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Before I talk about this, I should mention that I am not very knowledgeable about macroeconomics, and this idea may be old.

My friend Nick came up with, what seems to me, an extremely good stimulus mechanism for economic downturns. When economic downturns hit, instead of providing tax refunds, states temporarily cut their sales tax significantly.

The advantage that a sales tax holiday has over an income tax breaks is that sales taxes are consumption taxes, not income taxes. When people get a break in their income taxes, it is rational for them to save the extra income in order to spread the increased consumption out over a longer period. However, when people get a consumption tax holiday, it is rational for them to move future consumption into the present, as well as move the purchase of storable goods into the present. Thus a sales/consumption tax holiday would provide more concentrated stimulus than an income tax break.

A sales tax holiday would be broad based because it would apply to all transactions which are subject to sales tax. I don’t know much about stimulus economics, but this seems desirable as it is in tax economics.

Another advantage of a sales tax holiday is that it would be easy to make automatic, which is important for a stimulus mechanism, because special stimulus plans can take time to move through legislatures. I see two ways using a sales tax holiday as a stimulus mechanism could be automated:

  1. Tie the activation of the sales tax holiday directly to local macroeconomic conditions. For example, the sales tax holiday could be triggered if the unemployment rate falls below some critical threshhold (it could also be graduated).
  2. Tie the activation of the sales tax holiday to a Normative Prediction Market, that predicts what a specific council will, in the future, say should have happened right now (i.e. “There should have been a stimulus in August of 2008”). The committee would be a lot like the current committee that dates recessions, except that it would decide whether a stimulus was a good idea. You could alternatively simply use the committee for dating recessions; InTrade already has similar markets. The sales tax holiday would be whatever the market expectation value is for the recommendation, or when the probability of recession rises above some cutoff like 30%.

A number of states already have regular sales tax holidays, though these seem to me like a bad idea, since it is undoubtable distortionary. Some other people have also suggested using a sale tax holiday, notably the Missouri Lt. Governer called for such a simulus, and some states have extended their regular sales tax holidays.

Update: The Washington Post has noted that regular holidays have provided such a stimulus, though the holiday only applies to certain goods (link).

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There are many ideas floating around for reforming existing institutions so that they produce significantly better outcomes. The three ideas for reforming governing institutions that I know of are Predictocracy, Futarchy, and Professional Voting; I am sure there are more, and I know there are a lot more for reforming other institutions. However, there is a noticeable lack of experimentation with type of idea. Does it make sense not to experiment? Let’s do a few back-of-the-envelope net present value calculations to see if it does or not.

Let’s say that we judge Futarchy to have a 1% chance of working. Let’s also assume that if we experimented with it now it would take 30 years for the benefits to appear, that it would save everyone in the country $100/year (a conservative guesstimate, remember this is contingent on Futarchy “working”), and that the total investment would be about $100 million (surely a massive over guesstimation). Using a discount rate of 10%/year, the Net Present Value of a $100/year stream appearing after 30 years is $57 (I did the calculations). There are 300 million people in the country so the total Net Present Value is ( 1% x $57 x 300 million ) – $100 million = $70 million. So even under these calculations, the expected benefit of researching Futarchy is massively positive. Not experimenting is huge loss.

The thing that makes this investment so good is the fact that there are a lot of people in the country. Finding an institutional reform that makes peoples lives better provides a massive public good, but costs a fixed amount to find. In these calculations I have only included the people in the country, the expected benefit is an of magnitude larger if we consider the benefits to everyone in the whole world.


The Commodity Futures Trading Commission is calling for public comments on possible regulation of “Event Contracts.” As I understand it, this is good news for prediction markets; there is a lot of uncertainty about the regulatory status of prediction markets, and this seems like it would clear that up. A clear regulatory framework would pave the way for real-money prediction markets. At least, as long as event contracts are not regulated out of existence. It is my impression that this is a very good thing, so I am very excited.

I will be submitting comments via e-mail (secretary@cftc.gov), and I encourage others to do the same.

The gist of my comments is going to be that I see the potential for prediction markets to help regular people, who don’t have access to a lot of data and analysis, make decisions. For example, prediction markets about the future of renewable resource technologies could help engineering students determine whether they should invest resources in learning about those technologies. Prediction markets about the economic future of specific geographic areas could help young workers decide  where to move to get good jobs. Therefore, I would like to see the prediction markets relatively unlimited.

via Midas Oracle


For the last few months or so, I have been eating lunch on the Ave instead of bringing food from home. The Ave is a long street two blocks over from the University of Washington campus that has a lot of restaurants on it. Many of them are quite good.

Eating on the Ave regularly led me to think about how competitive the lunch food market on the Ave is. There are a lot of restaurants, so it is pretty competitive, but it could probably more competitive. This led me wonder why Seattle is almost devoid of street vendors (there are a few downtown). This article explains it

Back in the 1970s, our fair city decided “clean streets” meant enforcing the stiffest laws in the country regulating street food vendors.

[…]

I recently called the health department to inquire about opening a French-fry cart, the importance of which became apparent to me as a teenager in Amsterdam. The hardened municipal worker on the other end of the phone informed me that if I didn’t see it on the streets, it could not be done. When I decried Seattle’s embarrassing lack of street food variety, she suggested I “move to France, where their food poisoning rate is consequently higher.”

It is unfortunate that selling food on the streets is so heavily regulated. Allowing street vendors should reduce the price of lunch foods by reducing their operating costs. Street vendors have lower operating costs since they do not have to rent expensive storefront space, although they do have to rent or buy licenses. Allowing street vendors would also have the added benefit of reducing the number of storefront restaurants, which would free up storefront space for other things. I would like to see Seattle auction off tradeable street vendor licenses. Auctioned permits would also allow easy to vendor regulation since their licenses could be revoked.


I am reading Predictocracy: Market Mechanisms for Public and Private Decision by Michael Abramowicz, about how prediction markets can be used for decision making in various places. Since I talk about governance mechanisms a lot on this blog, I intend to review the book later on.

In the mean time, here is a series of posts that Abramowicz did for The Volokh Conspiracy on prediction markets which I found pretty interesting. It includes some good-back-and-forth with Robin Hanson about Futarchy vs. Predictocracy (which I have discussed before).


Intrade is apparently starting to include contracts on the future of aggregate economic measures (e.g. GDP growth rate or unemployment rate changes) conditional on political outcomes (e.g. Hillary gets elected) at the suggestion of a research initiative of the Westminster Business School; such conditional prediction market contracts are central to Futarchy. Now, perhaps, we will be able to see if prediction markets can make good predictions about these topics, though they may be too thin to reveal much information.

Looking at the contract prices and volumes on Intrade (Markets->Politics->Impact of Next Pres.) right now, the markets look pretty thin, but perhaps eventually they will have significant impacts on elections.


 

David Reevely has an interesting post describing the funny way in which Alberta tries exploit it’s oil rents by renting out the extraction rights. Currently, the Premier decides on the fraction of profits that must go to the province, which seems somewhat clumsy. Reevely points out that an auction would be a much better way for Alberta to capture all the rents, especially because information (surveying) costs are low relative to the potential profits. Oil extraction rights seem very similar to EM spectrum usage rights, where auctions have been very successful in generating revenue.

Addendum: Vernon Smith suggested auctioning Alaskan oil extraction rights back in 2004.


Responding to Dani Rodrik’s praise Costa Rica’s CAFTA referendum, Brad DeLong aptly summarizes the argument for representative government over directly democratic government:

Here in California we have referendums. LOTS of referendums. It is not an inspiring sight. It is much better for voters to elect representatives who share their values, and for the representative to then study and think and so develop informed opinions on the issues.

This idea–“the representation of the people in the legislature by deputies of their own election”–is, as Alexander Hamilton wrote 220 years ago, a great innovation in the

science of politics… [which] like most other sciences, has received great improvement. The efficacy of various principles is now well understood, which were either not known at all, or imperfectly known to the ancients…. [W]holly new discoveries… [and ideas that] have made their principal progress towards perfection in modern times… are means, and powerful means, by which the excellences of republican government may be retained and its imperfections lessened or avoided…”

Referendums have advantages as symbolic actions raising the issue decided to a higher place as far as the consent of the governed is concerned. But for making good decisions? Very doubtful.

This is just the simple  principle that you should be able to outsource your political decisions.


I rarely cheer for either political party, but the Democrats are calling for a ‘consensus candidate’ and threatening to block Bush’s nomination if it is Ted Olson, who would be a very political nomination. I strongly support the nomination of consensus candidates over political ones, so: Go Democrats!

Democrats, including current Judiciary Committee Chairman Patrick Leahy, indicated they would mount strong challenges to Olson if Bush nominates him. “He is certainly not a consensus nominee,” said Sen. Chuck Schumer, D-N.Y. “He has a very political background.”

Later in the article:

If Democrats delay the nomination, [Republican Senate leader] McConnell warned, “they’ll show the American people that their concern for the department was insincere.”

It takes some serious chutzpa to attack the Democrats for showing concern about the independence and centrism of the justice department.

I can’t be the only one who thinks that the position of Attorney General, or any appointment, should not be a political appointment. There are many people that would be acceptable to almost everyone, and the president should nominate one of these candidates.


Balkinization points to a Fresh Air interview with Charlie Savage on his new book about the expansion of executive power. Conclusion: Bush and Cheney, not Hayekians.