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Estimating state government tax revenue gains from cannabis legalization

1/Dec/2014 Comments off

The Vermont state government is currently funding a study on the comprehensive effects of cannabis legalization.

I find myself wondering how you’d estimate such a policy’s tax revenue effects. I look forward to reading the study and seeing how they (the RAND corp) go about doing this.

The main thing to focus on is the effect of bringing the cannabis industry into de jure GDP. Right now lots of product is sold on the black market. This really should be counted in GDP, because it’s a final transaction, but it goes untaxed and unrecorded. It’s similar to the problem of home production. Before the 1970s lots of working age women produced final food products and rendered household and childrearing services outside of the de jure economy. Many women still worked for cash, but you know what I’m saying, it’s not like today.  Home-working women were the ‘pot dealers’ in this example. Then, for complex reasons, women shifted into the cash economy, GDP statistics and the taxman captured the resulting rise in cash transactions, but ignored the drop in home production. However, the original production had a cash value greater than zero, so the measured effect[1] exaggerates the gain in production[2].

If you’re the government, and your goal is to maximize tax revenue while also staying in power, you should be out hunting for opportunities to bring economic activity from the ‘informal’ side of the ledger to the ‘measured and taxed’ side. Those drug dealers aren’t paying you protection.

The thing is, how do you measure the black market? How do you anticipate the industrial transformations that happen in the transition. Presumably, without the black market constraint, productivity in the industry will skyrocket, if only from the improvement in worker ability. In a case like this you never get much beyond ‘back of the envelope’ sorts of results.

This is why federalism is so great. The only reason Vermont is looking at this so soon is because the Colorado government made a boatload of money off their legalization. That’s evidence that convinces people. If your state’s politics permit legalization, and you’re a state government, this is a no-brainer, especially for a state like Vermont which is already has high taxes on the obvious revenue sources. The Vermont state government is in a bind, because the governor overpromissed on a single-payer healthcare system. Just maybe the state can narrow the gap by becoming the weed-beer-skiing tourism hub for Boston, Montreal and NYC. There are risks, but then Vermont votes for governor every two years. You got to deliver.

There are also tax gains from people shifting spending from consumer industries less taxed than cannabis presumably would be. Imagine if people bought fewer groceries and more drinks at bars. A dollar of bar drink is taxed at a higher rate than groceries, especially food. This is less interesting, because it increases the Taxes:GDP ratio, which I don’t like, but it could still be a modest source of cash for the government.


1.Which admittedly is buried within aggregate production growth and confounded by swings in productivity

2. I find that this example also helps show why real GDP is best though of as a production index. You can certainly come up with a reasonable dollarization of a given period of housewife production, but it’s somewhat misleading. The shift from home production to market production results in such a marked change in the economy that it seems odd to me that we’d choose to think of it first as a dollar concept. It’s more of a magnitude, a direction in a very big space. Using an index would more-readily bring the mind to this understanding, and I imagine that if RGDP were published as an index, with the dollarization buried in the release, that RGDP growth would get a lot less attention.

This post was updated on 19-Jan-2015 to correct typos and improve prose. a prediction market startup

18/Nov/2014 Comments off

A friend sent me a link to last night. It’s a decentralized prediction market start up. Unlike past prediction markets like intrade, these guys are going to try and set their market up using Bitcoin so it will be anonymous and hard for the bullies in U.S. government to shut down. I take this to also mean that Americans will be able to trade in the market, which won’t be the case with Sumner’s new NGDP market project.

I don’t know anyone on the team, and I haven’t even finished reading their theory paper yet, but so far it looks pretty cool. I particularly like that they’re using Bitcoin. If the government would just be reasonable and take a cut of the action (which is their right, as the uber neighborhood boss) we wouldn’t need Bitcoin, but for whatever reason its OK to bet on meaningless things like horses or football or spinning wheels, but not alright to bet on election outcomes or macro economic events, where the betting would yield socially useful signals. It’s possibly the government’s weirdest prohibition.

I just hope these guys aren’t based in the U.S., the safest place for them would be Russia or China (what a weird world we live in) but if I had to guess I’d say they’re in the Bay Area and if successful, will have their lives ruined.

Categories: Uncategorized

Whelps on a plane, a case of market failure?

14/Nov/2014 2 comments

Between direct consulting gigs, job interviews and a trip to San Francisco,  I’ve flown a good deal in 2014. Right now I find myself on the tarmac at Laguardia,  trapped with 50 other souls in a puddle jumper with some lady and her wretched squalling hellspawn.

There’s one on every flight.

I’m not much of a microeconomist, but the present way that Airlines deal with babies puzzles me. Every airline I’ve traveled on charges nothing for babies! I would gladly pay $50 an hour for a baby – free seat. I imagine others would be willing pay enough for airlines to offset their costs if they were to forbid babies on some on their flights.

Categories: Uncategorized

Efficient Forecast is screwed up

13/Nov/2014 Comments off

Hi all, I know a lot of people in the U.S. and Brazil[1] have been frustrated that they can’t get synthetic NGDP market forecasts lately. I confess that I don’t completely understand why the system is crashing so often, but I believe that the root cause is that my code is not capable of recovering from certain types of connection problems with my Amazon web server. I think that some times the traffic will be too high, which causes R to time out while it’s trying to open the text file that hold the current day’s intraday prices. I confess to not knowing what I am doing, but I am learning. I will fix it.

My hope is that if I port my web scraper into Python, from R, and maintain separate servers for 1.gathering intraday prices from financial websites and 2. updating the forecast and hosting the web pages, that this will increase stability. A hurdle to fixing things is that I am quite busy with a fantastic new job in a cool new city, and the fact that because things were so stable this summer, I sort of forgot the details of the R scripts that run everything. I don’t know when I will do the rebuild, but in the mean time I will continue to make remedial efforts to post forecasts. They may not always be real time, but I have my personal desktop computer running a backup web scrape, starting tomorrow, so if the gods are good I’ll have a viable backup.

My goal was to have forecasts for Japan and the UK running by the end of 2014. This is looking less likely, mostly because I’m having a hard time finding prices. If anyone is aware of real time data sources for Japanes or British inflation indexed bonds, normal bonds, REITs or other Japan- or UK-specific asset prices, please email me at justinpirving [that sign you use for email] or leave a comment.

Thanks for barering with me.

1. Brazil is number two biggest traffic source for the site. I am honored.

Categories: Uncategorized

Uber’s dynamic pricing is a feature, not a bug

14/Aug/2014 1 comment

Today I saw a silly article: Uber car service twists sharing economy into sucker’s economy.

It’s a childish argument, the gist of which seems to be that Uber should either overturn the laws of scarcity or just give rides to the first person who pings them in times of extreme supply scarcity or demand surging.

It’s almost not worth going over as I’m just preaching to the choir. Economists figured this shit out in the early 1800s, if not earlier. Still, it bothers me to see the knaves and fools go after Uber, which is a rare instance of a tech company providing a truly disruptive and  world-improving technology, rather than just hijacking our ape brains as say, Facebook does.

One of the great features of Uber’s dynamic pricing is that there will nearly always be a ride available at some price. In Manhattan and got a pregnant wife about to give birth in The Blizzard of the Century? For $1500 maybe you can get a ride to the hospital. Having that option seems to make the world a better place.

I’m a lot less of a libertarian than I was in my youth, but still think that “price gouging” is socially beneficial in times of stress.

For a compelling discussion of the matter, listen to Russ Roberts and Mike Munger work through the issues in this EconTalk podcast.

Categories: price gouging

U.S. markets are not overvalued

11/Aug/2014 7 comments

My market-driven nominal GDP forecasting system says that markets expect something like 3.8% nominal growth in the next year.

That’s the average forecast from the 10 best models I could build, they take into account changes in asset prices over the last year (lags going back 3 and 4 quarters proved the most accurate, out of sample). If assets became overvalued, it happened over a year ago.

To my mind, that’s pretty good evidence that financial markets as a whole haven’t gotten ahead of the nominal economy.

Markets are probably not greatly undervalued either. The Fed’s likely to keep nominal growth going along at 3.0%-4.0% indefinitely.

Personally, I’m buying stocks with any free cash that I get.



Categories: Uncategorized

Malthusian goods

5/Jul/2014 Comments off

The standard neoclassical economics line is that there are fundamentally no constraints on human population levels. As long as technology advances, new resources can be tapped and those we already have can be better used. Because more people means more ‘idea generators’, technology automatically increases with the population level. The idea is that the more desperately poor peasants in Bangladesh, the greater the odds that one of them will invent cold fusion. Let’s say I’m not convinced.

I can however imagine that if you could go back in time to the 1970s and magically boost the birth rate in industrial countries by 25%, while maintaining the realized immigration flows, that current GDP per head would be about what it is now. That is, today’s developed economy is not all that Malthusian.

BTW, in case you weren’t in the loop, an economy is ‘Malthusian’ when birth rates equal death rates. When the horse collar is invented, food output rises (GDP) followed shortly by higher birth rates, which gobble up the overplus and bring GDP per head back to the subsistence level. To get higher living standards, you need a higher death rate or a lower birth rate. More nuns or more wars.

There is a long run (centuries) tendency for our not-so-Malthusian economy to revert to its natural Malthusian state. In a land where the population is below the subsistence-level carrying capacity, alleles that favor high fertility will increase in frequency (say genes that make you less likely to use contraception). That we have low fertility in industrial countries is just because our genes are ill-configured for modern abundance and the welfare state. In the environment of the late middle ages, which industrial populations are more or less genetically programmed to live in, working long hours to buy stuff was adaptive, so today’s middle class focus on buying new cars and drinking fancy beer instead of whelping the vast hordes of unwashed, underfed urchins that could technically be funded by a modern income. It’s biological madness! We’re like the house cat that won’t drink still water, a behavior that was adaptive in an earlier environment lingers on when the environment radically shifts. Selection is of course at work remedying this unnatural situation, we’ll have to wait a few generations, but fertility should steadily climb back in the industrial world so long as we have so much extra food.

A return to the true Malthusian dynamics that ultimately govern all living systems is for the long run though, ‘when we’re all dead’. The world we live in now is not immediately Malthusian. Still, it seems to me that some markets are Malthusian, even if the economy as a whole isn’t. It also seems that the number of times Julian Simon’s name is dropped has little—or even no—effect on the supply of said goods.

I’d define a good as functionally Malthusian if a big increase in demand for said good would not be followed by a meaningful and sustainable increase in supply.

Here are some examples of Malthusian Goods:

Wine recovered from the Titanic

Housing in San Francisco

Wild-caught Salmon

Prestigious degrees

Highway space in the blue states (i.e. where you’d actually want to live)

Admissions to Yellow Stone National Park

Bayreuther Festspiele tickets

Museum admissions

Public goods funded with a fixed resource like oil

It’s no accident that it’s common for Russians (just richer than Mexicans by GDP/head) to have family summer cottages, while the Dutch (high GDP/head) live on boats: European Russia has low population density, and the Netherlands is plainly overpopulated.

There are some goods the market just can’t make.  The supply of shoe box condos in Singapore can easily respond to any conceivable increase in demand, but you need a secluded lake to build a secluded lake house. Likewise, fish stocks can be managed, but once the optimal management policy is in place, supply is set by the weather. And I’m sorry to say that farmed fish is an abomination and hardly a substitute for the real thing.

Policy and cultural failings can also turn situations that need not be zero sum into undignified Malthusian messes. Highways are a good example. The number of drivers in America and has grown rapidly since the interstate system was built in the 1960s and 1970s, yet highway capacity has not kept pace. Environmental concerns, greedy unions and dysfunctional government are more to blame than a shortage of concrete and asphalt, but the constraint remains. Every new driver on the roads means slightly worse traffic. This good is functionally Malthusian, we don’t have the social capital to do anything about it, and we’re not likely to in the future either. The same can be said of water supplies in California and Texas. Might we recognize our policy impotence in this area when making decisions in domains where the policy space is bigger?

I’m not saying it’s the end of the world if we all have to live in Hong Kong style cities.  My point is just that there are many aspects of the good life that can only be broadly enjoyed by a population if density is low. This isn’t talked about enough and economics blog readers would be well-served to grapple with the implications.



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