Two big articles on economic disparities between members of Congress and their constituents appeared on December 27th, one in the New York Times and one in the Washington Post. (Not sure if there is anything behind the coincidence).
The Times article is more about how members of Congress (MC’s) have been relatively sheltered from the economic downturn. It includes a brief discussion of whether MC’s use their insider connections to benefit in the stock market, including a reference to a paper by Jens Hainmueller and Andrew Eggers:
While the housing collapse nationwide has hurt many Americans, lawmakers still find the real estate sector the most popular place to park their money, statistics from the Center of Responsive Politics show, and members of Congress continue to profit from their investments there. Perhaps the most tantalizing but hotly debated factor in the rising wealth of Congress is lawmakers’ performance in the stock markets — and the question of whether they are using their access to confidential information to enrich themselves.
In a study completed this year, Mr. Ziobrowski at Georgia State and his colleagues found that House members saw the stocks they owned outperform the market by 6 percent a year. Their research from several years ago found that senators did even better, at 12 percent above average. The researchers attributed the performance to a “significant information advantage” that lawmakers hold by virtue of their positions and the fact they are not bound by insider-trading law.
However, a separate study last year by researchers at Yale and the Massachusetts Institute of Technology found that the portfolios of lawmakers actually performed somewhat worse than average investors. It found that members did do better when investing in companies in their home districts or associated with campaign donors — suggesting that they benefited from their political connections — but still not as well as the average investor.
The Post article is more about the absolute level of wealth of MC’s versus their constituents, and includes a quote from Duke political scientist Nicholas Carnes:
A representative’s occupation before being elected influences how liberal or conservative he or she is in voting, according to an analysis of more than 50 years of congressional votes by Duke University professor Nick Carnes.
In order from most conservative to most liberal: farm owners; businesspeople such as bankers or insurance executives; private-sector professionals such as doctors, engineers and architects; lawyers; service-based professionals such as teachers and social workers; politicians; and blue-collar workers, according to the analysis, which is being published in Legislative Studies Quarterly.
Carnes said that while party affiliation is the strongest determinant of voting records, “the differences between legislators of different occupational backgrounds are pretty striking. People tend to bring the worldview that comes with their occupation with them into office,” he said.
The Post article has almost 5,000 comments; the Times article about 250, as of this writing.
I was listening to this program last night. Too bad they don’t produce transcripts–there was a great exchange where the guests, left right and center, made various claims about whether taxation reduces the incentive to work. One made the claim several times and the other claimed there was no empirical evidence for this “theory.” At one point a journalist for the New York Times jumped in to say something like “Well the truth is economists just don’t know the answers to these questions because there are just so many factors and you can’t isolate the effect of one thing on another.”
Also, this post on Ezra Klein’s blog (but not by Klein) summarizes the economics literature on the effects of the stimulus. I was really impressed with the quality of reporting and the explanation of research design.
One apparent benefit of the new infusion of blog posts into my formerly print-only RSS is that I’m getting more posts about causal questions and academic studies. There are probably reasons for this, including the different incentives of bloggers and reporters.
Anyhow, I came across an interesting study via Ezra Klein (who found it via economic Robert Frank blogging at the Wall Street Journal). The study asks whether states imposing taxes on millionaires leads the affluent to migrate out of state. The finding was no. I’ll just reprint the portions Klein excerpted:
The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.
The study dug deeper to figure out whether the millionaires who were moving out did so because of the tax. As a control group, they used New Jersey residents who earned $200,000 to $500,000 — in other words, high-earners who weren’t subject to the tax. They found that the rate of out-migration among millionaires was in line with and rate of out-migration of submillionaires. The tax rate, they concluded, had no measurable impact.
If you follow the links, you’ll see the paper was published in the National Tax Journal. I think this is a really interesting and important study. I have two issues, though. One is the authors’ claim that the new tax constitutes an “experiment.” The other is the use of the lower-income bracket (200 – 500k earners) as a “control group.” On the first point, it is highly unlikely that (a) the imposition of the tax was “random” or (b) the wealthy in New Jersey had no say in whether the tax would be passed. Maybe the wealthy in NJ are just really generous; or, maybe they cut a deal that gave them a big loophole. The failure to randomize creates the possibility of all kinds of stories involving selection.
On the second point, on its face I just have trouble seeing the 200-500k group as controls. Maybe their migration patterns would have been different without the tax, too–they might be expecting to become millionaires rather soon (leading them to move more); or, they might appreciate that those above them are paying more of their fair share (leading them to move less).
Fortunately, there is a lot more data out there to be collected so we can get a better quasi-natural experimental design, as pages 278-279 of the paper suggest.
Boston Globe columnist Derrick Jackson writes,
[T]here is little conclusive data on the direct relationship between taxation and entrepreneurship, and plenty of examples where nations with high taxes have robust small businesses. Last month, Inc. magazine detailed how Norwegians pay nearly half their income to the government, yet measures of entrepreneurial activity are about the same or even a bit better than the United States.
Jackson motivates his discussion by talking about increasing rhetoric from Republicans on how the health care bill is supposedly crushing innovation by levying new taxes on small businesses.
So there are two causal claims here. First is the relationship between taxes and entrepreneurship in general. The second, which Jackson doesn’t seem to dispute, is that the new health care law is raising taxes on small businesses.
I can’t really comment on the second claim, but it seems simple to verify whether it is true or not. As for the first, one thing we have to worry about is trying to say something general by comparing the United States to a group of Scandinavian countries. We want to know the effect of taxation on entrepreneurship, but any relationship we see could just be due to some other difference, of which there are many, between the US and this group of countries.
The one that jumps out right away is the ethnic homogeneity in Scandinavia. I actually heard an interview with the author of the magazine article where Jackson is getting most of his data, and the interviewer raised this point. The author replied by throwing out the example of Israel, an ethnically diverse country with lots of innovation. I think there are problems with using Israel as a counter-example, but the bigger problem is that the writer seems to think that finding a single counter-example is sufficient to counter the ethnicity story. It isn’t. The way to test for the relationship of interest here involves gathering more data.