Category Archives: Economics

Apr 17 2010
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Economics, law

Missouri State Auditor Susan Montee on civil asset forfeiture

I sat down with Missouri State Auditor Susan Montee last night and talked to her about her 2009 report on civil asset forfeitures in the state of Missouri. I’ll have more to blog about soon, but wanted to highlight a couple things I learned.

The reports she received from prosecutors around the state detailing the extent of civil forfeiture activities were a ‘mess’. Often the records are misplaced or lost or ineptly kept, making her job compiling the the information necessary for a report difficult. There also appears to be little or no oversight of ‘adoptive’ or ‘equitable’ forfeiture, a mechanism that state and local police in Missouri have used in the past to dodge state requirement that proceeds from forfeited assets be turned over to the general fund. The current law requires judicial approval when assets are transferred between state and federal authorities in equitable forfeiture and I think is limited to assets seized with help from the federal government, but I am unable to find evidence that this law is being properly followed or enforced. Indeed, the large amounts of money moved around in this way by Boone County, Laclede County, Butler County, and New Madrid suggest to me that police agencies around the state continue to use adoptive forfeiture to retain control of the proceeds from seized assets for their own purposes.

Missouri law also mandates that civil forfeiture also be accompanied by ‘criminal action’ to prevent innocent people from having their property seized. Unfortunately I don’t know if the descriptor of ‘criminal action’ is equivalent to a conviction; it is still possible to seize and keep property and file charges that are dropped while satisfying the requirement for ‘criminal action’. Of course, this is problematic.

I’ll have more soon; I’ll be meeting Montee again next week to cover the subject in more detail.

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Apr 17 2010
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Economics, law

On conversations with unions

Talking to union members is oddly libertarian. They seem to mostly be concerned with property rights. Strange.

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Apr 15 2010
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Economics, politics

A quick bleg on the income tax and fraud

I argue that Missouri’s ‘Fair tax’ proposal to eliminate the income tax and implement a revenue-neutral, broad-based sales tax makes intuitive sense to me on the grounds that it is relatively more idiotproof. That is, sales taxes are relatively easy to implement and monitor and a lot less costly to enforce relative to income taxes. Sales taxes also are hard to get out of paying relative to income taxes; you don’t lose money when people forget to send them in (or they get lost in the mail), cheat on them, or  make mistakes.

Speaking of cheating on your taxes, here is a rather egregious story of tax fraud from CNN today:

Investigators say Monroe County jail inmates in Key West had been filing false tax return forms for jobs they never had as far back as 2004, and getting thousands of dollars a pop in refund checks.

Using a formula that kept their refunds to amounts under $5,000 per claim, inmates thought they would fly under the radar, investigators say. And they did for years, passing around cheat sheets that showed line by line how to fill out the complicated forms.

The scam however is not a local gig. Investigators and federal officials say it has been going on for decades in state and federal prisons around the country.

“These guys weren’t rocket scientists…They didn’t just wake up and come up with this great scheme,” Monroe County Sheriff Bob Peryam said.

Here’s how it allegedly worked: using names of defunct or made up businesses as places of work and a master cheat sheet for salary and other numerical information, inmates filled out 4852 tax forms — the ones you use if your employer didn’t provide you with a W-2.

The inmates sent the forms in and the IRS then issued refund checks, in some cases sending them directly to the county jail. But inmates didn’t just fill out the forms for themselves. For a $500 fee ringleaders at the prison filled out refund requests for other inmates, promising they would each get a return of about $4,500.

Some of the prisoners, homeless before their arrests, were unaware of the scam. They gave away their social security numbers for honeybuns, a sweet pastry that inmates can buy in prison. The scammers would then file more refund requests under those social security numbers.

Wow. Consider that without an income tax, this scenario is simply impossible.

I want to point out that I don’t have a philosophical objection to income taxes per se. Rather it seems to me a matter of pragmatism: how idiot-proof can we make our taxation and government mechanisms?

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Apr 14 2010
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cognition, Economics

Absence of racial, but not gender, stereotyping in Williams syndrome children

That is the title of this study by Santos, Meyer-Lindenberg, and Deruelle in the latest issue of Current Biology:

Stereotypes — often implicit attributions to an individual based on group membership categories such as race, religion, age, gender, or nationality — are ubiquitous in human interactions. Even three-year old children clearly prefer their own ethnic group and discriminate against individuals of different ethnicities [1]. While stereotypes may enable rapid behavioural decisions with incomplete information, such biases can lead to conflicts and discrimination, especially because stereotypes can be implicit and automatic [2], making an understanding of the origin of stereotypes an important scientific and socio-political topic. An important process invoked by out-groups is social fear [3]. A unique opportunity to study the contribution of this mechanism to stereotypes is afforded by individuals with the microdeletion disorder Williams syndrome (WS), in which social fear is absent, leading to an unusually friendly, high approachability behaviour, including towards strangers [4]. Here we show that children with WS lack racial stereotyping, though they retain gender stereotyping, compared to matched typically developing children. Our data indicate that mechanisms for the emergence of gender versus racial bias are neurogenetically dissociable. Specifically, because WS is associated with reduced social fear, our data support a role of social fear processing in the emergence of racial, but not gender, stereotyping.

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Apr 11 2010
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Economics

James Cameron defends property rights

From the NYT:

The focus is the huge Belo Monte dam planned by the Brazilian government. It would be the third largest in the world, and environmentalists say it would flood hundreds of square miles of the Amazon and dry up a 60-mile stretch of the Xingu River, devastating the indigenous communities that live along it. For years the project was on the shelf, but the government now plans to hold an April 20 auction to award contracts for its construction.

Stopping the dam has become a fresh personal crusade for the director, who came here as indigenous leaders from 13 tribes held a special council to discuss their last-ditch options. It was Mr. Cameron’s first visit to the Amazon, he said, even though he based the fictional planet in “Avatar” on Amazon rain forests. Still, he found the real-life similarities to the themes in his movie undeniable.

The dam is a “quintessential example of the type of thing we are showing in ‘Avatar’ — the collision of a technological civilization’s vision for progress at the expense of the natural world and the cultures of the indigenous people that live there,” he said.

Here is the wiki on the Belo Monte Dam. It is the old story of taking things from others by force, the story of national entities and identities forged in violence, for the benefit of companies run by the corrupt.

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Apr 09 2010
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Economics, Soccer

Why soccer players ‘fake it’ and South Africa 2010

From an article on SSRN titled “Football Most Foul” by William Birdthistle:

Scenes of simulation and outrage are relatively absent from American playing fields less because U.S. sports boast omniscient officials with greater acuity than soccer referees, or because there are no bad calls in America, but because the consequences of any official error are much less harmful. Except in relatively rare circumstances, American referees simply do not wield the power to work a game’s bouleversement with one blow of the whistle. Certainly, it is almost unheard of in the United States for a referee to be able to decimate (in the original sense) one team’s playing strength or to award another team the game’s only score. In soccer, however, a referee’s red card is regularly the most critical development in a match, and a penalty frequently leads to the game’s only goal. Last year’s champions, Italy, will readily attest to this principle. Indeed, so important is the power and personality of a referee that in Italy, media listings for domestic soccer fixtures routinely include – along with the teams, the date, and the venue – the official’s name.

He continues:

The World Cup comprises more nations than either the Olympics or the United Nations. It is therefore a rare, truly global event. Every four years, billions of fans follow the tournament hoping to enjoy the apotheosis of soccer, played by its finest artisans for the highest stakes. Instead, with pressure and finality so palpable in every game, players frequently compete with more calculation and defensiveness than they do in their wildly popular domestic leagues. The current set of referees’ rewards and punishments only  exacerbates the incentives to play in this cynical style. The abiding image of the tournament now is less one of spectacular goals or surpassing sportsmanship and more one of melodramatic chicanery. But if the referees’ tools can be adjusted and their roles thereby relegated, we might look forward to future World Cups in which the beautiful game, rather than the soap opera, plays center forward.

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Apr 09 2010
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Economics, Models

An extended thought on arms races

Reading over my previous post on nuclear deterrence and President Obama’s Nuclear Posture Review, I was immediately struck by the thought that it was incomplete. Part of the reason why I think nuclear weapons are becoming less important is because other technologies are becoming more important, or at least more relevant.

This world has already seen many arms races, and to-date the nuclear race has been the most important. But the arms race never stops. Nuclear weapons aren’t perfect weapons in the sense that they are relatively blunter and less precise than other technologies, or at least the promise of other technologies.

I suggest that while nuclear power will always be extremely relevant and nuclear weapons will remain the weapon of choice for ending the existence of all life on this planet, the true arms race has shifted to technologies that allow strategic micro-targeting. Predator drones represent but one facet of this direction; other directions include the military applications of sophisticated robotics, nano-technology, and bioengineering.

Perhaps one reason why America is willing to push for a nuclear-free world is because we are close to another game-changer, or because we already have one. In this world nuclear weapons don’t matter because other technologies provide effective countermeasures and the investment in nuclear weapons systems represent forgone opportunities to develop or build other technologies.

In any case, this is part of what I think the President’s Nuclear Posture Review signals.

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Apr 09 2010
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Economics, Models

On the Nuclear Posture Review and deterrence

Some thoughts that I’ve been having on President Obama’s negotiations with Russia over the number and status of our collective nuclear stockpile:

America is currently negotiating from a position of strength. This is true partly because the assumptions that have to be true for the theory of Mutual Assured Destruction (MAD) to exert a sufficient deterrent effect are no longer true: America has nuclear primacy, which means that we possess the capability to unilaterally first strike without the prospect of retaliation.

The signal that we are willing to reduce our nuclear inventory (from a President who has spoken openly of a nuclear-free era) is not a signal of weakness. Rather, it is a signal of utter confidence, and America’s enemies will take it that way.

Consider, by way of why this is true, the Predator drone. Unmanned drones offer us overwhelming conventional superiority because they allow us total control over a battlefield. It is not just the Taliban or Al Quaeda that should be making calculations about how viable they are in a world where drones see everything, it is the Russian and Chinese and North Korean militaries (and really, every potential enemy). Consider when unmanned drones are vastly cheaper for the US and more sophisticated in terms of the armament they’re used to deploy. In this world, no nation can claim the ability to control its airspace; squadrons of drones can infiltrate any airspace and stay radar-neutral, providing a blanket of offensive might that can completely neutralize entire nations. In this world, the option value of having nuclear weapons is increasingly offset by the prospect that unmanned drones can be anywhere, anytime.

Also consider that the US now has a dominant technological edge in military development. The collapse of the Soviet Union heralded the collapse of its military-industrial complex, and now the Russian scientists that are left mostly ply their skills elsewhere, leaving China and India as the only countries with the infrastructure to attempt to compete in this arena. I discount India as a strategic threat to the United States and think it unlikely that the Chinese alone can reach comparable levels of technological sophistication without the benefit of at least another decade. One might even reasonably assume that the next game-changing technological breakthrough will also be American.

Additionally, a world free of nuclear weapons is not a world free of nuclear technology. In a disarmed world, the nuclear threat is represented mostly by the prospect of a race to re-arm, a race in which America holds a dominant edge; even a timeframe of 24 hours to 48 hours represents a timeframe in which American air superiority, both manned and unmanned, is completely dominant.

The President’s formal declaration of the conditions under which nuclear weapons will be used is also a powerful factor in this equation. Now American enemies cannot use the argument that American nuclear power threatens non-nuclear states to muster support; at the margin, this makes the spectre of American military superiority more palatable to other nations and decreases the perception of America as a nuclear bully.

By committing to limiting our use of nuclear weapons, we implicitly signal that America is committed to maintaining our overwhelmingly superior conventional deterrent. Those that argue that nuclear weapons prevent the escalation of regional wars and that a nuclear deterrent is critical to maintaining peace were correct in the immediate aftermath of World War II; their assumptions are no longer true today.

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Apr 08 2010
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Economics, law

Henry Hyde on property rights and civil asset forfeiture

From Forfeiting Our Property Rights by former Representative Henry Hyde (R-IL), published 1995 by the Cato Institute, page 3:

Before going further, I think it appropriate to consider the basic principle that unchecked forfeiture undermines–the right to private property–and why that principle is so important in America, or in any just society. True, we are dealing with an abstract principle we usually take for granted, but the right to own and enjoy property protects and enhances the lives of all citizens. Without it, human being are reduced to misery and want. The stark reality of this truth is never so evident as when a squad of government agents breaks down your door, guns drawn, and confiscates your family home. That might sound dramatic. But too often that is the reality of modern American forfeiture law.

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Apr 08 2010
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Economics

On ”Anchor Prices”

From The Simple Dollar:

I have a quick four question quiz for you to run through in your head. Just give your snap response to these – don’t think about each one too much.

What is a wedding supposed to cost?
What is an automobile supposed to cost?
What is a home supposed to cost?
What is a three week vacation for a family of four supposed to cost?

For each of these questions, you came up with a number of some sort. That number is based on your own life experience coupled with what you’ve observed others doing and also the influence that media has had on you. That number, in other words, is your “mental anchor” for what that item should cost – and it’s often the basis of judging whether something is reasonable in price or not.

Of course, anyone who has read The Simple Dollar for long probably recognizes one thing immediately: that anchor price is nothing more than a sticker on the box. It doesn’t represent what you’d ever actually need to or have to pay.


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Apr 08 2010
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Economics, law

A thought on legal regimes, legislative processes, and evolution

There is much debate over the European social model, how well it works, and how desirable it is. What is interesting to me is how it came about. I suggest that part of the reason might lie in the institutional infrastructure of these European countries and is a side effect of poor institutional design.

Let’s start with some intuition about legal regimes. Legal regimes are generally categorized in the literature under the two main strains of common law and civil law regimes. There are variants of each, but the important differences are in how each regime is structured. Common law regimes are based on English common law and works this way: legislatures make laws and judges have wide latitude to interpret these laws in context of specific cases. In this way the majority of the actual law is case law, which we can also call judge-made law. Inherently I think there are two advantages here. The first is that common law regimes are more responsive to exogenous shocks and citizen demands because judges can interpret and apply laws contextually. The second advantage is that one can take broad principles, like freedom of speech, and apply them easily. Civil law regimes are based conceptually on the Justinian code and finds its most prominent expression in France, whose civil law regime was heavily influenced by the Napoleonic code. In civil law regimes, the law, whether principle or rule, is codified by a legislature. In this setup judges have vastly less latitude and adjudicate on a bright-line basis. Case law in this institutional paradigm is vastly less influential where it exists at all. The disadvantage here is that the law is vastly less responsive to exogenous shocks since judges do not have much ability to interpret these laws contextually.

So the next intuition is how policies are formed and wrongs redressed in civil law vs. common law regimes. On a broad, theoretical level, my intuition is that common law regimes are less likely to have legislation redress wrongs because citizens have options in courts. Consider two nations, one with a civil law regime and one one with a common law regime. In the nation with common law, citizens faced with uncertain legal footing due to technological change can obtain rulings to extend and clarify laws like the 4th Amendment, for example. In the civil law regime, the laws are inflexible, and citizens cannot obtain the same rulings in a court of law; their option is to enact new laws. In this second nation, the legislature is thus vastly more important. Laws are inflexible, so they must be changed, and legislators are put more often into the position of forecasting from afar the impacts of the legislation they propose based on singular datapoints.

The more active a legislature is, the more policies it enacts and the more money it spends. Additionally, legislators are often unqualified to actually write and interpret laws, which require sometimes substantial legal education and intellectual sophistication. The claim is that legislators are worse at writing laws to respond to exogenous, far off shocks than judges are at creating case law based on immediate, contextual information. Additionally, independent judges are often circumscribed by what they can do; though they can rule on the legality of specific issues they cannot create entire social programs to respond to systemic issues. But legislators can…and there are lots of legislators, both liberal and conservative, whose first instinct when approached with a problem is to think how a government program might be a solution.

So the claim is that civil law regimes are much more susceptible to policy-making by legislatures, which in Europe particularly has resulted in nations designed to legislate problems rather than adjudicating them. This results in the inevitable growth of social programs as citizens are constrained in their options when seeking responsive and flexible legal relief from the judiciary and are forced to pursue legislative relief.

Let me note here that I know I haven’t presented any data here; the argument I wanted to make here is analytical, not empirical, though I do have data that I’ll present in later posts on the subject.

Hat Tip: I am indebted to many fruitful conversations with Ron Harstad on the subject several years ago as well as conversations with Abhi Sivasailam more recently.

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Apr 08 2010
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Economics, law, politics

Against civil asset forfeiture, Part I

During my sophomore year in high school, I competed in policy debate. My partner and I chose to run an affirmative advocating the end of the system known as civil asset forfeiture, a relic of ancient English common law that has made an ugly reappearance since the passage of the Racketeer Influenced and Corrupt Organizations Act (RICO) in 1970. This topic has always remained on my radar and since that debate topic I have kept current with both the literature on the subject and have written several essays against it.

The basic premise of civil asset forfeiture is that under a truly ancient and archaic legal theory, the government can level a charge of being the product or accessory to a crime against property itself. Note that this completely changes the game. In criminal prosecutions, the government has the burden of proof and is held to a standard of reasonable doubt. Additionally, defendants enjoy numerous (though not always sufficient) protections, like the right to counsel and the right to due process. In civil actions, and particularly in a civil forfeiture action, the government only has to establish a preponderance of the evidence in order to obtain a forfeiture.

Note the trick here. A preponderance of the evidence standard is something that few people are familiar with, in part because it’s used as a criteria for adjudicating guilt so rarely. But consider the trap this puts an innocent person. The government seizes an asset on some arbitrary charge and provides an informant’s affidavit as evidence. An innocent citizen now has to prove a negative in order to retain the rights to their property by providing evidence of superior quantity and quality. This is nearly impossible for citizens implicated in the vast majority of civil forfeiture actions who now have to prove that their property (not themselves) are innocent. Additionally, since the forfeiture action vests against the property, not the property owner, the owner’s complicity in the alleged crime is actually irrelevant.

Imagine a paid informant provides evidence that a black man of some variety will be transporting a large amount of cash for a criminal activity through a certain town. On the strength of that reasonably vague affidavit, the police can stop and search almost at will. If they find a black man actually in possession of a large amount of cash, the affidavit constitutes probable cause for the seizure and evidence for the forfeiture action, regardless of whether or not the man is a criminal or the cash is for illicit purposes. The property owner now has to provide evidence that outweighs a sworn affidavit describing in generic but apt language the suspicion vested by the police on the strength of an informant who has no accountability for his testimony and is paid to provide the police with justification for warrants. In this case, this means accounting for the cash in every last detail of where it was from and where it was going. Generally, this is a costly prohibitive burden on the politically weak, particularly when traveling. One must deal with the expense of travel and the opportunity costs of having to be in other jurisdictions for proceedings, along with the cost of an attorney and the cost of proving impossible negatives.

In other words, this forfeiture can happen without the DA ever filing a charge. The calculation now is: we found a criminal and took his cash and we don’t even have to go to the expense and trouble of prosecution. The informant is even eligible for a cut of the seized property. This presumably exists to incentivize criminals to turn their associates by holding out the promise of financial gain. Note that when there is no check on informant credibility, this is a system that can be gamed by criminals for money.

It gets worse.

So many states have laws specifically deeming that the proceeds of forfeiture return to specific general funds, like education or healthcare. So police departments should have no incentive to seize without really having probable cause, right? Wrong. The federal government in many cases helps state and local police agencies subvert their own laws through a clever loophole. The loophole works like this: the state police find an asset in an appropriate situation where forfeiture is easy and unlikely to be contested. They then ‘detain’ the asset until a federal agent arrives and initiates a seizure under federal law. The asset is then liquidated and the local police get a kickback that is usually around 80% and goes straight to their budget.

In one fell swoop several fundamental checks and balances are cut out of the picture. First, there is the obvious dishonesty and travesty of letting one level of government actively subvert the will and intent of another level. Second, this allows police departments to become in theory self-funding, which eliminates the legislative check on executive power, since the legislature’s control of the public funds now becomes meaningless. This is a subversion of democracy that happens on both the state and federal level.

This is the first in what I intend to be a series of posts on this subject. Later posts will explore the specific constitutional violations that accrue through the use of civil asset forfeiture, the harms of letting police departments self-fund, and several other nuances to this story.

I am indebted to Mickey Klebanov, David Kramer, and Eric Kafka for the numerous conversations we had on this topic.

Addendum: Ilya Somin at the Volokh Conspiracy blogs about civil asset forfeiture here. Recommended.

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Apr 03 2010
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Economics, Intelligence

Petraean Signalling Theory

From Vanity Fair:

He still steers the Iraq war, and he oversees the developing strategy for routing the Taliban in Afghanistan. The all-out assault on Marjah in February demonstrated strict Petraean principles in action. It was announced months in advance, which gave civilians a chance to either dig in or clear out. There were civilian deaths, tragedies that were clearly inadvertent and which McChrystal publicly apologized for, but the numbers were a fraction of those common in such urban assaults. By so carefully reducing the potential for civilians to be caught in the crossfire, the offensive all but eliminated what is, perhaps, the strongest incentive for Taliban troops to stand and fight: to exploit such deaths to turn public opinion against America. Since they could not hope to defeat the onslaught of allied and Afghan troops, the insurgents largely melted away. The end result was the same: the allied and Afghan forces reclaimed Marjah, but they did so with relatively little bloodshed. This approach runs directly counter to military convention, which prizes secrecy and surprise. It recognizes that the real battle is not chasing the Taliban out of the city or underground but winning the population, a process which can begin only after the city has been retaken. American commanders have already announced an even larger offensive for later this year, on Kandahar.

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Apr 02 2010
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Economics, politics

Senator Orrin Hatch’s aides say dumb things about game theoreticians

From the WSJ:

In classic game theory, confrontation is sometimes necessary when cooperation breaks down to present a credible potential threat and get the two sides to re-engage, said Robert Axelrod, a University of Michigan political scientist and author of the game-theory book, “The Evolution of Cooperation.” He isn’t related to White House senior adviser David Axelrod.

The Senate doesn’t work the way game theorists think, said Antonia Ferrier, an aide to Republican Sen. Orrin Hatch of Utah. A body built on personal relationships is likely to spiral into endless tit-for-tat retaliations in the face of Mr. Obama’s new turn, she said.

Ms. Ferrier’s ignorance and willingness to make claims about she doesn’t know anything about is so painfully bad, it’s funny. For those who aren’t in on the joke, Robert Axelrod, yes, THE Robert Axelrod, seminally important political scientist who did much of the foundational work in applied game theory actually did discuss the tit-for-tat strategy in his work with Anatol Rapaport (a Russian mathematician) in 1980. Here is more abut the tournaments, in which tit-for-tat was the dominant, winning strategy.

So yes, Ms. Ferrier, game theorists do have insights into how the Senate works, and it’s unfair and really dumb of you to say that in response to the person who actually did all this work that you’re ignorant of.

Recommended: Axelrod’s The Evolution of Cooperation is one of the seminal texts in game theory and I am currently reading his earlier contribution, Conflict of Interest, which has a lot of to offer to the study of political coalitions.

Addendum: Here is a biography of Robert Axelrod by the indomitable Elinor Ostrom, one of our newest Nobel Laureates in Economics.

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Mar 30 2010
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Economics, pop culture, Travel

China line of the day, lil Wayne edition

From the NYT:

“People are coming with entire bags full of cash,” said Raymond Hau, general manager of the Sun Valley Golf Resort, which is building the 220 luxury villas. “I’ve seen this myself. A man had a bag and unzipped it. Boom. ‘Here’s the deposit,’ he said. ‘I want two apartments.’”

Mr. Hau shook his head. “It’s crazy. It can only happen in China.”

The golf resort is popular with the privileged. The president of Kazakhstan shot a hole in one here. And on a recent afternoon, when an attendant opened the passenger door of a black sport-utility vehicle that had just pulled up, a pile of large-denomination Chinese bills fluttered to the ground.

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