American Experiment wins national award
Center of the American Experiment’s “Think About It” radio campaign won the State Policy Network’s Communication Excellence Award in the Bold Brand Boost Category last week at SPN’s annual meeting…
The general consensus among my family at the end of the Vikings game yesterday was that the franchise’s investment in quaterback Kirk Cousins has not paid off. My in-laws didn’t put it quite like that, but this is a family website. A team that reached the Championship game last year with Case Keenum spent at least $80 million replacing him with Cousins and their season is over before the ball has dropped at Times Square.
Of course, it would be unfair to lay all the blame for a failed season on Cousins. He didn’t seem to get much protection and the receivers appeared to have greased their gloves for the last few plays of the game. But the American variety of football is almost unique in the responsibility placed on one man, the quaterback. In none of its cousin-sports – rugby union, rugby league, Australian rules football, Gaelic football, Association football (aka soccer) – is there a position with a remotely similar responsbility to dictate a game. Fair or not, when a team tanks in American football, the quaterback is going to carry a large share of the responsibility.
Investment is risky
When the Vikings invested this money in Cousins they presumably didn’t expect the season to pan out like this. They will have thought it a possibility, no doubt, but they would have thought that making the play offs – or even matching last year’s achievements – was more likely than not.
Investments are about spending today for a pay off in the future. But the future is not knowable with certainty, as Mike Zimmer and Zygi Wilf are contemplating this morning. This uncertainty, inherent in intertemporal action, is risk. All investments carry a risk. And the reward should rise or fall in tandem with that risk to incentivize investors to undertake it.
That is why we tax it at lower rates
This is one reason why investment income is often taxed at lower rates than labor income. A rough calculation of the return from an investment is
estimate of pay off x estimate of likelihood that you receive that pay off = estimate of pay off
To illustrate, if two people flip a quarter with the coin going to whoever calls ‘heads’ or ‘tails’ correctly, the return is
25c x 0.5 = 12.5c
With most economic investments the calculation is much harder. Flipping a coin has only two outcomes, rolling a dice only six. These exhaust all possibilities of coin flipping or dice rolling. Investing in stocks or a factory, by contrast, has an incalculable number of possible pay offs. Assigning probabilities to them is, thus, much harder. This difficulty increases with the length of time between investment or pay off. It also increases with the novelty of the investment. If you are undertaking an investment similar to some already undertaken, you can use the pay offs of those investments as a guides for your own. But if you are investing in something new – the sort of investment an economy needs for innovation – you don’t have that guide.
And the estimate of the pay off is reduced by whatever rate it is taxed at. To go back to our coin flip, a tax of 10% on the capital gain of winning that quarter will result in an estimated pay off of 10c (the estimated pay off – 10% capital gain on the quarter you’d win). As your pay off decreases, so does your incentive to undertake the investment.
Compare this to labor income. When you go to work you know in advance what your pay off (wage) will be. You know with near certainty that you will receive this. True, high labor income tax rates will, at the margin, disincentivize people from working. But there is a certain amount of work which we have to do to keep a roof over our heads and food on the table.
At least we’re not the Packers
We can draw some comfort from a look at Lambeau Field. The Packers have struggled all season, fired their coach, and closed out the year with a 31-0 blowout against Detroit.
But so what? The Vikings win no prizes for just doing better than the Packers – a very low bar this year – just as the Packers would win none simply for being better than the Vikings. Its called the National Football League after all. I understand that there is pleasure in beating your neighbors, but to really compete you have to beat the best, wherever they are.
The same goes for state economies. I wrote recently about an especially dumb article in City Pages which claimed that all was well with Minnesota’s economy because it was doing better than Wisconsin and Iowa.
This is laughably parochial. There are 47 other states in the country besides Minnesota, Wisconsin, and Iowa. When we looked at IRS migration data for our report ‘Minnesotans on the Move to Lower Tax States 2016’, we found that the top five states Minnesotans move to are Florida, Arizona, Texas, Colorado, and California. Wisconsin [which we also lose residents to] ranks 11th and we gain residents from Iowa, which ranks 48th. Our peer group is nationwide. Serious policy analysis has to involve more than just peeking over the neighbor’s fence.
In 2019, lets hope that our football players and economic policymakers take this on board.
Happy new year!
John Phelan is an economist at the Center of the American Experiment.