Still in Beta

Gmail is not kidding when they say they are still in beta. Check out my inbox from this morning:

Harvard, politics, and media

I like this NYTimes story that links a Harvard scholar, a Harvard award, Mayor Bloombery of NYC, and transfats.

In Defense of Supply Siders

Hoo boy, now there is a headline I never thought I would write. I am not a supply side economist by any stretch of the imagination, in that I don't believe that tax cuts will pay for themselves, certainly not in the short term. That said, I think James Surowiecki, a writer I like, did a bad job explaining the true trade offs between taxes, growth, and government spending. Surowiecki's key facts are correct

To begin with, the absurd idea that tax cuts pay for themselves is based on an idea that is not at all absurd, which is that tax rates can have an impact on people’s behavior. Increase taxes too much, and people may work less (since they get to keep less of the income they earn) and invest less (since their gains will be taxed more heavily), and so the economy will grow more slowly. The opposite can happen if you cut taxes. (How much of an impact tax rates have—and how high taxes have to get before they have an impact—is a subject of much debate in economics, but it’s inarguable that they do matter.) What supply-siders have done is start with that reasonable idea and extrapolate it to unreasonable lengths.

What are those unreasonable lengths? Let's continue:

They’re aided in that extrapolation by the simple fact that the American economy grows over time. As a result, even if you cut taxes the federal government will eventually take in more tax revenue than it once did. And that allows supply-siders to fashion a spurious syllogism: taxes were cut in 2001, government revenues are higher in 2007 than they were in 2001, therefore the tax cuts increased revenue. The comparison that really matters in analyzing the impact of the tax cuts, of course, is not between government revenue in 2001 and government revenue in 2007. It’s the comparison between actual tax revenue in 2007 and what tax revenue would have been in 2007 had there been no tax cuts in 2001.

I think the time element that Surowiecki raises is critical.

It's easy to build a simple model economy and see what impact taxes and growth rates have on it over time. You can set a low tax rate (30%) and assign that a particular annual growth rate (say, 3%). You can set a high tax rate (40%) and assign that a lower annual growth rate (say, 2%). As the article mentions, there is a great deal of debate on exactly what impact different tax rates have on growth, and this does not capture the myriad of regulations that impact actual business processes, and so also impact growth, but are not captured in a tax rate. Nonetheless, this model captures the essential elements in the argument.

In year 1, there is no question that a high tax rate economy will capture more revenue from the government than a low tax rate country. But the growth rates make a difference -- in 30 years (one generation) the low tax, high growth economy is 50% larger than the high tax economy, and the government is collecting the same amount of taxes in both. From the 31st year onwards, the low tax economy in every year collects more in taxes than the high tax economy. Does this vindicate the Supply Siders?

Not quite, because we need to determine how much we care about the next generation (year 30) compared to the current generation (year 1). If one tries to guess from current US spending patterns, and the large, hidden liability in medicare and social security, the implicit discount rate is very high -- ie. the government cares very little about the next generation compared to the last one. With a high discount rate, the net present value of the high tax model is higher than the low tax model -- all that extra growth and wealth does not count for anything because the benefits fall to the next generation.

If we use a much lower discount rate, say zero (which says we care about future generations as much as this one) then the low tax regime is better. Incidently, a zero discount rate is required for any environmental intervention to be worthwhile (ignoring opportunity cost) so it's not a crazy option.

So we're left in a difficult position. If you believe that there is a trade-off between tax rates and growth, then whether or not tax cuts pay for themselves is entirely a matter of what your time horizon is, and how much you care about today vs tomorrow. If you don't care about the environment (high discount rate) then high taxes are a good idea. If you care about the environment (low discount rate) then low taxes are a good idea. These combinations make strange bedfellows.

Flickr

Michael Blowhard does not get Flickr.

And here's something that puzzles me more generally: What are the advantages that the social-networking approach to weblife offers over the old website-plus-email model?

Much of my bewilderment no doubt has to do with age. Age does seem to be one of those big digital divides, after all. For one thing, older people can’t see any reason to scatter pieces of themselves all over the web. Show them a MySpace page and they'll wince and look away. Explain to them about microblogging and they'll ask, "Why on earth would anyone want to do that?"

I certainly do not find Flickr to be an easy way to post and share photos.

Final count

The final count seems to stand at 134. This NYTimes OpEd gets it exactly wrong, which is unsurprising given that it's a NYTimes OpEd.

Bad ideas

Pakistan needs good governance. So the US State Department sends a corrupt politician. People will start dying imminently.

Update Well, that didn't take long. 30 dead and counting.

Update Now we are at 108. The profound ignorance of the State Department is stunning.

60 Minutes on Dubai

I watched 60 Minutes on Dubai yesterday, which was great in that it had actual interviews by Sheikh Mohammed (rare), and which was awful in that 60 Minutes is awful.

I also think that some of the key themes that emerged were correct. Dubai has taken "if you build it, they will come" to heart and is making big bets on rolling out loads of new developments. The skyrocketing property prices reported on the show are real, but remember that this is in a region with no limits on development -- unlike San Francisco, supply will adjust to demand. Overall, Sheikh Mohammed, and his father, have done a great job running the country -- especially compared to the local competition.

The local competition gets an article in today's NYTimes. The article talks about how lovely Sharjah, Ajman, and Fujayrah are. Back in the day, all the Emirates were pretty similar, but the runaway success of Dubai has put the others to shame. I know most about Sharjah, since I grew up there, and I recommend the roads for anyone who wants to see bad decision making in action.

Advice for eBay

Fresh after it's wild success in the internet telephony market with the cash machine formerly known as Skype, eBay is hot on the heels of the next Valley phenom: social networking.

Once eBay has either acquired or defeated Facebook, it may wish to consider focusing on its core business -- online auctions. Because buying and selling stuff on eBay is a royal pain. I've always thought it is the second worst successful site out there, being pipped at the post by MySpace.

After moving to the Bay Area, all of my transactions have been through CraigsList, which is far easier to use. But it's not as if eBay's auction business is doing poorly -- it's only down 2% YoY.

Interest rate mechanism

These notes by Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco, say there is a question about how exactly interest rate reductions by the Fed impact consumer spending, and the broader economy.

Now let me return to the national economy. Beyond the housing sector’s direct impact on GDP growth, a significant issue is its impact on personal consumption expenditures, which have been the main engine of growth in recent years. Indeed, data on consumption spending in the last few months have continued to show strength. The nature and extent of the linkages between housing and consumer spending, however, are a topic of debate among economists. Some believe that these linkages run mainly through total wealth, of which housing wealth is a part. Others argue that house prices affect consumer spending by changing the value of mortgage equity. Less equity, for example, reduces the quantity of funds available for credit-constrained consumers to borrow through home equity loans or to withdraw through refinancing. The key point is that, according to both theories, a drop in house prices is likely to restrain consumer spending to some extent, and this view is backed up by empirical research on the U.S. economy.

A friend of mine at Chicago told me that MEW was the primary mechanism by which lower interest rates contributed to increased consumer spending.

Half right

I have no idea if Ameer Bhutto is related to Benazir or not, but this editorial gets the current story in Pakistan half right.

The fact is that Pakistan has lost all remaining vestiges of sovereignty, which has been sacrificed to western powers by our politicians to obtain power or cling on to power, for which they are even prepared to hand over Abdul Qadeer Khan to the IAEA and are also willing to formally allow American troops to go after Osama bin Laden on Pakistani soil.

...

The White House is running the whole show. After much denial, the Americans finally conceded that they sponsored the deal between President Musharraf and Benazir, leading to US Secretary of State Condoleezza Rice’s statement that Benazir should be made part of the next set-up. But if everything is to be worked out beforehand in shady deals, then elections become a pointless façade, the voice of the people loses all importance and the ‘democratic’ process is reduced to a sad burlesque of all hopes.

The White House is only running half the show (the Musharraf side). The other part of the show (the Benazir Bhutto side) is 100% State. And no, the two are not acting in concert.

Du-buy

Yesterday, I asked how rents in Dubai could be so high, given that the city is one enormous construction zone. Fellow U-Chicago alum, Megan McArdle, ventures:

doubling oil prices have pushed up many incomes in the businesses that cater to the oil industry, which in Dubai is nearly all of them, so that even skyrocketing supply is not keeping up with demand. I'd also expect that the flow of oil money has encouraged people in other parts of the Middle East to seek apartments in Dubai (as well as New York and London and Paris, which is one of the reasons real estate markets are so robust in those cities).

If prices are going up, it means that demand is somehow outstripping supply. And if supply seems to be robust, then demand must be even fiercer.

Dubai actually has little oil money, but that's certainly not true for Abu Dhabi, up the road, or neighbouring states like Qatar, Bahrain, and Saudi. If folks from those countries are deciding to move to Dubai, it's because the city seems to enjoy a temporary regional monopoly on sanity, and pleasantness. It's remarkable what a government can accomplish if it selects property development as being its primary goal, and focuses on that. Hopefully Dubai may start a trend in the region.

Or maybe they are just a bunch of guys, loaded with petrodollars, trying to outcompete each other.

Dubai Rental Challenge

There is a group on facebook called "Dubai Rental Challenge". It's claims are quite remarkable:

Too many properties are left empty while rents are climbing out of control. Rents are inconsistant (internationally) with other regular living expenses.

When we get 100,000 members to this group we will lobby the necessary authorities to introduce laws that will help reduce the excessive rents being charged in Dubai.

Possible solutions are:

A) Force property owners to prove occupancy within 12 months of ownership/property completion.
This will force speculators out of the market and make all empty properties available to be lived in by needy owners and tenants.

B) Cap the 5% Housing Allowance charged in DEWA bills.
They say Dubai is tax free, well this is a tax! It's "apparently" taken to cover things like rubbish collection, street maintenance, etc., much like a council tax in many countries. So why can't this be a flat charge?

C) Cap the service charges applied to new developments, especially apartments.
Developers are known to instal their affiliate companies to manage new buildings and set high charges, this is nothing but extortion!

I was on radio last week discussing these topics and promissed to setup this group. So don't just moan about high rents in Dubai, join the group and invite everyone you know, maybe we will have some impact!

Other ideas to reduce rents are welcome, message me directly and I will add them to the group description.

The primary complaint seems to be that rents in Dubai are too high -- which is not unusual. What is unusual is the top demand -- to force property owners to prove occupancy within 12 months of ownership/property completion. Essentially, this argues that owners are keeping their properties empty to drive rents higher. This may be possible if Dubai property ownership was a monopoly, where the owner could restrict supply to increase price (and therefore overall profit) but I think it is quite impossible these days to have the words "Dubai" and "restrict supply" in the same sentence -- the entire city is one enormous construction site.

Does anyone know why rents in Dubai are going up so fast during a period of massive residential construction?