Inequality and Regional Prices in the US, 2012

I have just completed a short piece on the impact of regional prices on the measurement and geographic distribution of low income individuals. Basically, Youcef Msaid and myself* used the March 2012-CPS data combined the BEA’s regional purchasing power parities database to correct incomes.

We found is that the level of inequality is very modestly overestimated (0.5%). Now this is a conservative estimate since we used state-level corrections for price differences. This means that we took price corrections for New York state as a whole even if there are wide differences within New York state. Obviously, with more fine-grained price-level adjustments we would find a bigger correction but it is hard to imagine that it could surpass 1-3%.

That was not our most important result. Our most important result relates to where the bottom decile of the income distribution is geographically located. We find that instead of being found disproportionately (relative to their share of the total US population) in poorer states, the bottom decile is disproportionately found in rich states. The dotted black line in the figure below illustrates the change in the number of individuals who are, nationally, in the bottom 10%. New York and California have significant increases while West Virginia has a large decrease. The dark black line shows the same for the top 10%.


Another way to grasp the magnitude of this change is to relate the change to the population shares of each decile by state. For example, New York had 6.29% of the US population in 2012 and 6.61% of all Americans in the bottom 10% of the income distribution before adjusting for regional purchasing parities. After adjusting however, New York’s share of the bottom 10% surges to 7.88%.

Why does it matter? Because most of the cost difference adjustments come from differences in housing costs. The first obvious point is that housing is a crucial aspect of any discussion of inequality. The second, but less obvious point,  is that these differences are massive barriers to migration within the United States and the poorest are those for whom these barriers are the heaviest. Unfortunately, the high-cost areas are also high-productivity areas (New York, San Francisco for example) whose high costs are largely the result of restrictions on the supply of housing. This means that high-productivity areas – which would raise the wages of low-skilled and low -income workers are inaccessible to them. It also means that those who were present before the increase in productivity of these areas capitalized the gains in more valuable real estates (even if this means lower real incomes).

In this light, the geographic reallocation of the bottom 10% is consistent with an emerging literature that argues that inequality is in great a result of housing policy (see notably Rognlie’s reply to Piketty in the Brookings Papers).  This small modification (I consider it small) that me and Youcef made has important logical ramifications.

* Thank you to my friends Rick Weber (who blogs here at NOL and whose research can be seen here) and Ryan Murphy (whose research can be found here) who provided good comments to bring the paper to the stage where we are ready to submit.


How to split up California?

The idea of splitting up California has been previously discussed on NOL (see here, here, and most recently). In this post I wish to consider how California could be split up.

California has a large population of 38.8 million. For comparison Canada has 35.1 million residents distributed among its 10 provinces and the New England states house 14.7 million yankees in six states. With such a large population it is not surprising that the state has several regions with distinct cultures. This in itself is not sufficient merit to split up the state. One of the wonders of a liberal republican form of government is that diverse populations can coexist so long as they are treated equally before the law and have the freedom to exercise their various cultures. The problem is when these cultural differences lead to different public policy demands.

Consider for example the issue of abortion. In most matters of religion it is sufficient to allow different faiths to practice their beliefs so long as they keep to themselves. Why should non-Jews care if Jews must follow kosher dietary restrictions? The same cannot be done with abortion though. Those who believe, often due to their religious inclinations, that abortion is murder cannot tolerate its practice among those of other faiths or atheists. What is to be done?

One option would be to break up California. Although those on both sides of the abortion debate exist across California, there is also quite a bit of spatial correlation. See here. The Central Valley and Inland Empire counties both have significant portions of their populations favoring abortion limitations. Both regions also have low support for same sex marriage, see here, so it is safe to assume that their cultural differences with the rest of California is not on just one issue but several important public policies.

I would caution those who propose splitting up California between its inland and coastal regions. Both the Central Valley and Inland Empire may be culturally conservative, but the inland northern counties do not seem to fall in line. Nor would I recommend the Coastal/Inland split for those concerned about partisanship, see here. The San Francisco Bay Area, Northern Coast and Los Angeles are liberal strongholds but the Central Coast and Orange-San Diego region aren’t.

Similarly a North/South split would do little to help address regional cultural differences. The North/South split would usually split the state apart at San Luis Obispo-Kern-San Bernardino county lines. This would lead to the conservative Central Valley being lumped into the same state as ultra-liberal San Francisco. Meanwhile the Inland Empire and Orange-San Diego counties would find themselves sharing a state with blue Los Angeles.

What would be a good split then?

I personally favor the creation of four new states. Jefferson (the northern coastal and inland counties), San Francisco (the bay area states), Los Angeles (LA County), Central Valley (everything between Fresno and Bakersfield roughly) and the rest of southern California.

Given that any division would have to be approved by Congress the new states of Jefferson, San Francisco, and Los Angeles would have to be gerrymandered in such a way as to ensure they are blue states and maintain as many electoral votes from old California as possible. The Central Coast would likely be gobbled up between LA and San Francisco.  This gerrymandering would be needed to get Democrat votes who would otherwise be against losing all those electoral votes. Although Democrats would get two more seats in the Senate the Republicans could favor the deal in order to sweep extra electoral votes from the Central Valley and Southern California.

Although the split would be less than perfect, it would still grant greater say over public policy to the conservation counties.

Thoughts? Further maps on Californian public policy opinions can be found here.

P.S. In regards to the water issue, I like to think that the split of California would lead to a revision of the Colorado River Compact and related laws in order to create a more market oriented process for water allocation. I can dream can’t I?

Is government decentralization the right answer to differences across regions?

That’s the main question being asked by Federico Boffa, Amedeo Piolatto, and Giacomo A. M. Ponzetto, all economists. I cruised through the whole paper (pdf) and have some superficial thoughts. One snippet:

Western California is more liberal, even among Republican voters and politicians; Eastern California considerably more conservative […] At a first glance, such a political divide might suggest that a break up of coastal and inland California would be optimal on preference-matching grounds […]

[H]owever [this is a] superficial assessment. [Eastern California] contain[s] a large Hispanic population that overwhelmingly prefers the Democratic party. This group is much less educated, less politically knowledgeable, and less likely to vote than Republican supporters in the region, who are on average older, whiter, and wealthier. At the same time, the left-wing Hispanic working class in the Valley shares the political leanings of highly educated liberals on the coast. This ideological alignment goes beyond mere partisanship and includes shared preferences over policies.

As a consequence, our model suggests that the political integration of California is welfare maximizing. For relatively uneducated inland minorities to have a government corresponding to their preferences, it is essential that they share a state with ideologically aligned liberal elites in the Bay area. Right-wing Californians, instead, are sufficiently educated and influential to have a voice in state-wide politics, despite being in the minority: California had a Republican governor for twenty-one of the past thirty years.

[This lesson] applies more broadly. Disadvantaged ethnic minorities— which are less educated and often politically underrepresented— should belong whenever possible to the same polity as better educated and higher-status voters having similar political preferences. Only then are politicians effectively held accountable to both groups. (29-30)

California is “welfare maximizing”? Somebody help me out here. Isn’t it also possible that poor Hispanics and rich liberals form a voting bloc in California as it is because of how the GOP is patched together? If California split into an East/West, current coalitions would be shattered and it doesn’t follow that rich liberals and poor Hispanics would share the same voting preferences in the new arrangement. It doesn’t follow that rich conservatives and poor Hispanics in a hypothetical East would be at odds, either.

The biggest weakness in the paper, if you can call it that, is that the authors are focused on the fiscal aspects of federalism rather than the diplomatic, cultural, and political aspects. Federalism binds people together and forces them to at least try to come to an agreement about some issues. That’s a big deal, though it’s obviously not sexy.

The paper is focused on the EU and the US. There are lots of interesting insights into the European Union but the US angle is kinda boring (I’m sure is vice-versa for readers living and working in Europe). (h/t Mark Koyama)

California Dreaming

Facts first: California, the state, is so far into the red, so overwhelmed with unfulfillable retirement obligations that only a major earthquake can save us. I mean a major earthquake taking place during a Democrat administration that would be eager to make the money of non-California taxpayers pour into our Golden State. Nor is the disaster affecting only the state bureaucracy. Many of us would secretly gloat if it, and only it, just went bankrupt. I wouldn’t even be surprised if one of our artsy craftsy conservatives (you would be surprised) were making ready a new flag for the occasion. Perhaps, it would show a grizzly bear with its foot in a bear trap.

The truth is that private business does not seem to have really recovered since 2008 either. If it had, I reason, you would notice it here in Santa Cruz, Silicon Valley Beach. Nothing further from the truth. There are still many empty window fronts right downtown. And new businesses don’t seem to last. The turnover is higher than it used to be, as if those that tried shouldn’t have because they have financial feet of clay. Just yesterday, a new restaurant left its door ajar before actual opening, for deliveries and such. It occupies a really good spot where a popular drinking hole stood for twenty years. The owner of the new place, a Palestinian immigrant, told me that I was the sixth person in thirty minutes to walk in spontaneously to wish the new business good luck. We are that eager for good economic news.

Anyway, Sunday and Saturday was the annual Cabrillo street music festival and fair. It was surprisingly good. It’s surprisingly good each year; no one should be surprised, really.

Among the street fair exhibitors, you found, of course, the usual insipid watercolors and second year art students’ plein air art of the California hills all in shocking primary colors. I mean boring paintings, of course. And then, there are the pretty non-discriminate earrings from no one knows where that sell only because of the nature of women’s eyes: You put anything on women’s ears, including little broke pieces of mirror, and their eyes shine and sparkle. Yet, yet, there are good surprises, because this is California, I think. Someone is offering earrings and other jewelry made of sea glass, original, at least. (Sea glass is made up of pieces of broken bottles and such that have been rolled by the ocean until their shape, texture, and color have been radically modified for the better.) Further down the street, an older lady is selling colorful birds nesting boxes made of old food cans. A young couple is doing a brisk business in incredible objects. They are attractive belts, laptop cases, and even frankly elegant purses made entirely with old bicycle inner tubes (recycled, I think). Yes, there is a common theme here. Although I am skeptical of the economic rationality of most recycling, I am in love with the ingenuity involved in turning old into new, seeming nothing into something. California for you, even if the original impulse is rooted in the insane fallacies of the climate change cult!

And then, there was music non-stop on an outdoor stage from 10 am to 8 pm. My old friends of Aza gave their usual brilliant performance. They play Amazigh music with a Santa Cruz twist. The Amazigh are the original inhabitants of North Africa, before the Arab conquest. (Saint Augustine was a romanized Amazigh.) They are the same people we often call “Berber” (but we shouldn’t because it really means “barbarians.”) The Amazigh have their own language that is unrelated to Arabic. Their culture is extraordinarily vivacious, especially in Morocco where they are probably a majority of the population though divided into several subgroups. Anyway, these two young Moroccan Amazigh guys, both trained musicians, emigrated to Santa Cruz, separately twenty years ago. They bumped into each other and began playing together. Then, they recruited local musicians to round off their band, to include more instruments. The locals were steeped in rock and roll and some, in (Western) classical music. Several played instruments never heard in North Africa before, such as saxophones. What comes out is profoundly original music. It’s Amazigh music with a zing and a bang and spitting fire. Last summer, they got first prize at an all-Amazigh music festival in the Atlas mountains of Morocco. You might say this Santa Cruz, California-grown ensemble are the world champions of Amazigh music.

There was also a group performing Carnataka stylized dance from South India. Only two of about twenty dancers appeared to me to be of Indian origin. (I am a kind of expert on Indian appearances, don’t ask.) The dance seemed perfectly accomplished to me. (But what do I know?) I didn’t catch where the group hailed from. Might have been Silicon Valley, someplace in California, for sure. One of the last numbers was West African drumming and singing. There were two energetic West African guys on stage beating traditional African drums very loudly and singing in Wolof (I think) plus a pretty African woman dancer. They were accompanied by a white woman on the drum set, I mean the Western-style drum set. Couldn’t have been less “authentic” and, that’s a key to success, to inventiveness, I believe. It’s one of the reasons nearly bankrupt California remains a beacon to the world. Within minutes, the drummers has thirty people dancing on stage with them, nearly all white. (No Mexicans though, Mexicans are a dignified, reserved lot. Perhaps, their California-born children will join later.)

I ended the lovely day a couple of miles away from the festival, near a restaurant at the harbor, having a smoke. A guy in his early fifties was standing nearby puffing away too. He was in very good shape. He wore a t-shirt of a light blue color matching precisely the blue of his eyes. Athletic gay guy for sure, right? He introduced himself as a former Army drill sergeant, which I believed immediately. Nowadays, he said, he was making his living teaching art at San Francisco State. California dreaming never ending!

What’s wrong with migrating?

This is a response to Irfan Khawaja over at the Policy of Truth blog.

I am of Jewish descent. I am not a JewI was baptized a Catholic as a baby and have no plan to convert in the foreseeable future. I am nonetheless of Jewish descent. My paternal grandfather is a rabbi and my cousins from that side of the family are Jews.

My family patriarch migrated from Germany to Mexico during the turn of the 20th century. He migrated long before the Holocaust, but I wouldn’t be surprised if he was motivated to migrate to escape prosecution in Europe.

I also have slaves in my family tree. My great grand mother (Or was it great great? I forget.) was a black Cuban and my parents thought I might be born with dark skin. Blacks, for those who are keeping score at home, are not native to Cuba. Slavery in Cuba did not end till 1886. My great grandmother migrated to Mexico to escape prosecution in Cuba.

I myself migrated to the United States at the age of two. I might have been born in Mexico, but I was a libertario at birth. I loved Mexican food but that was not sufficient reason to stay in a country with such a poor conception of personal liberty. So I kissed my mother good bye, packed my bags, and crossed the border. I ended up settling down in Los Angeles, where I could have Mexican food and liberty.

What I am getting at here is that there is nothing wrong with migrating.

Had I stayed in Mexico I would likely be dead now. If a cartel member asked me to pay protection tax I would have refused and instead given him a speech on why we should legalize drugs. My town of birth, Morelia, is one of the capitals of the drug trade so you can imagine how long I would have lasted.

Had my great grandmother stayed in Cuba she would have to live with left over discrimination against slaves and their descendants. Worse still her descendants would be living in Castro’s Cuba!

My family patriarch might have survived the Holocaust if he had stayed in Europe. Or he might have been baked.

I agree with Irfan Khawaja that one should be assured of their personal safety and liberty regardless of any incidents of birth. I also agree with him that Benjamin Netanyahu, current Israeli Prime Minister, is wrong to urge European Jews to migrate to Israel. Israel is hardly a safer country for Jews than Europe.

Where I disagree is that I see nothing with migrating or urging others to migrate in pursuit of safety or liberty. There are times when one should hold strong and defend themselves. There are also times when one should realize that your neighbors are bigots and they won’t stop being bigots during your lifetime. If you can improve your quality of life by migrating, why not do so?

For any European Jews who might be reading this: forget about Israel and come to the United States! Specifically come over to my hometown, the San Fernando Valley.  The San Fernando Valley is a lovely community within Los Angeles. The original Karate Kid series, and countless other films, take place in the Valley. The film industry is actually located in the Valley, not Los Angeles itself. Best of all, the valley is filled with Jews. My undergraduate university, Cal State Northridge, has one of the largest concentration of Jews in America. Did I mention that there is plenty of Mexican food to go around?

I’ll be honest, there are some drawbacks to the valley. We are ruled over by the incompetent authorities in Los Angeles city hall and attempts to form our own city have been thwarted over the years. Real estate prices are also high. Despite this though I love the valley and welcome others to migrate there if their current home is undesirable.

The California Solar Energy Property-Tax Exemption

California exempts solar energy equipment from its property tax. The exemption will last until 2025. The California Wind Energy Association has complained that this exemption puts solar energy at an artificial advantage relative to other renewables such as windmills. Biomass, the use of biological materials such as wood and leftover crops, is also at a relative disadvantage.

Rather than eliminate the solar tax exemption, the other energy industries should seek to eliminate the property tax on all energy capital goods. With this exemption, the government of California is recognizing that property taxes on capital goods – buildings, machines, equipment, inventory – impose costs that reduce production and innovation. Since this tax is toxic, the property tax should be removed from all improvements.

The best revenue neutral tax shift would be to increase the property-tax revenue from land value by the same amount as the reduction in the taxation of capital goods.

The other energy industry chiefs call the solar property-tax exemption a subsidy. We need to distinguish between absolute and relative subsidies. An absolute subsidy occurs when government provides grants to firms, or limits competition. A relative subsidy occurs when one firm or industry receives a greater subsidy than its competitors. All absolute subsidies are also relative subsidies, because they exist relative to the rest of the economy. But if the subsidy is not in funds or protection, but from lower rates on industry-destructive taxes, this is a relative but not an absolute subsidy.

Suppose that there are patients in a hospital suffering from continuous poisoning. The doctor stops poisoning one patient, and he recovers. But the other patients are still being poisoned. The other patients complain that it is not fair for one patient to be singled out for favored treatment. But the just remedy is not to resume poisoning the recovered patient, but to stop poisoning the others. The taxation of capital goods is economic poison, which the state recognizes would poison the solar energy industry they seek to promote. But why poison the other industries? The property tax should exempt all capital goods, all improvements.

A broader issue is the subsidies to energy. All forms of energy, except human muscles, are subsidized by the state and federal governments. Energy from oil and coal are implicitly subsidized by exempting them from the social costs of their environmental destruction. There is no economic need for any subsidies. But to obtain the true costs of energy, governments should also eliminate taxes not only on their capital goods but also on their incomes and sales. We cannot know whether renewable energy can stand on its own until we eliminate all the government interventions, including taxes, subsidies, and excessive regulations.

Since a radical restructuring of public finances is politically impossible today, a politically feasible reform would be to exempt all capital goods investments from the property tax. If this needs to be revenue-neutral, California could replace its cap-and-trade policy with levies on emissions. The relative subsidy to solar power is unfair to the other energy industries, but the real unfairness is the property tax on their investments.
This article first appeared at

California Times Six

I live in California. It’s a great state. Too great.

A proposition to split California into six states may be on the ballot in 2016. “Six Californias” has announced that it has collected sufficient signatures. Why six? California’s population of over 38 million is six times lager than the US state average. The ruling powers may find a way to block the proposal, as some opponents claim that the signature gathering was unlawful. If “Six Californias” does get on the 2016 ballot, in my judgment, this will be a rare chance for fundamental reforms.

Many Californians have said that the state is too big to govern effectively. But the governance problem is not size, but structure. After the property-tax limiting Proposition 13 was adopted in 1978, taxes and political power shifted from the counties and cities to the state government. California could be governed well if decentralized, but the concentration of fiscal power to the state has made the state among the highest taxed and worst regulated in the USA.

There have been many attempts to reform the lengthy California constitution, but they have all failed. Attempts to replace the Proposition 13 have gone nowhere. The best option is to start over. Creating new states would provide six fresh starts.

Critics of the six-state plan say that the wealth of the new Californias would be unequal. The Silicon Valley state would include the high-tech wealthy counties of San Francisco, San Mateo, and Santa Clara, among others. The promoter of this initiative, Timothy Drapers, happens to be a Silicon Valley entrepreneur.

But the current 50 US states are also unequal in wealth. The income inequality problem is a national and global problem. Income can become more equal without hurting production by collecting the land rent and distributing it equally among the population. Since the critics of Six Californias are not proposing or even discussing this most effective way to equalize income, their complaints should be dismissed as irrelevant, immaterial, and incompetent.

US states have been split in the past. Maine was split off from Massachusetts in 1820, and West Virginia was carved out of Virginia in 1863.

If the initiative passes, a board of commissioners would draw up a plan to divide the state’s assets and liabilities among the six new states. A good way to do this would be to divide the value of the assets by population, but to divide the liabilities (including both the official debt and the unfunded liabilities such as promised pensions) by the wealth of each state. That would go a ways to deal with the inequality problem.

California’s complex water rights could be simplified by eliminating subsidies, instead charging all users the market price of water. There could continue to be a unified water system with a water commission with representatives from the six state.

If this measure is approved by the voters and by Congress, each state will design a constitution. The new constitutions should be brief, like the US Constitution, in contrast to the lengthy current California constitution that contains many provisions best left to statute law.

The new constitutions should retain the declaration of rights in the current state constitution, including Article I, Section 24: “This declaration of rights may not be construed to impair or deny others retained by the people.” This wording, similar to the US 9th Amendment, recognizes the existence of natural and common-law rights. This text should be strengthened with something like this: “These rights of the people include the natural right to do anything which does not coercively invade the properties and bodies of others, notwithstanding any state interest or police power.”

These new constitutions will be an opportunity to replace California’s market-hampering tax system with economy-enhancing levies on pollution and land value. There should be a parallel initiative stating that if Six Californias passes, the states will collect all the land rent within their jurisdictions and distribute the rent to all six states based on their populations. A tax on land value is by itself market enhancing, better than neutral, because it promotes an efficient use of land, it reduces housing costs for lower-income folks, and eliminates real-estate bubbles. Combined with the elimination of taxes on wages, business profits, and goods, the prosperity tax shift would raise wages and make California the best place in the world for labor and business.

This is all a dream, but the past dreams of abolishing slavery, having equal rights for women, and eliminating forced segregation all came true. This proposition will at least provide a platform for discussing such fundamental reforms.
This article was first published at