Perils Of Freakonomics

As readers (accidental as well as unfortunate) must be aware already, I am commonplace ignoramus as far as general scheme of life is concerned, and quite profound (ignoramus that is) when field is Economics. As such this is comfortable existence, however the ignorance is a bit of impediment when I have to write about economics, and this time I have to. So appealing for mercy in advance and meditating upon Jagadguru, I proceed.

Article that concerns us is this and the ensuing chaos (caused mostly by repentant but still persistent dunali) in comments here. The crux of the issue is that Talented Mr Pai is not happy with the proposed exit tax , in fact he is feeling very bad. Let deconstruction begin. The article covers three issues, which must be kept separate.

1. The rationale behind subsidies: Mr Pai contends it is wrong to subsidize higher studies. I agree totally (My first DP link, such fond memories) , and this post by Incredible Mr Dey should be enough to convince . Related to this is the desirability or morality of preventing emigration.
If Mr Pai had kept this as main arguement, I believe there would not that much disagreement. However, discontinuing the subsidies is not the focus of the article, opposition to exit tax is.


2. Implementation of exit tax: Mr Pai contends it is a costly and difficult measure.
Now broadly implementation has two broads components, first the calculation of exit tax, How do we calculate tax ? Now to me a sensible way is to keep the tax at opportunity cost, which is the return which state would have got if it had invested the capital somewhere else. Assuming that economics does have some characteristics of steady state equilibrium (I am just borrowing the phrase I am familiar), I think this opportunity cost will be equal to the positive externalities that Government is expecting from investing in higher education. Of course what constitutes positive externalities in this case is not easy to decide. Or if we have too much of time, opportunity cost should be equal to returns from student working at country minus remittances sent by student from abroad.
Now I am not the best authority on this, so I may be wrong, however I agree that calculation of tax is a difficult and more importantly boring exercise.This being a fun blog, can not support any boring exercise.

Similarly the second problem how to actually extract tax, is also complicated as mentioned in the Economic Times article.

In short the implementation , as we see is not easy either. If Mr Pai had focussed on implementation, even in that case I would have no problem. However he didn't .


3. Loss of "guilt": Unfortunately this was the main arguement of the article, which started with this example from path breaking book Freakonomics

"Parents used to arrive late to collect their children, forcing a teacher to stay after closing time. We introduced a monetary fine for late-coming parents. As a result the number of late-coming parents increased significantly. After the fine was removed no reduction occurred. We argue that penalties are usually introduced into an incomplete contract, social or private. They may change the information that agents have and therefore the effect on behavior may be opposite than expected. If this is true, the deterrence hypothesis loses its predictive strength, since the clause ‘everything else is left unchanged’ might be hard to satisfy." [Link]

Incidentally I have just finished this book. Explaining the reason behind failure of best laid plans of day care center to enforce punctuality, Steven Levitt (author of the book) described importance to take into account moral incentive along with the remunerative incentive.

Moral incentive works as a social courtesy, or norm, and while its exact nature is dependent on the extant culture, as a general principle it is most effective when transaction is of personal nature and further when observance of social courtesy is disconnected from any financial cost. The problem then with the plan (of day care center) was that with introduction of penalty, in other words introduction of financial cost, the moral incentive (guilt arising out of inconvenience caused to day care center workers by delay in picking) was eliminated and the opportunity cost of penalty was so small (compared to pick the children at leisure) that more parents started picking late.
However, Steven Levitt clarified, if the penalty were high enough to exceed the opportunity cost of picking at leisure, it would have been possible to ensure that the delays are minimized.

Now drawing parallel from this case, Mr Pai asserted that imposing exit tax will eliminate moral incentive and actually encourage emigration, without backing up this assertion with any data.

But I am going to be frank, no amount of data could convince me of the "guilt". The reason for this is having "wallowed in the halls" of the concerned institute I can confidently state that "rare exception" apart, when choosing between staying put or going abroad, the moral incentive arising out of subsidized education plays no part in student's decision.
Cultural bankruptcy of middle class apart the impersonal nature of subsidy ensure lack of moral incentive, instead there is moral incentive due to attaching with the family or security in familiar surrounding, this is what I pointed out in the article.
On the contrary any significant exit tax will discourage emigration, as it will make emigration less attractive.
In brief IITians are shameless bastards persons of unknown parentage, with the possible exception of respected FiTWji, who can trace his genealogy from Lord Mahabali.

But why I am writing about this. It is because, the reason that I respect and place importance on opinions of people, whom Jagadguru fondly calls free market fundamentalist fools, is because they have something more than courage of conviction, which is courage of reason, courage of informed debate as opposed to,and I say this without exaggeration, all too familiar and heart-breaking, hollow rhetoric which passes as discourse in India.

Unfortunately it is a common human failing to value form over content, a failing which is exacerbated by the exhilaration induced upon reading of Freakonomics. Which is why, sometimes a desire to shock and awe (utterly pwned here and here) prevails over dispassionate analysis. Result can only be termed as "Thinking it through".