Another take on full funding of public pensions

23 May 2022

... From the taxpayers' perspective.

Should public retirement plans be fully funded?

Most state and local retirement plans strive for full funding, at least by actuarial standards. Funding measured at market values fluctuates and often falls short. In a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers’ costs of borrowing. Hence, zero pension funding is optimal. Also, unfunded pension promises are properly discounted at a rate strictly greater than the government's borrowing rate. Funding can still be in taxpayers’ interests if legal enforcement problems make unfunded pensions risky for employees, but except in special cases, the optimal funding ratio is less than 100%.

‘Neither a borrower nor a lender be’ (Shakespeare)

Tax the rich (again)

07 May 2021

Testimony to House Finance, in support of H5227, 6 May, 2021

Since 1995, when the state tax administrator chose to ignore a law imposing a surtax on wealthy taxpayers, our state's tax policy has been all about giving money to rich people in the hope that they would do something constructive with it.

We cut the income tax by 10% across the board in 1997-2002, and then we cut the capital gains taxes shortly afterward, established tradable tax credits for several purposes, and offered the wealthy a "flat tax" option in 2007. That was supposed to be temporary, but it was baked in permanently in the 2011 changes.

That's over a quarter-century of indulgence to the idea that tax cuts promote economic growth. I see no evidence that we got what we were promised, but the evidence is overwhelming that we lost out on important investments in the meantime. Over these past 25 years, these tax cuts represent over $2 billion in foregone income, more than two years of income tax collections.

When the legislature made those cuts, they were never paid for. Nobody identified the spending that would be cut to pay for them. So we didn't invest in our state's schools, just for example. Accounting for inflation, local school funding next fiscal year might just barely reach the level it was at in 2003. That was before No Child Left Behind, and a whole host of state education mandates as well.

We didn't change mandates to municipalities for clean water, elections, policing, or anything else, either. The state just moved responsibilities onto cities and towns while patting itself on the back for cutting taxes.

Property taxes, of course, fall most heavily on the poor. So at the same time we were making life easier for rich people, we were making things more miserable for the poorest Rhode Islanders. While also failing to invest in education, public transit, affordable housing.

It's a shame to run a state this way. They say the best time to plant a tree is 25 years ago and the second best time is now. We made some serious mistakes in tax policy 25 years ago, but now is the time to fix them.

Novelty in science

20 April 2021

Two interesting papers from NBER.

"Bias against Novelty in Science: A Cautionary Tale for Users of Bibliometric Indicators"

Research which explores unchartered waters has a high potential for major impact but also carries a higher uncertainty of having impact. Such explorative research is often described as taking a novel approach. This study examines the complex relationship between pursuing a novel approach and impact. Viewing scientific research as a combinatorial process, we measure novelty in science by examining whether a published paper makes first time ever combinations of referenced journals, taking into account the difficulty of making such combinations. We apply this newly developed measure of novelty to all Web of Science research articles published in 2001 across all scientific disciplines. We find that highly novel papers, defined to be those that make more (distant) new combinations, deliver high gains to science: they are more likely to be a top 1% highly cited paper in the long run, to inspire follow on highly cited research, and to be cited in a broader set of disciplines. At the same time, novel research is also more risky, reflected by a higher variance in its citation performance. In addition, we find that novel research is significantly more highly cited in “foreign” fields but not in its “home” field. We also find strong evidence of delayed recognition of novel papers and that novel papers are less likely to be top cited when using a short time window. Finally, novel papers typically are published in journals with a lower than expected Impact Factor. These findings suggest that science policy, in particular funding decisions which rely on traditional bibliometric indicators based on short-term direct citation counts and Journal Impact Factors, may be biased against “high risk/high gain” novel research. The findings also caution against a mono-disciplinary approach in peer review to assess the true value of novel research.

"Does Science Advance One Funeral at a Time?"

We study the extent to which eminent scientists shape the vitality of their areas of scientific inquiry by examining entry rates into the subfields of 452 academic life scientists who pass away prematurely. Consistent with previous research, the flow of articles by collaborators into affected fields decreases precipitously after the death of a star scientist. In contrast, we find that the flow of articles by non-collaborators increases by 8.6% on average. These additional contributions are disproportionately likely to be highly cited. They are also more likely to be authored by scientists who were not previously active in the deceased superstar's field. Intellectual, social, and resource barriers all impede entry, with outsiders only entering subfields that offer a less hostile landscape for the support and acceptance of “foreign” ideas. Overall, our results suggest that once in control of the commanding heights of their fields, star scientists tend to hold on to their exalted position a bit too long.

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