The Amazon Tax

Amazon is practically the only place I shop. That is not meant as a boast. It is actually pretty embarrassing, not to mention, hypocritical and kind of immoral with all the sweatshop warehouses they’re running. But I get free shipping (yes, even to Guatemala but that is because I’m taking advantage of a loophole, again, not very ethical). It is easy to forget that Amazon’s competitive edge doesn’t really come from exploiting its workers. That is hardly unique. It comes from their ability to avoid paying state income taxes.

Now that a few states have enacted online sales taxes, some academics at Ohio State crunched the numbers to see if Amazon sales were hurt by the tax. The paper was highlighted by Chris Blattman at his blog but I wanted to draw some attention to it. Five states started taxing Amazon in 2012 and 2013—New Jersey, California, Pennsylvania, Texas and Virginia. The authors found that the tax did change people’s choices. Amazon purchases (by dollar value) dropped by almost 10%. The decline was steeper for bigger purchases, suggesting that people were making the choice based on taxes. At the same time, purchases to local, physical stores increased by 2% and purchases at non-Amazon online stores increased by 20%.

Congress is currently debating the Marketplace Fairness Act that would make it possible for all states to collect sales tax on internet purchases. States are especially in need of revenue and since regressive taxing is all the rage, this seems like a good bet. Raise the sales tax. Legalize casinos. But don’t ever raise taxes on the wealthy or close some corporate tax loopholes. Spain did it. And look how great it worked for them. In the height of the crisis (26% unemployment) they nearly tripled their sales tax on a lot of staple goods (school supplies went from 4% sales tax to 21%) while lowering the taxes on yachts. But again, that little rant aside, they should at least make Amazon play by the same rules as everybody else.

So an Amazon tax is good. If for nothing else than to try to put a small dent in their monopoly power. Then again, now that you can watch Game of Thrones on Amazon Prime, it might be too late.

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Guatemala’s Toll Road Fiasco, or How to Give Money to Your Friends in the Private Sector

The toll road in Guatemala that runs from Palín to Escuintla (on the way to the Port) is the nicest road I’ve seen in Central America. It makes sense. You have to pay 15 quetzales (about $2). Prensa Libre has a report on the finances of the concession today. And surprise, surprise, Guatemala got a terrible deal. If you read Spanish, check out the article. I’m just summarizing it below.

As the article explains, in most concessions of this sort, a private company builds the road in exchange for the right to the future earnings from tolls. In Guatemala, however, the state built the road and then gave it to the company for 25 years. The Guatemalan state gets 1% of the tolls. In exchange, the company (Marhnos) built a separate road and loaned the Guatemalan government $50 million. The numbers are pretty bad.

The road cost the government over $40 million. In the 14 years of existence, more than $115 million has been raised. The government receives 1%, meaning about $11.5 million. The company says they spent $23 million on the separate road. A politician says the company actually spent less than $13 million. Anyway, taking the most generous numbers, the state loses from $14-30 million on the concession.

The Government says that it was their first concession and it was done in ¨a different era.¨ I’m not sure if that means that the government used to be able to get away with massive giveaways of taxpayer money to private companies, but it seems like it. File this under how to give money to your friends in the private sector.

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Ethics, RCTs and Opportunity Costs–Where Should We Put the Money?

Critics have called RCTs (Randomized Control Trials) unethical from the very beginning. Some have likened it to playing the role of God in choosing who receives treatment and who doesn’t. Defenders respond that in all development interventions, you are making a choice of who to treat (and therefore who not to treat) but RCTs at least make a conscious effort to measure the effects of the treated vs. the untreated.

As RCTs become the standard practice in most development interventions these days, there has been pushback. Francisco Toros at the Campaign for Boring Development recently wrote about a double-blind RCT done with high-yield seeds. In the paper that Toros discusses, the authors point out that in medical RCTs, in order for the results to be considered valid, they must be double-blind, ie neither party knows who is receiving the treatment and who is not. The authors realized that with high-yield seeds (which look the same as regular seeds) they could perform a double-blind RCT. And the results were rather disheartening. Basically, the only people that improved their harvest were the ones who were told they were receiving high-yield seeds. People who blindly were given high-yield seeds didn’t have higher yields. Toros saw this as a huge blow to RCTs in development (as evidenced by the title of his blog post ¨A TORPEDO AIMED STRAIGHT AT H.M.S. RANDOMISTA¨) Anyway, there were a lot of problems with this experiment. One problem that Toros identifies was that the experiment was on a secondary crop. This brings up certain questions as to whether the participants might have put less effort into the crop. But the other problem, and the thing I wanted to write about here, is that this information (whether the farmer is receiving a high-yield seed or not) does matter. People respond differently when they have certain information. A double-blind RCT in medicine makes sense. Researchers need to know whether the medicine is having the intended effect. The problem with this RCT is that we already know that high-yield seeds do produce more. The point of these interventions is to figure out how to get farmers to use them most effectively. The corollary to this experiment would be giving a farmer a regular seed and informing him that it was a high-yield seed. Of course they didn’t do this because nobody would really expect the results to be higher.

So the other question that this brings up is that of necessity. A recent paper entitled ¨The Unprincipled Randomization Principle¨ by Stephen T. Ziliak and Edward R. Teather-Posadas, argues that many RCTs in development economics violate one of the most basic tenets of running an experiment. Known as essentiality or equipoise, this ethical guideline requires that any intervention (and therefore lack of intervention in a control group) must be providing new information to be justified. The Ziliak paper uses a large study of Chinese students and eyeglasses as an example of a non-essential intervention. Of 19,000 students with bad eyesight, a certain number (the paper isn’t clear on the amount) are given glasses for a year and a control group receives nothing. The authors of the paper argue that it is obvious enough that bad eyesight will hinder your school performance that this experiment is entirely unnecessary and in fact very unethical for the control group. As a clinical trial, the authors are absolutely correct in stating that this brings no new evidence. But from a policy standpoint, some people argue that it is necessary in a benefit-cost analysis (I guess we are supposed to say it that way now).

Over at the World Bank’s Development Impact blog, Jed Friedman argues that these RCTs are not done to determine if eyeglasses improve schoolwork but rather to see if the impact is enough to justify supplying students with free glasses. The logic being that paying for glasses in a policy choice and we need to determine if it is the best use of resources. Friedman is correct in framing the argument in this way. Unfortunately, the argument is not framed that way by economists, leaving them open to the kind of criticism from the Ziliak paper.

Jeffrey Hammer, in a post entitled ¨The Chief Minister Posed Questions We Couldn’t Answer,¨ he tells the story of a conference of development economists who are asked by the Minister of Punjab province in Pakistan how he should allocate funding. Was it better to put it in infrastructure, social services, health etc? Nobody could answer the question.

Maybe the Chief Minister would be better off improving education or road networks or police or rural electricity. Some of these alternative policies could have more impact on food consumption than food distribution if we thought about how the world worked. Getting food to market securely (roads, better cold storage, trustworthy police and safe roads – this is Pakistan, which no one seemed to notice) may increase food availability much more than any tunnel-visioned food program Or not – maybe the food distribution system is better. We just don’t know. And none of us “experts” are trying to find out.

Hammer says that the lack of comparison (or maybe the lack of any connection to reality) makes all these RCTs useless for policymakers. Opportunity costs (hardly a novel idea) need to be taken into account.

When someone says “we should have more “X” because we have evidence that it works”, the response should be “compared to what?” What should we cut in order to promote your particular interest? My hobby horse these days is more sanitation in South Asia. I should have to defend it against (at least) a few alternatives.

Anyway, these are questions that have not been answered sufficiently. And until they are, these RCTs will continue to face criticism from both the ethical and the practical sides of the debate. After all, if dozens of highly trained economists can’t even answer the question of where to put the money, we are in trouble.

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Decision-Making Fatigue, Scarcity and Development

Every morning, Barack Obama chooses between a gray and a blue suit, nothing more. Prisoners who get an early morning parole hearing are more likely to be freed than those that appear just before lunch or late in the day.  Decision fatigue is pretty intuitive. You make a lot of decisions and it tires you out, erodes your judgment. Basically, your willpower is like a muscle and it gets tired.

In his new book Scarcity: Why Having Too Little Means So Much, Harvard Behavioral Economist Sendhil Mullainathan explores how the extreme focus on a scarce resource causes us to neglect a lot of important things. When you are on a deadline, you are able to work a lot quicker. When you are hungry, that is all you can think about. This is probably a good evolutionary development. After all, if you are starving, it is better not to forget it. But Mullainathan, who recently spoke to CGD, says that it causes us to focus on what is urgent, not what is important.

So what the hell does this have to do with development? Mullainathan refers to our willpower as bandwidth and he emphasizes that we all have a limited amount of bandwidth. Our problem is that in designing programs, we don’t treat it like a scarce resource (can you tell he’s an economist?). In a paper he wrote with CGD in 2012, he uses as an example a conditional cash transfer program that requires people to attend a meeting each week in addition to the training sessions. But rather than see it as a valid requirement, he says we need to think about the cost/benefit of these requirements. Because according to the bandwidth theory, that person attends that meeting to the detriment of something else. Maybe that means he is spending less time with his children, or in planning his harvest. Whatever it is, it needs to be understood that these decisions don’t occur in a vacuum.

He also uses his theory to understand a conundrum that has come up in studies about fertilizer use in Kenya. Farmers know that fertilizer is good. Nearly 100% of farmers tell researchers after their harvest that they plan on using fertilizer the following year. It is sold in amounts that the farmers can afford. Basically, fertilizer is available, understood and affordable but it is still not used. Economics and their rational choice models have trouble explaining this. But that is why economists and their models fail to explain a lot of things that are we understand intuitively. Poor people, believe it or not, are similar to rich people in a lot of respects. They procrastinate and they lack self-control. Tomorrow I will start a diet. And tomorrow I will also mow the lawn. Farmers buying fertilizer react much the same way. Tomorrow becomes today and they need to plant. They focus on the urgent, not the important.

Mullainathan’s suggestion is that we need to think about it.

Other studies have shown that poor farmers awaiting their harvests, short of food and stretching what little cash they have until the crops come in, experience about 3/4 of that effect. “So it’s as if the poor are pulling an all-nighter every day. This is a huge effect,“ Sendhil explains.

Obviously we have no problem thinking about scarce resources. We just need to consider that cognitive decision making is also a scarce resource. Simply considering that there is a cost is a huge improvement, he says. And I agree.

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Another warning to those who dared to convict Rios Montt

After virtually guaranteeing that Rios Montt will not be tried again before he dies, his defenders are sending a warning to those who dare try to serve justice. Claudia Paz y Paz, the star attorney general was/is being forced out of her position seven months before her term ended. Now, the presiding judge in the Rios Montt case, Yasmin Barrios, has been suspended for a year for ¨humiliating ¨ a defense lawyer during the trial.

In February, Guatemala’s Constitutional Court ruled that Claudia Paz y Paz’s tenure would end earlier than expected. Because she replaced one of Guatemala’s normal (i.e. terrible and incompetent) Attorneys General, the court said that she should complete his term, and not start her own four-year term. It was hard to argue that the decision wasn’t political. From Mike Allison at the time:

¨Her removal looks pretty shady. Two internal court reports had previously determined that the AG’s term should end in December. The individuals who wrote those reports, however, were then removed from their positions.¨

Her removal was also seen through the lens of upcoming elections next year. With her out, there was less (no) risk that they might be charged with any of their corrupt dealings before the election.

The suspension of Yasmin Barrios, the presiding judge in the Rios Montt case, however, is striking for its pettiness. She was accused of ¨showing a lack of respect¨ or ¨humiliating¨ one of Rios Montt’s lawyers. In a recent interview, Barrios discusses some of the absurdities. She was suspended by the Ethics Board, but it is the Disciplinary Board that has the authority to hand out sentences to judges and she was already cleared by them.

Judge Barrios had this to say about the effect of her suspension:

¨Judicial independence and the rule of law should be respected in our country. Punishing honest judges through illegal mechanisms shouldn’t be allowed because it deteriorates the justice system. No judge should be punished for his or her resolutions. Procedural appeals exist to respond to displeasure over a resolution.

Judicial independence is a guarantee, not just for the judge, but so that the Guatemalan people can count on honest and dignified judges, to whom they can present their cases and be assured they are tried with adherence to the Constitution and the law without favoritisms, neither economic nor political. It is a guarantee for the people before it is a guarantee for the judge.¨

Oh Guatemala. If only your authorities were as good at dealing with narcotrafficking and corrupt politicians as they are with honest judges.

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Add this to the list of why big dams are terrible

A study out of Oxford last month analyzed 245 large hydroelectric dams built around the world since 1934 and found huge cost overruns, debt and inflation problems in most of the projects. This study just analyzed the economic logic of building these mega-projects and it concluded that they were a terrible investment in most cases. The average cost overrun was 90%, making it the worst of all infrastructure projects. And the authors point out that the budgets continue to be wrong. There was no difference in cost overrun in 1934 and today; they were both horribly wrong in their budgets.

Writing in the Guardian, the two authors of the study suggest that smaller dams should be favored over these mega-projects. Smaller dams can be built faster and cause less destruction, meaning less cost overruns. Unfortunately, most countries continue to support these projects.

The World Bank was basically shamed out of supporting these projects in the 1990s, but has increased their investment in hydroelectricity again to the point that they are now investing more than ever. That is probably not a coincidence. These projects do tend to benefit some people, just not the people that need the help. The World Commission on Dams found that these projects do benefit mining companies and aluminum smelters a lot. Meanwhile, after two mega-dams were built along the Congo River 30 and 40 years ago, only 10% of the DRC has access to electricity while 85% of the electricity generated is used by high-voltage consumers (ie mining companies). The other reason the World Bank might be reluctant to back away from mega-projects: administration costs. They basically say that administration costs are the same for a million dollar project and a billion dollar project, so they might as well go with the big one. It doesn’t matter that these mega-projects have been huge failures and human catastrophes, they give the World Bank more bang for their buck.

Back to the authors of the first study (from their Guardian article):

¨Countries with a higher per capita income and better macroeconomic climate typically build dams more quickly with lower cost overruns. This suggests that developing countries, in particular, despite seemingly being most in need of complex facilities such as large dams, ought to stay away from bites bigger than they can chew.

A 90% complete dam is as valueless as a dam not built at all. This typically escalates politicians’ desire to throw good money after bad and try to complete a dam long after it has become clear that the investment is a dud.¨

Just another reason why hydroelectric mega-projects are not viable. And as wind and solar technology improves (and the World Bank continues to direct most of their renewable funds at hydropower), these mega-projects should be abandoned. If 10 million people displaced and environmental catastrophe didn’t convince them—dream on—maybe the fact that they are a terrible investment might. Then again, it seems to really just mess up your public finances and create a lot of public debt and what leader cares about public debt? Well, besides when they are using it as an excuse to cut social services.

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We cleaned your computer today

The IT guy stopped by my office today to inform me that they cleaned my computer while I was out of the office.

Great, I told him. ¨But it doesn’t really seem like it’s running faster.¨

¨There were two dead cockroaches near the fan that I got rid of,¨ he said.

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