Is there a map?

My Israeli sim card from Cellcom was too large for my Galaxy S5 phone. A friend told me that cell phone stores can clip the sim cards to fit different phones. Neither Cellcom's website nor google maps was helpful in identifying a Cellcom location, so I went to the Ayalon Mall, which I assumed would have an outlet. Seeing no map at the entrance, I approached a woman at a nearby kiosk.

Me: Excuse me, is there a map?

Woman: Where do you want to go?

M: Is there a Cellcom store?

[She points to her right.]

W: Go all the way to the end of this wing, it will be on your left.

I felt this interaction was pretty typical of my experience in Israel. I often don't know how to do something or where to find something, but usually there's a person around who can help if I ask. On one hand, it's nice that somebody is there who is willing and able to help. On the other hand, why can't there just be a map?

Four policies better than the minimum wage

Some of my friends are joining the “fight for 15”, a campaign to raise the minimum wage to $15 an hour. I expect the campaign will succeed in many states and maybe at the federal level, and I commend their apparent desire to help poor people. However, if the goal is to help poor people, the minimum wage is an inferior policy tool.

Here are four alternatives that I think would help poor people more than raising the minimum wage:

1. EITC - Expand the eligibility or generosity of the Earned Income Tax Credit.
2. HCVP - Fully fund the Housing Choice Voucher Program, which currently assists just one out of four people who are eligible for assistance.
3. SNAP - Expand the eligibility or generosity of the Supplemental Nutritional Assistance Program.
4. Personal exemption - Raise the personal exemption on federal income tax, or convert the personal exemption into a refundable tax credit. A refundable tax credit with universal eligibility would be equivalent to a basic income.

These policies share the feature that their cost is visible in the form of higher government spending or reduced tax revenue. Raising the minimum wage might be more palatable to Congress because it has no direct budget impact. The cost of the minimum wage is less obvious.

One cost of the minimum wage is borne by employers who pay employees a higher wage. The burden on employers deserves consideration but doesn't bother me. What bothers me is the social cost of the minimum wage, which is borne partially by poor people.

Consider the following thought experiment. If raising the minimum wage is good, why should we stop at $15? Why not $20, or $50, or $500? It would be wonderful for everyone to earn $500 an hour, but I suspect that many employers who pay lower wages now would employ fewer people rather than raise wages to $500 an hour. Losing jobs is bad for poor people.

This intuition is consistent with basic economic theory, which suggests that raising the minimum wage (a price floor) is good for some workers but reduces overall employment. The empirical consensus among economists is that the short run effect on employment is small. I think we should care more about the long run effect on employment, which my colleague Isaac Sorkin argues hasn't really been measured empirically.

The minimum wage helps some poor people and hurts others. Raising it a little would probably on balance be good but not great for poor people. The alternative policies I suggested are better at helping poor people and put the burden where it belongs: taxpayers.

Hamilton, Babylonia, and antibiotics

Again, this blog post is due to encouragement from my brother Yonah, who blogs at meiselspot.blogspot.com.

Listening to Lin-Manuel Miranda's excellent new musical Hamilton reminded me of a lesson from American history. Americans did not suddenly begin governing themselves with no prior experience after a successful revolution. The capacity for self-government developed over the course of decades, aided by the British policy of salutary neglect. Selective British law enforcement facilitated the institution of American self-government.

Another institution--mobile identity--received similar assistance from repression that was only partial. This may be a conceit of my Jewish education, but I am currently under the impression that Jews were the first group with a mobile identity.* The story is that most gods were local, so when a person moved to a new place she would discard the gods of her origin and worship the gods of the new locality. Monotheism helped change that. When a Jew moved to a new place she could continue worshiping the god of her origin, who she believed was also present in the new locality.

The partial repression that aided mobile identity was the Babylonian exile.** Ancient empires that conquered new areas sometimes deported the local population to quash rebellion. There were two unusual features of the Babylonian exile. First, it was incomplete. Many Jews remained in the Kingdom of Judah. Second, it was brief. Jews were permitted to return from Babylonia after about 50 years. The Babylonian exile made Jewish identity mobile by:

• establishing a myth of exile and return (or strengthened it if you believe the exodus from Egypt is actual history), and
• establishing a model for a permanent diaspora community.

Partial British repression fostered American self-government, and partial Babylonian repression fostered Jewish mobile identity. And since I like comparing human institutions to biological phenomena, I'll conclude with the observation that a partial course of antibiotics can foster antibiotic-resistant superbugs.

* In this post I use Jews interchangeably with Hebrews and Israelites, which I'm sure is wrong but I doubt is consequential.
** I'm not sure where historical myth ends and actual history begins, but I believe the exodus from Egypt is probably historical myth and the Babylonian exile is actual history.

Why does AIPAC love the Purim victim narrative?

My brother Yonah over at meiselspot.blogspot.com encouraged me to get back in the blogging game.

This week, Jews observed one of the happier holidays, Purim. Traditionally, Purim is observed by reading the story of Esther, dressing in costumes, getting drunk, delivering goody bags to friends, performing farcical skits, and baking triangular pastries--variously called hamantashen (Haman's pockets) or oznei haman (Haman's ears). The observance is something like American Halloween meets American St. Patrick's Day.

The story of Esther goes something like this: King A* of Persia summons Queen Vashti to strip at his party and executes her when she refuses. To replace Vashti, King A holds a beauty pageant, which is won by Esther, a nice Jewish girl. Esther's cousin Mordechai refuses to bow down to the King's chief minister, Haman. Haman gets very pissed off, learns Mordechai is Jewish, and decides to kill all the Jews. Haman gets a rubber stamp from King A for his murderous plan. Meanwhile, Mordechai discovers a plot to kill King A and turns in the conspirators. King A rewards Mordechai, which adds salt to Haman's wound. Mordechai informs now-Queen Esther of Haman's plan to kill all the Jews. Esther fasts then invites King A and Haman to dinner. She reveals she is Jewish and that Haman is trying to kill all the Jews. King A executes Haman and tells the Jews to defend themselves, which they do.

There's an old joke that the summary of every Jewish holiday is, "They tried to kill us. We survived. Let's eat." Purim fits that mold probably more than any other, but I would say that Passover does not fit that mold. Passover commemorates the exodus from Egypt. "We were slaves to Pharoah in Egypt, and now we are free." The theme of Passover is freedom, and it is used all over the place as a justification for other ethical requirements. "Do not oppress the stranger, for you were strangers in the land of Egypt." I'm a Passover Jew. I think collective memory of oppression and appreciation for freedom is inspiring and meaningful.

Purim is different. The lesson from Purim is that they're out to get us. Powerful villains in general want to kill all the Jews, and a Persian villain in particular wants to kill all the Jews. This lesson is not entirely wrong. Some people hate Jews. Antisemitism is real. But that is a terrible starting point for building identity.

On the other hand, it is a great starting point for AIPAC. Thematically, Purim is spot on for AIPAC lobbying Congress about Iran in so many ways. Persian villain who wants to wipe Israel off the map? Check. This year the role of Haman was played by the Ayatollah. (Mahmoud Ahmadinejad was a better fit, but he left office two years ago.) Well-placed safe Jew who has the opportunity to defend Jews in danger? Check. The role of Esther is now played annually by American Jews at the AIPAC policy conference. The religious resonance is deafening.

So, are American Jews reenacting a biblical story as spokesperson-defenders of Jews against a determined Persian villain, or dressing up in costumes for a farce? It depends how you view the threat from Iran. I believe Israel's security professionals when they say that "deterrence works against state-like entities" and that ISIS is scarier than Iran.

* The king's name is Achashverosh in Hebrew, which for some reason is written as Ahasuerus in English. Either way it's too complicated, I'll use King A.

bargaining power

Voluntary trade is often beneficial for both traders. If you buy an apple at the farmer's market, hopefully both you and the farmer are better off after trading at whatever price you pay. This paper* asks how the benefits from trade get split among the traders. Who got the better deal, you or the farmer?

One thing that affects this is bargaining power. In this paper, bargaining power is determined by the number of other trading opportunities a particular trader has. If there is one farmer with one apple at a stall and two hungry buyers, it is natural to think the farmer has more bargaining power.

This paper formalizes the intuition that more trading opportunities often increase a trader's bargaining power, and thereby increase her share of the benefits from trade.

* Manea AER 2011 Bargaining in Stationary Networks

tax evasion

Public finance economists devote significant attention to behavioral responses to tax policy. A citizen might respond to an increase in the income tax by choosing to work fewer hours, choosing to work more hours, or choosing a new occupation. She might respond to an increase in the tax on cigarettes by buying fewer cigarettes, or by buying and storing ten cartons before the tax takes effect. All of these responses, and many more, are legal. They are grouped under the heading of tax avoidance. Tax avoidance is by definition legal, and in some cases it is even desirable. If Congress introduced a tax deduction for people who install solar panels, one would hope a few extra people would alter their behavior by installing solar panels.

When a behavioral response is illegal, it is called tax evasion. Today's article is a classic in the public finance literature, and it focuses on a particular type of evasion: misreporting income.

The basic idea is that people choose how much income to report to the tax authority based on their income, the tax rate, the probability of being caught misreporting, and the penalty if they are caught. The paper concludes that people will misreport less when the probability of being caught is high and the penalty is severe, and that increasing the probability of being caught is more or less interchangeable with increasing the severity of the penalty.

There is not an obvious relationship between true income and the extent of misreporting. This is related to the idea that misreporting is like taking a gamble. You "lose" if you evade and get caught and "win" if you evade without getting caught. Are rich people more likely to gamble? Not necessarily. They might be more willing to part with money, but the lure of a successful gamble is also weaker. So the paper does not draw strong conclusions about the relationship between income and the extent of evasion.

What if the probability of detection depends on the extent of misreporting? The paper derives some technical conditions for optimal behavior, but concludes only by echoing the idea that people misreport less when they are more likely to be caught.

What if, when an audit takes place, it discovers not only current cheating but also past cheating? The paper notes that this can be interpreted as a relatively more severe penalty for misreporting, which it has already been noted reduces misreporting. Again there are a few technical results.

This paper comes with caveats. Most employers report income to the IRS, so misreporting is for many employees not a realistic option because it would be so easy to catch them. Some people feel a moral obligation to report truthfully, so they are not tempted by the gamble. For these and other reasons, the paper is not a complete analysis of tax evasion, but it sets up a clean framework.

Allingham Sandmo JPE 1972 Income tax evasion: a theoretical analysis

collateral constraints

In the past this blog focused on my experience in Israel and on Israeli politics. Yonah has wittily and prolifically taken up that thread, so I leave it to him.

I turn now to economics. I'm a fan of the econ blog Marginal Revolution, but that cannot be my model if I hope to finish my PhD on time. Instead I'll use the blog as a commitment device.

Macro and public finance are my fields. As I read articles, I'll distill them into a brief nontechnical summary. I won't do this for all the articles I read, but blogging on a schedule will hopefully force me to keep up a brisk pace and be a good exercise in translating jargon into English. My plan is three summaries per week, posted Monday Wednesday and Friday at noon. Hat tip to Yonah for the schedule structure.

The first paper* is about borrowing limits. Think of a farmer who must borrow money to buy seed and machinery. The bank lending money to the farmer worries that the farmer will not have enough money to repay the loan if there is a bad crop. The bank requires the farmer to pledge farmland as collateral, which the bank will own if the farmer cannot repay. The limit on the farmer's borrowing is the value of the land he has available to pledge as collateral.

The paper considers the case where if one farmer has a bad crop, they all have a bad crop. Think of a bank lending to farmers in one region that is sometimes hit by a flood or drought. Then the bank will own all of the farmland pledged by all of the farmers, because none were able to repay. Things get complicated because the price of the farmland depends on whether there is a good crop or bad crop. In particular, following a bad crop, the price of farmland is low because the bank would like to sell lots of the land it now owns. Knowing that the value of the collateral will drop if it is ever collected, the bank is unwilling to lend very much to the farmers.

Krishnamurthy observes that the farmers could mitigate this problem by buying insurance. If there is no flood, they give some of the bumper crop to the bank. If there is a flood, the bank not only allows them to keep the farmland but also gives them enough money for new equipment and seed.

That seems reasonable enough. But remember that when one crop goes bad they all go bad. That means that when there is a flood, the bank will have to shell out insurance payments to everybody at the same time. How do the farmers know the bank will be able to pay? The same way the bank guaranteed the farmers could pay: by demanding collateral. And now the tables have turned, because the bank might not have enough cash on hand to provide a sufficient amount of insurance to all the farmers in the event of a flood.

Why don't firms fully insure against risk? Krishnamurthy shows that one possible answer to this question is that insurers don't have enough collateral. Krishnamurthy notes that if insurance markets are failing for this reason, then it could be a justification for the government to be more active in providing insurance.

*Krishnamurthy JET 2003 Collateral constraints and the amplification mechanism