Thursday, February 21, 2013

Point Estimates and Division of Labor vs. Technocracy

In his recent book, Public Policy in an Uncertain World, Charles F. Manski notes
Modern democratic societies have created an institutional separation between policy analysis and decisions, with professional analysts reporting findings to representative governments. Separation of the tasks of analysis and decision-making, the former aiming to inform the latter, appears advantageous from the perspective of division of labor...
However, the current practice of policy analysis does not serve decision makers well. The problem is that consumers of policy analysis cannot trust the producers...I recommend that journalists reporting on policy analysis should assess whether and how researchers express uncertainty about their findings, and should be deeply skeptical of studies that assert certitude. That caution and advice extend to all readers of policy analysis. (pp. 173-174)
The rest of the book is quite good, and makes the case for expressing social science results in confidence intervals rather than point estimates, which give (at best) a feeling of false precision. An example of this methodology in practice can be found in Manski's paper on recidivism with Daniel Nagin (1998).

Returning to the quote above, an implication seems to be that technocracy (having the analysts make the decisions in addition to doing the analysis) might be more desirable than representative democracy. It would foster more accountability on both ends - politicians can't blame analysts for policy mistakes after the fact, and vice-versa - and I'd speculate that the benefits of division of labor in politics are a bit overstated.

However, it's hard to imagine the personality types represented by statisticians and actuaries as running successful political campaigns, so division of labor is what we've got, like it or not. Manski's caution about the false precision of point estimates might be a step in the right direction though. For example, the CBO would be a lot more credible if they gave estimates in confidence intervals, instead of specific estimates that are consistently wrong.

Tuesday, February 19, 2013

Grounding "Methodological Individualism"

This topic came up indirectly today in conversation about communitarian ethics versus classical liberalism.

Classical liberals usually envision a human subject who can choose who and what to associate with, joining or leaving various communities depending on which offers the best "bundle" of services. This search by individuals, finding their private optimums, is supposed to induce efficiency between providers of services who want to attract as many users as possible. The result, classical liberals say, is a spontaneously generated system of social goods which emerge from individuals' entry and exit into various associations.

The communitarian critique (represented by Habermas, Barber, etc.) is to say that people are social animals; we develop our selves through interaction with others. Classical liberals, according to this account, underrate the role of community which can both enrich life beyond what mere individualism can offer, and also restrict the free exercise of choice which classical liberal social theory depends on.

The classical liberal retort to this is "methodological individualism." It is simply a truism that at the core, all choices must be made by individuals so it only makes sense to ground political/philosophical views on individual choices. A community does not exist beyond the coordinated actions of its members, so to speak of "collective preferences", or similar, is just the fallacy of composition writ large.

Methodological individualism is the basis for most good, mainstream economics and from a practical standpoint I think it makes a lot of sense. Talking about the "good of the community" without addressing the incentives of its members invites fuzzy-headed thinking and bad policies which sound good on paper but never work out in the real world. In practice, most people's everyday political heuristics operate on some notion of communal good, so a strong counter-dose of methodological individualism can often lead to improved conclusions.

But, from a philosophical perspective, it's not clear that this fully resolves the communitarian critique of classical liberalism. Indeed, how can we say that methodologically individualist stance is an objective one, derived by us wise political economists with the uncommon privilege of standing outside all the social structures which block the view of others? To put it differently, if we are always already situated within social roles (to borrow some annoying post-modern rhetoric) then perhaps the classical liberal stance simply emerges from growing up in a society where classically liberal and individualistic values are commonly accepted.

Of course, the communitarian stance falls prey to this as well, because Habermas et al are also socially situated in their formulation of communitarian ethics. They have no privileged "eye from above" stance either. At this point we spiral into a long infinite regress of navel-staring and the entire discussion of political economy is put on hold, perhaps indefinitely.

Is there any grounding for methodological individualism, aside from the tautology that "only the individual chooses for the individual"? I can see two possible resolutions for this dispute.

1. Look to results (pragmatism). Which stance works better? From the historical record it appears that individualist societies have grown and prospered much more so than others.

However, there are no pure cases in the real world, and a dedicated communitarian could probably look for the social roots of Western historical success, and/or piously lament the crisis that overly-individualized society has brought upon us today.

2. Dismiss the search for grounding entirely. It may be that no code of social ethics can claim a solid foundation, and all philosophy is built upon chutzpah, pulling itself up by its bootstraps, and assuming its own foundational values into being. In this case we are left with large mental edifices that have been built upon sand, but appear to be functioning pretty much okay, so maybe it's better just not to worry about these grounding questions at all.

In an earlier time this grounding issue could be resolved with an appeal to God, divinely inspired creation, innate human dignity, and so on. But, in an era of secularized social science, competing social perspectives seem to be engaged in an endless bootstrap-pulling competition.

Friday, February 15, 2013

Future of the Welfare State -- is there one?

This was the subject of a talk I attended earlier this week. Loosely titled "The Future of the Welfare State", it featured two discussants to address the funding and politics of the redistributive state. I'll give the highlights here for those who weren't lucky enough to attend, along with some of my own thoughts along the way.

Professors Kent Weaver and Kimberly Morgan speaking at Mason Hall.

The first to speak was Professor Kimberly Morgan of George Washington University, whose presentation was titled "The American Welfare State: How We Spend So Much Yet Achieve so Little". A large part of her talk was dedicated to clearing up factual misunderstandings about the welfare state.

Some figures she cites that are worth knowing:

  • Public Social Spending in United States is ~16% of GDP (2007). Closest comparable countries: Australia, Ireland. Largest in this category is France at 28%.
  • In net social expenditure as % of GDP we're in 5th place, next to Sweden and the UK.

Net social expenditure is defined as public social spending, plus tax breaks for social purposes, plus publicly mandated private spending (not done very much in the U.S.) plus voluntary private spending (e.g. employer provided health insurance), minus taxes levied on benefits.

An implication of this net social expenditure measure is that the U.S. implicitly subsidizes many groups through the tax code, e.g. the Earned Income Tax Credit (EITC).

In the private voluntary spending category the U.S. is #1, at above 10% of GDP. Next in line is the Netherlands at ~6%. A big part of this is made up of employment-related benefits; U.S. employers spend about $15,000 per employee in health care.

Comment: I see the logic of including private health care spending as "net social expenditure" because it all goes toward public well-being in some fashion, but I object somewhat to lumping this in with government money as if private employer spending is also a variable of choice for public policy. Admittedly, the entire provision of health care by employers is a rather silly relic of wage controls passed during WW2 which has become the "new normal", but it is still distinct from government provided services and should not be treated as a dollar-for-dollar substitute.

  • In average indirect tax rates, the highest is Denmark at 26% (followed closely by other Northern European countries) lowest is the U.S. at 4%. This is largely money taken in consumption taxes, e.g. VAT. The upshot is that while the U.S. spends less in benefits, we also "claw back" less of that money than Europe does.

Startling fact: Once you count up all these different social spending categories the US is roughly equal with Sweden as % of GDP! Sweden is famous for its generous welfare state, but voluntary spending in the U.S. is what makes up the big difference.

This begs the question, if we spend so much why are the outcomes so unsatisfactory? Dr. Weaver identifies the biggest cause as how those benefits are distributed; namely, they aren't progressive enough.

  • 18% of the U.S. economy goes to health care. Next is the Netherlands, at 12%. In spite of this the American health care system isn't very good in many respects: we're strong on technology, weak on primary care, and nearly worst on "preventable mortality" among developed nations.
  • Distribution of entitlement spending in the U.S by income: the middle 60% gets 58%, bottom 20% gets 32% (from the Center on Budget and Policy Priorities).
  • Distribution of "tax expenditures": Top 20% gets 66%, bottom 20% gets about 4%, the rest goes to the middle.
Comment: describing a tax break as an "expenditure" seems questionable to me. Dr. Morgan defends this by saying that this money is "given" (i.e. not taken) to promote various social goals, so we should be observant of which sectors of society are given back to the most. To me, this distribution of "tax expenditures" seems inherently obvious: the top 20% pays the lions share of federal income taxes, so obviously there's just more to give back in the form of deductions. It's simple arithmetic.

Dedicating more tax expenditures towards the bottom 20%, who pay little if any income taxes, basically implies a negative income tax ala Milton Friedman. That's a worthy proposal to make and can be debated on its own merits, but the tinge of class warfare in this framing seems amiss.

The next to speak was Kent Weaver, Georgetown professor of public policy. His talk was entitled "Future of the Americaan Welfare State: Constraints and Options". I took less detailed notes during this section; partially because the coffee was wearing off, and partially because he made his points more often with editorial cartoons than charts or graphs, which I personally find less engaging.

He noted the demographic change occurring in America: there are increasingly less workers per retiree, a problem that is even more pressing for Japan and much of Europe. Politicians are also caught in a trap: they can only keep promising high benefits when economy is increasing.

The incentive for politicians becomes focused on NOT punishing groups rather than finding ways to benefit them. This is an interesting point, and one that could be explored in more detail through public choice economics.

Overall both speakers were good, although I enjoyed Dr. Morgan's half of the talk much more. The facts she presented were useful regardless of which ideological persuasion you came from, while Dr. Weaver was more focused on how to expand and continue the welfare state, not necessarily just reform it to accomplish its goals at the same (or lower) cost.

What I took away from their presentation is that, regardless of whether you think government redistribution is a good idea or not, the current way we're doing it in the U.S. is far from optimal. I think this provides some common ground for liberals and conservatives on entitlement reform: if the goal is to provide a social safety net without going toward cradle-to-grave coverage, policies need to be better tailored to accomplish that goal instead of the hodge-podge we have now. Of course, how to get there from here is the real struggle.

Wednesday, February 13, 2013

Development of the Cayman Islands as a Banking Center -- paper commentary

Tomorrow at George Mason's Philosophy Politics and Economics (PPE) seminar series, Prof. Andrew Morriss of U. Alabama law school will be coming to present his paper, "Creating Cayman as an Offshore Financial Center: Structure & Strategy since 1960", written with Tony Freyer (also of University of Alabama). The paper is still in a draft stage but quite good, although unfortunately, not easily available online (yet). These are my comments upon reading it.

From the paper, I understood there to be three main causal factors which led to financial market development on the Cayman Islands:

1. Relative independence granted by Britain which allowed institutional experimentation

2. As a seafaring nation there was limited ability to tax the locals directly. Instead they used indirect taxes like import duties and stamps, which stalled the growth of redistributive government and encouraged flexible policy

3. Historical timing. In the 1950s better transport and communication technology were becoming available, and the government encouraged access through air/sea travel. This allowed the banking sector to flourish even though it was far from population centers in Europe, which might not have been possible 50-100 years earlier.

One question this invites: Why not Jamaica? The two islands were administratively linked for many years, but Jamaica took a much different development path. The 1960 Companies Law is some explanation because it encouraged company registration in Cayman rather than Jamaica. The authors also note that Jamaica had a more racially-divisive independence movement while Cayman had been racially mixed for a long time, but this "shock" in the 1960s seems inadequate to explain their full divergence.

I'd argue that the Cayman Islands went into finance because they were so small. Lacking much land, population, or other resources besides access to the ocean, Cayman had few other choices but to adopt capital-intensive industries. Jamaica, on the other hand, has more arable land and also tourism revenue which made banking less of a necessity. I'm sure there's more richness that could be added to this story by someone with more expertise in the region.

I thought the section on development of the medical malpractice insurance market in the 1970s was interesting. While the authors use "crisis" to describe the U.S. insurance market of the 1970s there are several journal articles from around that time which contest that framing, and arguably the insurance market in the 1980s was more crisis-like than the 1970s. Malpractice insurance (especially for non-medical professions, like lawyers) was offered primarily by Lloyd's of London or other "boutique" insurers prior to the 1970s, so nearly any increase in tort claims might be classed a "crisis." I can see why a market opened for more foreign providers as demand for insurance increased, but I don't get a full story from the paper as to why the Cayman insurance sector benefited dis-proportionally (if indeed, they did).

Aside from this, the level of detail and description regarding the Cayman Islands as a tax haven, conflicts with the IRS, fighting laundered drug money, and so on is very impressive. Their conclusion, which emphasized the role of stable institutions in allowing Cayman to offer diverse financial services, summed this up nicely. The authors successfully make their point that strong institutions, rather than shady practices or corruption, were the foundation of the Cayman Islands' success. I just wish there had been more of a comparative element which could have contrasted Cayman against some similar nation to show more concretely how those constitutional differences mattered.

Tuesday, February 12, 2013

Review of "The Science of Success" by Charles G. Koch

I picked up a copy of The Science of Success: How Market-Based Management Built the World's Largest Private Company. It's a quick read, at under 200 pages, and I'll post a brief synopsis of my thoughts on the book here.

Science of Success starts with an overview of the history of Koch Industries, its early development and business moves, and then quickly moves into the "meat" of the book which is a discussion of market-based management (MBM). Inspired by the Misesian tradition in Austrian Economics, MBM has five aspects:

  1. Vision - locating where the greatest value can be generated by the organization
  2. Virtue and Talents - getting the right people in the right places
  3. Knowledge processes - recording and applying relevant information
  4. Decision rights - empowering and holding decision-makers accountable
  5. Incentives - giving rewards based on value-creation

(paraphrased from a list on p.26).

The fact that such a book can be written I think illustrates a strong point for Austrian Economics vis-a-vis its competitors. If one believed strongly in the Neo-Classical paradigm, with a Walrasian auctioneer who engineered prices to achieve constant social equilibrium, what role would there even be for effective management or entrepreneurship? Neo-Classical economics does have some powerful tools for predicting or forecasting social behavior, but it's not particularly useful in a non-academic setting (at least in its most common academic applications). Of course, if Koch Industries had followed the most extreme strands of Austrian thinking which are hostile to measurement and quantification, it's also unlikely they would have been so successful. However, the Austrian emphasis on entrepreneurship and discovery does make an interesting kernel for a management strategy.

As a handbook on management, The Science of Success has many aspects that you would expect: examples of successful and failed corporate experiments, dealing with people, and product development within a competitive market. I found the parts on how to work within a regulated market to be particularly interesting because those seem like areas that an Austrian economic approach, which appeals strongly to free markets, might struggle. I just wish the section on "Practicing MBM in a Political World" had been a big longer and more detailed.

In many ways, the book is directed more toward helping people understand the philosophy which has driven Koch Industries, rather than necessarily showing how to implement it in other contexts. As described in the introduction, The Science of Success is primarily aimed at current or future Koch Industries employees who want to know how the company thinks and operates, and only secondarily toward a more general audience. So, if you're the CEO of a young start-up company this should still probably be on your reading list, but maybe not as the first title.

In addition to its core Austrian influences, other management thinkers are also featured in The Science of Success. Michael Polanyi is quoted several times, and W. Edwards Deming's idea of continuous improvement is also a driving influence. While some might read it as an ideological screed, The Science of Success also sticks to mainstream best practices. Many of the ideas expressed in Austrian economic jargon could probably also be found in other management handbooks, just phrased differently.

I do have some small technical criticisms. A chart on p. 27 compares a $1000 value of Koch Industries growing since 1960 vs. $1000 in the S&P 500 over that time -- the divergence is notable. However, that difference is somewhat driven by survivorship bias; there were many small natural resource companies an investor might have chosen from in 1960, but many of them are now defunct, and their former CEOs have no reason to write a book on management. Similarly, entries in the S&P 500 have changed over that time, always reflecting relatively "mature" companies which have already reached a stable size and stopped growing quickly. If you were to pick, say, Microsoft or Xerox from its inception and track it against the S&P 500 over that same time period you'd see the same sharp returns curve, but that's because you're comparing a company known in hindsight to have been successful (information not available to investors at the time) against an index representing a safe return. It's not a fair comparison.

Overall, The Science of Success is worth reading because it lays out the intellectual driving forces of Koch Industries. Given the prominent role that the Koch brothers have taken in the world of ideas regarding libertarian economics and public policy, this is useful background knowledge for anyone engaged in those discussions. To keep a semi-balanced perspective, perhaps I'll pick up some of the authorial works of George Soros next...

"Portfolios of the Poor" -- active financial lives on $2 per day

I started reading Portfolios of the Poor by Daryl Collins, Jonathan Murdoch, Stuart Rutherford, and Orlanda Ruthven. I'm not very far in yet but I'm already impressed by their data collection methodology, which involves a "financial diary" kept by the people they study.

Discussing borrowing and lending between families in the third world, they note
Because these activites are "informal" and not written down, they are easy to overlook or hide... It was sobering, then, to find that we would have missed much of the action had we undertaken only single, one-time interviews of each household. Using the South African data, we did a "flow of funds" analysis - comparing all inflows to all outflows of money in each time period for each household - and found that, in the earliest interviews, we were often missing more than half a household's financial activity in a given week.
...The frame-after-frame views revealed much greater levels of financial activity than large surveys usually show, and much more active management of finances... We might have blindly accepted arguments that they are especially eager for loans to run a small business, or that, if offered loans, they would fall rapidly into deep debt...
All of those assumptions are right some of the time. But they are wrong much of the time. Uncorrected, they can mislead businesses that plan strategies to work with households like Hamid and Khadeja's, and misdirect policymakers who design interventions to hasten their escape from poverty. (pp. 12-13)
This might be a shock to Western commentators who want to "empower" the poor that the poor are quite empowered already. A lack of physical resources doesn't always imply lack of mental resources.

On the one hand, this is cause for optimism because those in poverty are already actively working to improve their lives, but on the other, it should cause pessimism about policy attempts which assume that the poor will follow along unquestioning with whatever "development" scheme is foisted onto them. The failure of traditional foreign aid over the last fifty years shows the wisdom of both perspectives.

Monday, February 11, 2013

Does credit card fraud have a GDP multiplier?

The exposure of an 18-person credit card fraud ring, which involved 7,000+ fake identities and 25,000 credit cards, got me thinking about parallels between government stimulus and private fraud.

Some of the most popular arguments for government spending go something like this: "companies are sitting on lots of cash, holding out reserves which could be stimulating the economy if they were put to good use." Banks, manufacturers, tech companies... All with big cash stockpiles that make government spending enthusiasts' eyes grow wide.

So what exactly is the difference between government taxing away money and spending it, versus fraudsters tricking banks into lending them money and spending it? The recently uncovered ring is estimated to have stolen $200 million - small potatoes when it comes to stimulus - but it seems the effect on the economy is nearly identical to government spending, just on a smaller scale. If the Keynesian story is correct, all those purchases of luxury cars, jewelry and so on should be applauded because they increased aggregate demand and spurred job growth in associated industries.

Going a little deeper, most of the arguments for why fraud is bad for the economy also apply to stimulus.

1. Fraud takes resources away from higher valued uses to lower ones. But, government stimulus likely does the same, by bidding away inputs from the private sector to the public and investing them less efficiently.

2. Fraud undermines trust which is essential to a market economy. But does anyone really trust that government is spending money wisely either?

3. Fraud causes dead weight costs when businesses try to protect themselves against fraudsters through costly measures. But tax evasion and IRS-dodges are also wasted resources to avoid the grabbing hand of Uncle Sam.

4. Fraud creates bad incentives, causing potentially productive people to exploit others instead of producing. Government service may be less directly exploitative but it tends to generate more paperwork than goods, generally speaking.

5. Government can spend on infrastructure or other public works which generate future growth, but fraud is money wasted on immediate consumption. I think this claim is actually fairly persuasive, although unfortunately most government spending is also consumption - missiles and medical treatment - and lots of supposed "infrastructure" ends up being bridges to nowhere or Solyndra-style investment. But it's at least marginally better than fraud.

The implications are thought provoking. If dedicated Keynesians are convinced our problem is just that austerity-hawks in Congress are damming up the necessary flow of federal dollars to create a robust recovery, it seems like the solution is to encourage more "private Keynesianism" through credit card fraud. If the multiplier works then we should all be happier if banks have their funds stolen and wasted on consumption.

The fact that most of us think this idea is ludicrous and even immoral when done by private agents, but much more plausible when undertaken by the state, says something about the heuristics that people bring into play when talking about government and the economy.

Sunday, February 10, 2013

Legalize voter fraud. An economic case

"Fraud" has such a nasty ring to it; more specifically, I'll argue that voters should have the right to sell their federal ballot like any other economic commodity. Four reasons (five, actually, counting the super-libertarian one, but I'll leave that low-hanging fruit for the Mises Institute) this might be good public policy.

1. Politicians are bought already, and that money should go to voters instead. For all the efforts that have gone into campaign finance reform, limiting donations from lobbyists, the "toothpick rule", and so on, D.C. is still awash in political money. Revolving door jobs for Congresspeople in the industries they formerly regulated are common as well. 

Lots of money is made by being in Congress, and those people hardly even need it! Average net worth for a Senator is about $14 million. Let's democratize the bribery and have some of the spoils go to the common people instead.

2. Direct transfers are better than indirect transfers. Politicians already buy votes through generous entitlements and pork barrel politics for their districts. But, as any kid will tell you, it's better to get a twenty dollar bill than a $20 gift card. People would probably prefer to get direct transfers for their vote, but because that's illegal, the second-best solution is to give lots of indirect transfers instead. These also cause distortions and economic inefficiency, which would be lessened if money was just given in lump sums to voters.

3. Improved fiscal policy. Entitlement programs like welfare, Medicare, Social Security, and so on create vested groups of voters who will vote to keep those programs around during their lifetime, even though they will likely bankrupt the next generation. This makes reform nearly impossible. But what if you could buy out senior citizens by giving them a cash transfer equivalent to their expected Social Security benefits if they vote for reform? 

In effect, purchasing votes introduces Coasian bargaining to the political process, which can help reduce externalities created by majority-rule democracy. If voters choose candidates selfishly, that selfishness can be harnessed for the common good and improve public policy, leaving us all better off. When peanut and tobacco subsidies were cut a similar "buy-out" policy was used to lessen opposition from farmers, so the idea is hardly unprecedented.

4. It has a long and distinguished tradition in America. In early American history, voters were brought to the polls with offers of free food and drink. I suspect reviving this practice would lead to a great increase in voter turnout.

File this away under the "posts which guarantee I'll never have a career in politics" section.

Friday, February 8, 2013

"Tyranny of Political Economy" by Dani Rodrik -- a brief critique

Today Professor Dani Rodrik of Harvard published an article criticizing economists' traditional political economy models which emphasize vested interests, and advocated for the role of ideas in shaping government policy. I enjoyed the article, but at the same time I think it is overly optimistic about the role of economists and completely ignores the role of voters.

A snippet of his argument:
If politicians’ behavior is determined by the vested interests to which they are beholden, economists’ advocacy of policy reforms is bound to fall on deaf ears. The more complete our social science, the more irrelevant our policy analysis.
...By endogenizing politicians’ behavior, political economy disempowers policy analysts. It is as if physicists came up with theories that explained not only natural phenomena, but also determined which bridges and buildings engineers would build. There would then scarcely be any need for engineering schools.
Almost ironically, this stance seems to be driven by his own vested interest. "If vested interests drive politics, there would be no need for the type of courses that I teach. I know that the courses I teach have value, so it cannot be the case that vested interests drive politics!" It cannot be because it must not be. 

If we start from the assumption that what economists teach is both true and useful, this is a valid point, but those assumptions are not verified a priori: it is perfectly plausible that what economists say is true but of no use at all in the realm of politics. It would be unfortunate, but possible. It's premature to rule out policy irrelevance.

Of course, as Dr. Rodrik rightly notes, there are many examples of politicians responding to ideas rather than solely to vested interests. I agree that models which solely focus on the venality of elected officials are missing part of the picture. But are ideas alone enough to fill that gap in? He goes on to say:
There are three ways in which ideas shape interests. First, ideas determine how political elites define themselves and the objectives they pursue...
Second, ideas determine political actors’ views about how the world works...
Most important from the perspective of policy analysis, ideas determine the strategies that political actors believe they can pursue.
This is all true, as far as it goes. But where do the voters factor into this account? If voters are rationally ignorant or, even worse, actively irrational in their policy preferences, the ideas that politicians respond to may not be good ones.

Suppose that tomorrow there was suddenly a 100% consensus among economists that open immigration would boost national GDP and make the general public better off, and that every politician was made aware of this fact. Would that be enough to overcome the public's anti-foreign bias, which makes open immigration a quick ticket to the unemployment line for elected officials? Probably not.

Tellingly, Dr. Rodrik's examples of policy revolution due to the role of ideas - China and South Korea - are/were not particularly democratic states. So bringing good ideas to the ruling elite can have great results, but only if you can bypass all the terrible ideas brought by the general public, which is not an option available to us living in a Western democracy.

In this respect, the "vested interest" story is more optimistic than the "ideas" story. Even if the steel industry gets its way and extracts some rents from the general public through higher prices, they also care about keeping the overall economy functioning. If politicians respond to ideas, they're probably bad and wrongheaded, which is much more likely to crush our economic output.

Arguably, the best social role for political economists is advising the vested interests in how to rent-seek in the most inoffensive way possible. It's less noble-sounding, but a much more direct route to policy relevance. There is still a role for teaching good economic principles to students, but expecting that to trickle-up into better policy is optimistic in the extreme. Given the choice I'd rather speak to the captains of industry, rent-seekers though they might be.

Thursday, February 7, 2013

Chart of the day: (dis)trust in government

The Washington Post today reported on a Pew Research project which has tracked trust in government over the last fifty years. The results are surprising.

In the sixties, during the days of the counter-culture, trust in government was at a historic high of 73%. It began to fall with the aftermath of Vietnam and Watergate, rose slightly again under Reagan and Clinton, and now has bottomed out at 26% under Pres. Obama.

Source: Pew.
A libertarian interpretation of this graph: the steady expansion of government power and services is not a good representation of "the will of the people." If the public was genuinely happy with all the regulations and general largess being given out by the Federal Government, one would expect to see their trust increasing because they're getting more of what they want! Instead, the opposite has happened, and an increase in the government's power has made it steadily less trustworthy.

A psychology interpretation: blame the media. Maybe government has been basically the same over this time period, but journalists have gotten more and more tools to muck-rake on our leaders. So representativeness bias leads people to think government is less trustworthy than it really is, because that's what they see on the tube.

A political science interpretation: this is old news. People commonly say they distrust government in general, but when asked about their Congressperson specifically, they tend to have favorable impressions. This is why incumbents can keep winning even when Congress as a whole has a ~10% approval rating. It's always "the other guys" we don't trust, but of course our state would only send an angel into office.

A demonstrated preference interpretation: who cares what people say to a pollster about their opinions of government? Their voting decisions (and continued willingness to live in this country) show that they are generally pleased with what government is doing. If the median voter truly distrusted government this much, they wouldn't keep voting for it.

The Washington Post takes a lamenting tone, talking about the "death of trust in government." Frankly, I'm more optimistic. If distrust makes voters more watchful of our representatives, maybe they'll start doing more things that we want and less of the things we don't.

Rent dissipation and Greek food riots

Is food really "free" if you have to wait in a huge line and risk getting trampled by an unruly mob to get it? This must be what many Greeks are asking themselves right now. A farmer's protest which distributed free food ended in disorder and several people were seriously injured.

More generally, this illustrates a concept raised by Gordon Tullock: rent dissipation. If there is "free money" available, people will compete for it up until the costs of competing are equal to (or occasionally greater than) the value of the prize.

For example, when universities give out free tickets to basketball games, students stand in line for a week in advance to get them. People will be willing to stand in line until the value of the ticket is equal to the value of the time lost, which (not coincidentally) is probably very close to what the price would have been had the tickets been offered for sale. The same logic can be applied to political contests, online deal hunting, and many other activities.

So, some people in Greece received free food and were better off as a result of the giveaway, but a few people were hurt in the process. Gains equalize losses. Rents are dissipated. The lesson: there truly is no such thing as a free lunch.

Wednesday, February 6, 2013

Nietzschean Classical Liberals

This thought inspired by a conversation yesterday.

People with nihilistic or Nietzschean philosophical views probably reject the underpinnings of libertarianism; what is "freedom" but another empty value? However, such people have strong reason to support a classical liberal system of government, because it's one of the few which protects people with wildly unpopular philosophical beliefs (as Nietzscheans tend to be) from persecution by the masses. So the "practical" nihilist might advocate for libertarianism, even while thinking most of its ethical claims are baseless.

There is also an argument to be made, as presented by Edward Romar's 2009 paper, that Hayek's free markets and Nietzsche's disdain for slave morality are perfectly consistent, but I'll leave that interplay for the philosophers to sort out.

Can you know what you want when you know nothing?

Specifically, about politics. In the first chapter of Collective Preferences in Democratic Politics, Scott Althaus raises this dilemma:
Sampling problems and nonresponse error are well-known pitfalls to survey researchers, and the questions that are used in surveys may fail to capture the public's real concerns. While these problems are worthy of serious attention, there is an even greater problem about which few seem aware or concerned: the public's low level and uneven social distribution of political knowledge diminish the quality of political representation provided by opinion surveys... This problem is so pervasive as to call into question whether opinion surveys can tell us reliably what the people really want. 
In other words, if a tree falls in the forest but no one nearby can tell a tree from a bush or weed or flower, should we put any stock in their opinion about whether it makes a sound?

Tuesday, February 5, 2013

If you can't ban it, regulate it to death, Part 2: "Gun Insurance"

This just in. California Democrats propose that gun owners should purchase "violence insurance" to cover damage that it might cause. The idea is silly enough that it probably can't even pass in California, but just to beat a dead horse even further...

1. Most gun crimes aren't committed by licensed gun-owners. According to the Bureau of Justice Statistics, 80% of criminals acquire guns illegally. In Texas (2009) there were 65,651 gun-related violent crime convictions, only 101 of which were committed by people with licensed concealed carry permits. In other words 0.15% of crimes were committed by legally carried guns - approximately one in a thousand. Obviously a gun-toting criminal won't care about insurance requirements any more than (s)he cares about concealed carry laws.

Premiums for gun insurance will either be negligible and thus irrelevant, or they will inaccurately count illegally committed crimes against legal gun owners, causing insurance-buyers to effectively cross-subsidize damage caused by criminals.

2. Personal liability should be enough to deter carelessness with guns; being bankrupted due to misuse of a firearm is a pretty serious consequence. And, if that doesn't stop someone, why would purchasing insurance be any more of a deterrent? If anything, the economic prediction would be that insurance encourages less care by gun-owners, because the costs of their mistake will be borne by the insurance company (as well as the unlucky victim). Of course, maybe insurance companies refuse to insure people who seem like a "bad risk" but this is effectively circumventing the second amendment right to bear arms.

3. Such insurance basically functions as a tax on guns, which will only help keep them out of the hands of low-income individuals who might live in dangerous neighborhoods and want personal protection.

Beyond the immediate consequence of more crime, the implications of taxing a right protected by the Constitution are staggering. Should every YouTube contributor have "free speech insurance" in case they post an inflammatory video that causes riots overseas? Should every voter carry insurance in case their ignorance brings war-mongering, deficit-raising politicians to office? Oh wait, that is called a "poll tax" and we had a Constitutional amendment to get rid of them.

I hope I'll look back at this blog entry and laugh at myself in a few weeks for even thinking there's a chance that this law might pass, but stranger things have happened in politics.

Counter-signaling and Crayon Resumes

Taking as a starting point that most education and credential-seeking is in fact signaling good traits to employers (rather than productivity enhancing) one has to wonder what sorts of strategies an informed job-seeker might use to take advantage of this system.

One aspect of signaling is that it has a negative externality on other job-seekers; every new degree I get makes others look comparatively worse, so they need more degrees and so on. It's an academic arms race. Only one person can be the "best" candidate, and as more and more degrees are acquired, the marginal value of each continues to fall.

So what about counter-signaling, i.e. intentionally refusing the signaling game or sending the opposite of a positive signal in order to distinguish oneself from others? This phenomenon certainly exists in some areas; think of brilliant Berkeley mathematicians who dress like homeless people. They're simply so good that they can actively disregard social convention, and the fact that they can afford to disregard convention is further evidence that they are that good.

So when might it be advantageous to do something outlandish when applying for a job, like submit a resume written in crayon? It would certainly stand out, but to work I think these other three conditions also have to be met:

1. Other observable traits already show you are highly competent;

2. The signaling market is fully saturated;

3.. Value placed on conformity is low.

What sort of jobs might fit these conditions? I think the third is least likely to be satisfied, because people in general (and employers especially) tend to value conformity. However, being a nonconformist in polite and non-threatening ways can sometimes pay off, as this intern's application to Wall Street which went viral demonstrates.

If you're a demonstrated mathematical genius applying for a hedge fund position along with 10,000 other mathematical geniuses, maybe a crayon resume would pay off. Unfortunately,I suspect for the rest of us the conformity test would lead that resume straight to the trash bin.

Conservatism: wisdom of ages vs. path dependence

I think one of the better arguments for conservatism (historically speaking, not necessarily the modern-GOP variety) is the classical one raised by Edmund Burke. To paraphrase, the institutions we have now were chosen over time because they worked well and served some purpose that people valued. It is all very well and good to question those institutions, but before making radical changes, we should understand why things are the way they are.

Put bluntly: give presumption to the status quo, and put the burden of proof on those who would change it.

This argument is persuasive against radical revolutionaries, but it is vulnerable to a simple counter-argument: times change, and institutions often do not continue to serve the purpose they were originally designed for. Uncritical acceptance of what is can lead us to path dependence, where we repeat the same mistakes over and over again.

How to resolve this dilemma? I'm reading Robust Political Economy by Mark Pennington, and I found his take on this to be fairly compelling. In defending the classical liberal tradition, he says:
Social evolution depends on the battle between competing ideas and can be halted or reversed owing to human error. There is, therefore, no implication that 'whatever is must be efficient.' For much of human history, the prevailing assumption has been that social order can only be maintained by the exercise of deliberate authority. It has been the contribution of the classical liberal tradition to argue that this is not so... Looking for ways to expose institutions to competitive trial and error may be a more robust method...
Recognising the benefits of competitive processes is not to deny a role for institutional design. Rather, the central concern is to create a framework within which evolutionary processes can be harnessed to beneficial effect. (p. 43)
From this perspective, a limited government is best because it allows maximal experimentation. The wisdom of ages will thus be preserved, while path dependence will fail the competitive test. I'm not sure that's the end of the story for Burke, but it's a good advancement in the classical conservatism vs. classical liberalism debate.

Monday, February 4, 2013

If you can't ban it, regulate it to death: abortion laws in Michigan

This from Bloomberg Businessweek, Jan. 21-27 edition:
On Dec. 28 last year, Michigan Republican governor Rick Snyder signed an omnibus bill combining multiple abortion-related measures... One stipulation requires abortion clinics to install special gooseneck scrub sinks. Another says recovery rooms must provide 80 square feet of floor space per bed, three feet between each, and one lavatory for every six patients. Corridors must have a minimum width of six feet...
These sorts of regulations should seem immediately silly to libertarians - regardless of the service being performed, shouldn't a business be free to decide on its own how wide the corridors are? - but they also expose some fundamental incoherence on both sides of the pro-life / pro-choice debate.

1. Liberals who are both pro-choice and pro-regulation face a contradiction. If the state is empowered to regulate as the populace sees fit, how to ensure it doesn't regulate away (arguably) core personal freedoms, like the decision not to carry a child to term? The result of increasingly onerous regulation on abortion clinics may be eventually the same as banning it altogether, effectively circumventing Roe v. Wade. But how do you fight such a strategy without admitting that regulations themselves are fundamental violations of human freedom?

2. Conservative politicians are presumably acting in response to strong constituent demands to stop abortion. But, if these regulations are couched in terms of safety and patient services, what are they supposed to tell the voters? "We've made abortion SO SAFE and with SUCH GOOD amenities that no one will be able to have one anymore." **wink wink, nudge nudge** Obviously, anti-abortion groups can read between the lines. but what happens if the Onion's "Abortionplex" moves from satire into reality? The end result might be that abortion clinics become so high tech and sophisticated that their use does not decline by much; higher quality service compensating for higher cost. What then?

I guess no one has accused political parties of philosophical coherence, but the convoluted and short-sighted politics of abortion regulation are now verging on self-satire.

Why are some societies rich and others poor?

Short answer: institutions + entrepreneurship.

Perhaps the most important question for modern economists, discovering why some societies have achieved great affluence while others remain in grinding poverty has spurred much important research. Obviously, under-developed societies lack the abundance of productive capital and labor which promotes growth in other parts of the world. However, this observation only scratches the surface; more than two trillion dollars has been given in foreign aid over the last fifty years so if capital investment alone were sufficient to end poverty, the problem would be solved already. In my view, there are two necessary elements for a society to prosper: a culture of entrepreneurship, and stable institutions which protect private property. If either alone were sufficient then poverty would be much easier to combat, but in reality both entrepreneurship and institutions are needed to create economic growth.

Entrepreneurship, defined broadly, is risk-taking aimed at exploiting previously untapped benefits from exchange. All humans almost certainly have some spark of entrepreneurship within them, but depending on the society they live in, that drive may be expressed along different margins. In cultures which promote group conformity, entrepreneurship which causes divergence from societal expectations may not be accepted. Individualistic culture, as is most often seen in Europe and the United States, has proven the most open to entrepreneurship, and led to more opportunities for economic growth. Entrepreneurs find new ways to use low valued resources and new ways to connect buyers and sellers, in ways that enrich both themselves and other members of society.

While by definition all freely chosen exchanges are mutually beneficial, not all exchange is voluntary. As Baumol (1990) famously observed, entrepreneurs can be either productive or destructive. The way entrepreneurial talents are deployed depends on another set of factors, referred to broadly as institutions. This encompasses the stability of the legal system, ability to enforce contracts, security of private property against state expropriation, and so on. Entrepreneurs operating in a weak institutional environment may exploit non-market methods to coerce others into involuntary exchanges. Coerced exchange transfers resources from higher-valued to lower-valued uses, causing society’s total wealth to shrink.

Institutions with consistent rules, applied impersonally, are best able to avoid destructive entrepreneurship. The Anglo-Saxon common law inherited by the United States from Britain is a good example of such an institutional structure. It is no coincidence that Hong Kong, which was also governed under British law for many years, outpaced the rest of East Asia in economic growth throughout the 20th century. The people of Hong Kong are presumably not very different from mainland Chinese, but because they acted under a different set of institutions their productivity was much higher, leading to rapid economic development.

To use a mechanical analogy, one can think of economic growth as a moving vehicle with entrepreneurship as the fuel and institutions as the engine. Without any fuel, even the best engine will not move forward; on the flip side, a badly constructed engine with lots of fuel will lose energy as waste and ultimately self-destruct. As almost any person is a potential entrepreneur to fuel economic growth, I think this second scenario is much more prevalent in poor parts of the world. There is nothing innately wrong with the people, except that the institutions they live under cause productive energies to be wasted and resources to be expended on rent-seeking rather than innovation.

 The reason that some societies are prosperous is that their people were free act entrepreneurially, and they were guided by strong institutions toward making mutually beneficial exchanges. In some under-developed societies entrepreneurship is hobbled by cultural attitudes which do not respect individual achievement, and by institutions which reward predation rather than creation (or both). This is why transferring capital from the rich to the poor alone is not enough to solve poverty; without the institutional and cultural preconditions for development in place, resources cannot be productively employed to bring lasting prosperity.

(Context: I wrote this essay for another purpose but I like it enough to recycle as a blog).

Sunday, February 3, 2013

Are economics blogs entering mainstream news?

Spoiler: no, not really.

For an unrelated project I'm working on, I wrote some scripts which allow easy text searching and analysis of LexisNexis articles. As the tools were already there, I decided to check up on how economics bloggers, particularly those who happen to be GMU economists, are faring in mainstream news coverage. The results weren't very pretty.

Procedure: I downloaded about 2,000 articles from the last month's major world publications which mention the words "economics" and "professor" (just to give them a fighting chance) somewhere in the text. A few Python scripts later, I have these cleaned, in a csv, and then STATA-readable format and can construct statistics for how often various words occur in each article.

This table summarizes the results.
"Max" shows the most number of times each is mentioned in an article, "mean" the average number of times.
Don Boudreaux and Russell Roberts run Cafe Hayek, a well-reputed blog in many circles, but are not even mentioned once in the last month. Alex Tabarrok and Tyler Cowen write for the famous blog Marginal Revolution, and are each mentioned just once. None of the Econlog bloggers appear, except David Henderson is mentioned once.

Maybe this is because my list contains lots of libertarian-ish bloggers, so I include a few Keynesians for balance. Brad DeLong is never mentioned. Paul Krugman appears a total of four times, twice in one article, so there must be at least three articles this month which feature his name. I'm happy to report that Mercatus is able to tie Krugman, so not all hope is lost... And George Mason appears more often than all the others combined, a home run in my book.

So, while the social media revolution may be sweeping other parts of journalism, it appears from these numbers that the economics blogosphere remains fairly isolated from mainstream media. Then again, publications like All Africa and the South China Morning Post may just not care that much about the econ-celebrities of the United States.

Friday, February 1, 2013

Applebee's server an object lesson in social media sanitation

There's been a flare-up of internet anger after an Applebee's server was fired for posting a picture of a bad tip (plus snotty note) left to her by a church pastor, which went viral. Get the details here.

This is hardly the first time someone has lost their job over social media indiscretions. There's the Burger King worker who put up a picture of himself stepping in lettuce, who was quickly tracked down on 4chan and canned; a recently-hired Google employee who broke his NDA on Reddit and was terminated; and back in the ancient prehistory of 2004, a Delta stewardess was let go for taking pictures of herself in uniform for her blog.

The server in this case is more sympathetic than most because she appears the victim rather than the perpetrator; only after her picture of the check (which happened to contain the pastor's signature) got popular was she fired, stated reason being that she violated the privacy of an Applebee's guest. There's been a mild uproar of support on Twitter under the hashtag #BoycottApplebees and the story has even made it onto Fox News, although I suspect the whole thing will be forgotten in another 48 hours and the waitress will still be out of a job.

I have sympathy for the woman who got fired but really, she should have known better. Anonymity on the internet is an illusion; no one is nameless, there are just varying degrees of difficulty in tracking you down. It's better to assume any and everything put online will follow you forever, and act accordingly.

Companies are (understandably) very touchy about their online image and tend to lack a sense of humor when it comes to complaints from workers. While the NLRB has protected employees' right to complain on Facebook, it's a narrow shield at best.

All that said, I suspect the server could have gotten away with it if she had been clever enough to crop out the pastor's easily-identified signature from the picture. That was what originally prompted the complaint leading to disciplinary action by Applebees.

To pick three lessons from this sordid affair:
  1. Don't complain about your job on the internet.
  2. If you must complain about your job, don't make it obvious to the target of your ire.
  3. Still don't complain about your job on the internet.