didn’t save the river!” Should we be concerned with transaction costs or outcomes? You do have a trade-off there.  I looked at the level of litigation under common law and statute law. We looked at the amount of litigation in the post-1970 world and the pre-1970 world and it looks like you get about the same amount of litigation with the statutes as you do at common law. It’s not an apples-to-apples comparison because all we’re looking at are counts of cases that are brought. Statute law generates a huge amount of litigation, and litigation costs are transaction costs in a way. That’s an important consideration, but I think the more important consideration is outcomes, and then to look, in some way, at the costs.\”

The start of the \”environmental saga\”:
\”From 1970 through last year, we had 2.5 million pages of the Federal Register published during that period; from 1940 to 1970, about 350,000. What I call the environmental saga begins in the United States in about
1970 and that’s when the world changes dramatically.\”

On  \”bootlegger and Baptist\” coalitions: 

\”That was the story of two groups who favor restrictions on the sale of alcoholic beverages on Sunday. The Baptists take the moral high ground; they would like to see a diminution in the consumption of alcoholic beverages. The bootlegger just wants to get rid of competition one day a week. I called it bootlegger and Baptists  for alliterative purposes. It could  have been called “bootlegger and Methodists” and you would have the same story. … I was working on the White House staff reviewing newly proposed regulations during the end of the Ford administration and the first part of the Carter administration, in a unit of the Council on Wage and Price Stability. My beat was the EPA. I reviewed the copper smelter standards. I would get their big regulatory bundles and review them, and we would make comments in an attempt to try to reduce the cost of accomplishing the goal. EPA had an excellent economic analysis. The last section said when this regulation becomes final, there will never be another copper smelter built in the United States of America. How would you feel if you had a copper smelter? You’d just been told you will never have any new competition.\”

For a short and readable recent article by Yandle, see my post of July 1 on \”The Accumulation of Regulations.\”

conversableeconomist

The Miles-per-Gallon Fallacy

 Here\’s a gentle brain-twister: 
Person A upgrades their car from one that gets 11 MPG to one that gets 13 MPG. 
Person B upgrades their car from one that gets 29 MPG to one that gets 49 MPG. 

Who saves more on gas?
A and B would actually save the same amount. Here\’s the explanation from Hunt Allcott in the May 2011 issue of the American Economic Review (p. 98). 
As an example, consider two pairs of vehicles. The first pair is two vans, one rated at 11 MPG and the other at 13 MPG, and the second pair is two cars rated at 29 and 49 MPG. Many people intuitively believe that conditional on gas price and miles driven, the difference in fuel costs between the second pair is much larger, because the difference in MPG is much larger. In fact, the fuel cost differences are almost exactly the same: the difference between each pair of vehicles in gallons of gasoline consumed per mile driven is 0.014. Interestingly, if this misperception has any magnitude outside of the laboratory, it would make us more likely to buy a Hummer and more likely to buy a Prius, while making us less likely to buy a medium-MPG car. This is because it causes us to underestimate the relative costs of the lowest-MPG vehicles and overestimate the relative savings of the highest-MPG vehicles.

In short, when it comes to making cars more fuel-efficient, what might look like modest MPG gains for the lowest-MPG vehicles actually matter quite a bit more than whether someone who is already in a high-MPG vehicle makes additional gains.

And maybe some smart marketing person or heads-up government regulator should be figuring out a way for car buyers to learn about how many gallons it takes to travel a mile–or 100 miles?–not how many miles to a gallon.