The gains from trade .... redistributed (updated)

A recent piece at Free Exchange asks How do we ease the job-sucking? The point of the posting is that while there is a surplus of benefits from trade, not all sectors of the economy will gain, that is, some regions of the economy are likely to fare worse with trade than they would without trade. There is ample evidence that the gains from trade do outweigh the losses but the distribution of the gains is an issue. Economists need to devise ways to transfer some of the available gains to those adversely affected.

The politics of trade is about finding ways of ameliorating attendant job losses and other economic dislocations that some regions will face. But, as we see currently in the US, some politicians find it easier to be anti-free trade in the hope that will win them votes. What they don't tell the would be voters is that the problems associated with free trade are much more manageable than those associated with closed economic borders. Places like Cuba and North Korea don't trade much with the outside world and is their standard of living really one we want?

But the problem remains, many people see free trade as bad because they see the downside of it around them. Coming up with better ways of distributing trade's benefits would help counter these peoples objections.

Update: Tim Worstall comments on the Compensating the Losers from Trade at the Adam Smith Institute blog and argues against the idea. Steven E. Landsburg also argues against compensation in his essay, What to Expect When You’re Free Trading.

Economcis of Teeth (updated)

This is economics you can get your teeth into. Joshua Hall has a forthcoming paper on Factors Influencing Interstate Variation in Tooth Loss while there is a new NBER working paper out on The Economic Value of Teeth.

Well John Maynard Keynes did always want economists to be more like dentists.

(HT: Division of Labor)

Update: Tim Harford comments here.

The effects of the smoking ban in the UK

Tim Worstall at the Adam Smith Institute blog posts on The effects of the smoking ban in the UK. He opens his message by noting

I'm sure there was supposed to be a massive increase in the pub trade as a result of the smoking ban. Absolutely certain of it in fact. For there was that huge pent up demand, wasn't there, all those non-smokers who were denied their right to a social pint or two without reeking like an ashtray?

He ends with the observation

So, umm, pubs are going bust left right and centre as that heaving mob of non-smokers desperate for a watering hole turns out not to exist, to have been a figment of some fevered imagination.

Boudreaux on Earth Hour

Don Boudreaux, as ever, get to the heart of an issue. Reproduced below, taken from a posting on the Cafe Hayek blog, is the letter he has sent to Carter Roberts, President of the WWF about "Earth Hour":

Dear Mr. Roberts:

You and members of your organization worry that industrialization and economic growth are harming the earth's environment. I worry that the intensifying hysteria about the state of the environment - and that the resulting hostility to economic growth - might harm humankind's prospects for comfortable, healthy, enjoyable, and long lives.

So I commend you on your "Earth Hour" effort. Persuading people across the globe to turn off lights for one hour supplies the perfect symbol for modern environmentalism: a collective effort to return humankind to the dark ages.

Sincerely,
Donald J. Boudreaux

Boudreaux goes on in this blog posting to note

By the way, of course, the WWF should award some special prize to the North Korean government, for that government keeps North Koreans not in any meager "Earth Hour," or even "Earth Day," but in what WWFers might call "Earth Decades" -- very little light ever. This picture of the Korean peninsula speaks volumes -- the Dark Ages today; a society keeping its carbon footprint tiny. Of course, in doing so it keeps itself also desperately poor, often even to the point of starvation.

The Ethics of Price Gouging

Matt Zwolinski an Assistant Professor of Philosophy at the University of San Diego has a new paper on The Ethics of Price Gouging. Zwolinski describes gouging as

a practice in which prices on certain kinds of necessary items are raised in the wake of an emergency to what appear to be unfair or exploitatively high levels.

He then goes on to argue that the moral condemnation that we commonly see with regard to "price gouging" is largely unjustified. He makes his argument in three steps by rebutting three widely held beliefs about the ethics of price gouging, namely,

1) that laws prohibiting price gouging are morally justified,
2) that price gouging is morally impermissible behavior, even if it ought not be illegal, and
3) that price gouging reflects poorly on the moral character of those who engage in it, even if the act itself is not morally impermissible.

At Knowledge Problem, Michael Giberson argues that Zwolinski's

... position emerges from a basic understanding of economics, and particularly the role of prices in society. Zwolinski argues that anti-price gouging laws work to prevent individuals already in a vulnerable position from entering into what would be a beneficial exchange. Further, drawing on Hayekian notions about prices as information and coordination devices, Zwolinski asserts that anti-price gouging laws discourage extraordinary (or perhaps even ordinary) efforts to aid persons in need, because the laws interfere with information about scarcity and reduce incentives to act.

Inflation Zimbabwe style (updated)

Shashank Bengali reports, via his blog, Somewhere in Africa, on inflation in Zimbabwe. He writes

After a catastrophic few years that have seen the economy crumble and inflation soar to 200,000 percent, Mugabe's most powerful political weapon – fear – appears to be eroding. To understand what 200,000 percent inflation means, a journalist friend I was traveling with, N., said that on Friday, he had lunch at a hotel in Harare , where a local beer cost 2 million Zimbabwean dollars (less than $1). He passed by the hotel after work the same day and the same beer was going for more than 4 million.

Update: Ken Rogoff talks about Zimbabwe's hyperinflation on National Public Radio, see Zimbabwe's Hyperinflation Poses Unique Challenges.

Anti-competitive use of government

Daniel Hamermesh has an interesting blog at Freakonomics on Using the Minimum Wage to Beat the Competition. He notes that Germany is considering a new government imposed minimum wage to apply to postal carriers and related workers. Hamermesh also notes that one of the major supporters of the idea is Deutsche Post, the privatized postal service. Deutsche Post is one of Germany's biggest employers, so why would they want a plan that could raise their average variable cost? The answer offered by Hamermesh is

The reason is that the German Post, which is a high-wage employer, faces increasing competition from lower-cost carriers. If the minimum wage is imposed, it will not raise Deutsche Post’s average variable cost by much, since most of its workers already make more than the proposed minimum wage; but it will raise its competitors’ costs.

In other words Deutsche Post wants the government to act in an anti-competitive manner to help it deal with competition. The German governemnt should just tell Deutsche Post to become more efficient, that's how you deal with competition.

One wonders if the government would be thinking about this idea if Deutsche Post wasn't a former government firm. Is this just the government trying to give a former state-owned and still inefficient firm an unfair advantage?

Glaeser on Galbraith (updated)

In this article, The Age of Abundance: Reconsiderations, Ed Glaeser reflects on the fifty years since the publication of John Kenneth Galbraith's "The Affluent Society". Glaeser notes

"The Affluent Society" reflects both the economy and the culture of 1958. The book's main observation was that America has become unbelievably prosperous. In the 1930s, America wasn't so rich, and by the 1970s, America's wealth wasn't so remarkable anymore. Galbraith beautifully captured that moment in the late 1950s when rising prosperity freed the median American from having real fears about basic necessities.

He goes on to point out that

The book's tone also reflects the style of the well-educated liberal outsiders of the 1950s, who were themselves the intellectual heirs of pre-war social critics. When Galbraith wittily mocks the conventional wisdom, he has put on Mencken's mantle. Just as the Sage of Baltimore attracted readers in the 1920s by letting them feel superior to boobs in Tennessee, Galbraith invites readers to look down on the conservatives of his day. He was one of the cadre of public intellectuals of the 1950s, like Richard Hofstadter, and intellectual politicians, like Adlai Stevenson, who offered a seemingly sophisticated alternative to Ike's military mien and prayer breakfasts.

But Glaeser also points to one reason why Galbraith was never accepted by economists,

But while "The Affluent Society" reflects American society in the 1950s, it was quite detached from postwar trends in economics, which is why Galbraith has rarely been embraced by economists. In the 1940s, cutting-edge economists turned to mathematical models and statistics. Galbraith did not. His books are essentially number-free. Even an otherwise glowing review in the New York Times pointed out Galbraith's tendency to favor witty ripostes over economic rigor.

In many ways Galbraith wasn't an economist, he seemed to be more of a public intellectual and advisor to the great and powerful than a true economist's economist, in the tradition of, say, Samuelson, Tobin or Friedman. Lord Desai once described Galbraith as "the Geoffrey Archer of economics".

Glaeser goes on to say,

While I am a staunch supporter of free markets, I agree with Galbraith that there is much the public sector needs to do. Private firms do not automatically provide safe streets, good roads, and clean water. Even more important, Galbraith was dead right in arguing that we need more effective schools. Human capital is our best tool against poverty and economic stagnation.

I think one difference between Glaeser and Galbraith would be that Glaeser would use the market to achieve the aims that the government has. As Andrei Shleifer has written,

The benefits of private delivery-regulated or not-of many goods and services are only beginning to be realized. Health, education, some incarceration, some military and police activities, and some of what now is presumed to be "social" insurance like Social Security, can probably be provided more cheaply and attractively by private firms. It is plausible that 50 years from now, today's support for public provision of these services will appear as dirigiste as the 1940s arguments for state ownership of industry appear now. A good government that wants to further "social goals" would rarely own producers to meet its objectives.

What is called contracting out is a means to get the advantages of private provision while having the government meet the costs of those activities that public sector needs to do. This is something Galbraith would never have accepted.

Glaeser closes his article by noting,

Galbraith's great failure was that he never really understood how much society is strengthened by a free and competitive private sector. "The Affluent Society" argues that a lack of regulation made American homes inferior to those in European social democracies. That view was wrong in 1958 and is completely untenable today. American housing is the best in the world, and the weaknesses of the housing market reflect too much, not too little, regulation, especially those rules that stymie construction and make housing unaffordable.

The last sentence could just as well be about New Zealand today.

(HT: Greg Maniw)

Update: Megan McArdle writes

I don't know many economists who respect John Kenneth Galbraith's professional work; he tended to substitute wit for rigor, and the major economic model he proposed1, the theory of countervailing force, isn't looking so hot. On the other hand, almost all economists wish, to the extent of heartsickness, that they could write that well. And while the theory behind his economic history is often not quite right, the storytelling is absolutely first rate. You can't get a better popular overview of 1929 than The Great Crash, even though A Monetary History of the United States is probably a better way to understand the thing.

Regulatory Overkill (updated)

Allan H. Meltzer writes in the Wall Street Journal on Regulatory Overkill. He notes,

The first principle of regulation is: Lawyers and politicians write rules; and markets develop ways to circumvent these rules without violating them.

Meltzer also points out

Regulators and most politicians are good at developing rules and restrictions, but poor at thinking about the incentives that the market will face. If the incentives are strong, the market circumvents the regulation.

These are points that regulators should keep in mind. They aren't going to achieve whatever they think they will achieve with their regulations. The law of unintended consequences holds big time with regulation mainly because regulators and politicians don't think about incentives. There is often a naive assumption made by people that regulation will work exactly as the regulator intends but this assumption is almost always wrong and wrong, in many cases, by a wide margin.

Update: Arnold Kling makes the same basic point, see Meltzer on Financial Regulation.

More Cowen on Sachs

I blogged here on Tyler Cowen's recent comments on Jeff Sachs's new book "Common Wealth: Economics for a Crowded Planet." Well here are further and longer comments from Cowen on the book.

Good sense on bailouts

The New York Times is reporting sensible comments made by John McCain on government actions to help solve the mortgage crisis in the US,

SANTA ANA, Calif. — Drawing a sharp distinction between himself and the two Democratic presidential candidates, Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

Mr. McCain’s comments came a day after Senator Hillary Rodham Clinton of New York called for direct federal intervention to help affected homeowners, including a $30 billion fund for states and communities to assist those at risk of foreclosure. Mrs. Clinton’s Democratic opponent, Senator Barack Obama of Illinois, has similarly called for greater federal involvement, including creation of a $10 billion relief package to prevent foreclosures.

But the big question is what would he actually do if he was in power? The political pressure to intervene is huge no matter what the economic case is. Could McCain withstand the pressure?

This New York Times report on the Clinton call for $30 billion for home mortgage crisis quotes Hillary Clinton as saying “We need a president who is ready on Day 1 to be commander in chief of our economy.” Now that is scary. The economy is not an army, the economy is not a war, it doesn't need a commander in chief.

Happy?

This news report considers the results of a UMR Research poll and tells us that

Believe it or not, people who earn more are happier than those who earn less and people who own a home are happier than those who don't.

and

Those who earned more than $75,000 were the happiest (37 percent), but those earning $40,001-$50,000 were less happy (27.5 percent) than any other income group. "Retired" was the happiest occupational group (42.8 percent) ahead of self-employed, with unemployed the least happy. Widows were happier than widowers, but both groups were more inclined to smile than their genders of another marital status.

Should these income related result surprise us? As I pointed out here, Angus Deaton's work showed that life satisfaction is higher in countries with higher GDP per head, so a similar in-country finding doesn't seem that odd. Money may not buy happiness but it does make the unhappiness easier to live with.

(HT: Not PC)

Incentives matter: school candy file (updated)

This from Tyler Cowen at Marginal Revolution;

With candy sales banned on school campuses, sugar pushers are the latest trend at local schools. Backpacks are filled with Snickers and Twinkees for all sweet tooths willing to pay the price. "It’s created a little underground economy, with businessmen selling everything from a pack of skittles to an energy drink,” said Jim Nason, principal at Hook Junior High School in Victorville.

Update: From the Freakonomics blog comes the news that

When elementary and high schools ban the sale of candy and sodas, students create flourishing underground economies to satisfy demand for the sweet stuff.

In the ensuing crackdown, even high-profile figures are laid low.

For example, in Connecticut last week, an eighth-grade student body vice president was forced to resign after he was caught buying an illicit packet of Skittles from a classmate.

Adam Smith statue (updated)

The Adam Smith Institute has blogged on that fact that a statue of Adam Smith will soon go up in the historic heart of Edinburgh.

The announcement gives the details of the statue, see picture, as

The statue shows Smith in later life – he spent the last twelve years of his life in Edinburgh, where he had been appointed a Commissioner of Customs, which might explain his slightly stern look.

Behind him is a ploughshare, modelled from a contemporary plough in the Scottish Farming Museum, which reminds us of an economic doctrine from which Smith made great advances – the physiocrat doctrine that all wealth stemmed ultimately from agriculture. To his front is a beehive, a symbol of industry, topped by a globe on which Smith rests his hand - made invisible by his academic gown.

The most likely date of the unveiling is Friday 4 July.

The statue follows Smith appearing on the English £20 note. He is in fact the first Scot to adorn an English banknote, and the first economist.



Of the four banks that issue notes in Scotland, the Clydesdale Bank has Adam Smith on their £50 note.



Update: Gavin Kennedy at the Adam's Lost Legacy Blog reports that there is News on the New Adam Smith Statue from New Zealand.

Munger on EconTalk

This week on EconTalk, Mike Munger of Duke University talks with Russ Roberts about the economics of subsidies. What is the economic argument for subsidies? What is the history of the economic argument and what is its relevance today? Munger draws on his personal experience as a farmer to help listeners understand the pros and cons of using government-funded payments to encourage various activities deemed to be worth encouraging.

Sunk costs and moives

While blogging on the topic of the Worst movie ever?, Megan McArdle shows why economists and non-economists should never go to a bad movie together. McArdle writes,

I saw the latter with my then boyfriend, who was the son of an economist. Ten minutes into the movie, he said "Let's go."

I demurred. "We paid three dollars for these tickets. I'm going to watch the movie."

Ten minutes later, he whispered more urgently "Come on, it's just getting worse. Let's go."

"No," I insisted, "I am not wasting three dollars on twenty minutes of movie."

The rest of the movie passed in a sort of a nightmare that has become associated in my mind with Mark Twain's description of opera:

The banging and slamming and booming and crashing were something beyond belief. The racking and pitiliess pain of it remains stored up in my memory alongside the memory of the time that I had my teeth fixed

By the time the lights went up, we were the only people in the theater. This on a Saturday night.

My boyfriend looked at me and said "I'm taking you to meet my father."

"Why?"

"Because someone needs to explain the concept of sunk costs to you."

Planned v. market economies

On the blog of the Adam Smith Institute Madsen Pirie considers the idea that A sensibly planned economy is more efficient than random chaos. No one would of course suggest that 'random chaos' is anyway to run an economy and a market economy isn't random chaos. It is, as Pirie points out, a "spontaneous and unplanned order". The real issue isn't about a planned economy versus chaos, its about a planned economy versus a market economy. Pirie goes on to say,

The free economy is more rational than the planned society. First of all, it contains far more information than can be held by one human mind. Secondly, that information is continually being updated by individuals. Thirdly, it is constantly changing and adapting to new circumstances, and modifying itself, learning from errors and improving itself. The planned society has none of these improving characteristics. It makes one giant forecast and attempts to fulfill it, where the spontaneous society makes millions of small-scale forecasts and constantly modifies them.

He adds

The spontaneous society responds constantly to the needs and desires of its citizens. Its overall order is at once more efficient and more moral. It converges on consumer satisfaction and directs resources to those who are successful at achieving it. At the same time, it allows individuals to nominate their priorities and freely to pursue them, instead of making them live as the planners decide is appropriate.

A free market economy is more organized than the term 'random chaos' would ever suggest and makes better use of knowledge to better allocate resources and meet the needs of its citizens than any centrally-planned economy can. Central planning isn't necessary to avoid the problems of a chaotic economic system since a market economy produces not chaos but order, as Adam Smith famously pointed out more than 200 years ago. Eamonn Butler has summarised Smith's insight as:

[Smith] ... realised that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest need not lead to chaos, but - as if guided by an 'invisible hand' - would produce order and concord. They would also bring about the most efficient possible use of resources. As free people struck bargains with others - solely in order to better their own condition - the nation's land, capital, skills, knowledge, time, enterprise and inventiveness would be drawn automatically and inevitably to the ends and purposes that people valued most highly. Thus the maintenance of a prospering social order did not require the continued supervision of kings and ministers. It would grow organically as a product of human nature. (E. Butler, 'Adam Smith: A Primer', London: Institute of Economic Affairs, 2007: 27-8).

Exactly!

Underpricing concerts, why? part 2 (updated)

Recent I blogged on Why are concert tickets under priced? This is just one example of a puzzle as to why prices so rarely rise in the face of a shortage. Tim Harford point out a number of other examples of this puzzle.

There was a shortage of Wii games consoles last Christmas, Xbox 360s in 2005, PlayStation 2 consoles before that, and so on, yet the retail price remained the same. To secure tickets for a hot concert, you will usually need to go to a ticket tout, because the regular concert promoters wouldn't dare charge a price that might bring demand down to the level of supply. And when US oil companies raised gasoline prices after Hurricane Katrina, there were howls of outrage – despite the fact that the refining infrastructure was badly damaged and it was self-evidently impossible to supply everyone at the customary lower price.

But Harford is putting forward an explanation for the puzzle based on an idea by David Friedman. Harford writes,

The intuitive explanation, of course, is that we irrationally object to high prices even when the alternative is rationing, long queues, and uncertainty over whether we can buy what we really want.

No one likes an explanation based on people being "irrational". This is where Friedman comes in. As Harford continues,

That is discomfiting for economists, but we might at least take solace in the idea that even though there is no immediate logic to a belief in the right price, there is at least an evolutionary logic. David Friedman – son of the late Milton Friedman, and a superb communicator of economics – has argued that our ancestors evolved in an environment where most transactions were one-on-one bargains. A hard-wired refusal to accept something other than the customary price would, in such a setting, be an advantage. Anyone who reacts to a price rise with irrational rage turns out to be a strong negotiator.

Our stubborn preference for a just price evolved in a setting that is no longer common; but evolution does not respond quickly, which may be why we still shriek with outrage at price hikes. It would also explain why ticket touts still make a living.

But do we really have a "stubborn preference for a just price"? If we did wouldn't ticket touts be out of business? After all touts stay in business because we are willing to pay their (unjust?) prices, which seems to mean our preference for a just price can't be that stubborn. Those going to the tout can't have much of a "hard-wired refusal to accept something other than the customary price", by definition. Why is it that this "stubborn preference" prevents the promoter from raising his price but doesn't also prevent the tout from charging a higher price?

Also what sets the "customary or just price"? In the case of concert tickets wouldn't the price originally set by the promoter be the customary price? Isn't it in comparison to this price that the touts price would be called unjust? But why can't the promoter change this price? Note that different concerts by different performers have different prices, so there seems to be many just prices out there. Also different concert tours by the same performer have different ticket prices and these tours have different prices across countries. This may just be price discrimination but if promoters can discriminate then how seriously can we take the idea that there is a "customary or just price"? Which price is the just or customary one? And if under pricing doesn't maximise profits the promoter has a big incentive to increase the price.

I guess I must be missing something in the Harford argument.

Update: John Fountain has a entry on his blog on the reselling of tickets for rugby world 7's event in Wellington, see ticket scalping rugby world 7's: for or against?

Reviewing charities

I have blogged before on why entrepreneurs who start new firms may choose not-for-profit status, see Thinking about nonprofits. Charities are one obvious form of not-for-profit firms. An important issue for charities is how do you evaluate their performance? Given they lack the obvious performance measure for a firm, i.e. profits, how do we know when a charity is doing well?

One paper by Ed Glaeser, The Governance of Not-For-Profit Firms, argues the primary check on the not-for-profit organisation is the need to compete in markets. This is true for areas like education where their a many provides of the service, but its not so clear that many charities have a "market" in which to complete.

The Times has an article on efforts to review the performance of one charity in the UK, namely Jamie Oliver's Fifteen. Fifteen was set up to help disadvantaged youngsters by training them as chefs. According to The Times article

It [Fifteen] offered “hit-and-miss” training and patchy support and counselling for its often troubled recruits, and was distracted by the television cameras that were recording for a Channel 4 documentary.

Of the 106 young people who started apprenticeships with Fifteen since March 2002, only 54 completed the course and many of those who dropped out were never heard of again.

“It was assumed that everyone, inspired by Jamie’s example, would just get it and the training would work,” the report concludes. “The truth is that the start-up of Fifteen was messy and the boat left port without all its sails and supplies ready.”

But the article goes on to say

But perhaps the most surprising aspect of this warts-and-all assessment is that it was commissioned by Jamie Oliver and Fifteen itself, who wanted to know exactly where they had gone wrong and how to improve. Few charities assess their work in this systematic and critical way.

Fifteen will publish the report, Life in the Present Tense, next month in the hope that it emboldens other charities to do the same.

The director of Fifteen makes the point:

“... there is a a straight business case. If you don’t understand what you are doing, if you don’t get someone from outside the culture to verify it, how do you know how to improve things?”

I'm not sure too many other charities will follow this lead and allow outsiders to investigate them in a similar manner. You would think that a few too many charities are too happy just fundraising, agitating and achieving not too much at all.

Many charities are happy with, what Sir John Hicks called, "a quiet life" and given there is no obvious performance measure to guide evaluation of them, they can get it.

(HT: Adam Smith Institute)

A clear, simple and straightforward explanation from a bureaucrat.

Castro and Cuba (updated)

In a recent article, Viva Castro's departure: Cuba in 2008 should be the Hong Kong or Singapore of Latin America, Mark Milke makes a simple, but telling, point about the effect Castro has had on Cuba.

In 1958, the year before Fidel Castro came to power in a revolution and promised prosperity, democracy and the restoration of Cuba's 1940 constitution, the Caribbean island, while troubled by poverty, a corrupt dictator and the American Mafia, was also better off than most developing nations.

While poor compared to the United States, Cuba in 1958 had a per capita GDP of $3,170 according to the OECD. (Canada's was $8,947.). But Cuba outranked all other Latin American countries except four: Argentina, Chile, Uruguay and Venezuela.

Tellingly, in 1958, the island nation's per person wealth was higher than any East Asian country or colony, save Japan, which barely beat Cuba at only $3,290. Hong Kong had a per capita GDP of $2,924, Singapore's was $2,294, the Philippines' was $1,447, Taiwan's per person GDP stood at $1,387 and South Korea's was $1,112.

Thus in 1958, Cuba was almost as rich as Japan, one and half times as wealthy as Singapore, richer than Hong Kong, and three times as prosperous as South Korea.

Fifty years later, Cuba is one of the poorest countries in Latin America.

Meanwhile, jurisdictions such as Hong Kong, Singapore, South Korea and Taiwan (the latter two also had dictators and problems similar to Cuba in the 1950s) have long eclipsed Cuba. They've done so not only in per capita wealth, but in measurements Castro's defenders point to when they assert the Marxist revolution "worked," such as in health care and education

GDP per person isn't a perfect measure of well being, but it is a rough guide to average living standards. And by that standard Castro has much to answer for.

(HT: Arts & Letters Daily)

Update: Not PC points out there is Still no April Sun in Cuba.

Brad DeLong on Karl Marx the economist

"This week I asked my graduate students to write on the following question: whether, and how, Karl Marx is relevant to a twenty-first century neoclassical economist."

(HT: The Bayesian Heresy)

"Authoritarian capitalism"

Joshua Kurlantzick, a visiting scholar at the Carnegie Endowment for International Peace, has piece in Boston Globe called State Inc. In it Kurlantzick discusses the rise of what has become known as "authoritarian capitalism". This is where state owned companies from authoritarian nations, such as, for example, China, the United Arab Emirates and Russia, are becoming global economic players. As the article notes

In the past five years, governments around the world have been transforming themselves into deal makers and business players on a scale never seen in the modern era. In China, state-owned oil giant PetroChina has become the largest company in the world, worth more than $1 trillion. In Russia, state-owned Gazprom has grown into the world's largest gas company. States are also wielding influence by directly buying into major private firms: The investment fund run by the Arab emirate of Abu Dhabi is now the world's largest, and recently spent $7.5 billion to become the top shareholder of the American financial giant Citigroup. Singapore's state-controlled wealth fund, Temasek Holdings, sank $5 billion into Merrill Lynch, the largest US brokerage. By 2015, according to an estimate by Morgan Stanley, such state-owned funds will control a staggering $12 trillion, far outpacing any private investors.

In the case of China Kurlantzick notes

Over the past 25 years, while keeping firm control over its economy, China has adopted many of the tools of capitalism - ceding some operational power to a Western-trained executive class, inviting foreign investment and partnerships, and buying and selling on the global open market.

Beijing has also selected a range of strategic industries to develop, from oil to telecommunications to automobiles. By creating the state-owned China National Chemical Corporation in 2004, Beijing birthed a plastics manufacturing giant, one that quickly swallowed foreign companies like Qenos, one of the biggest plastics firms in Australia. State-owned Chinese automaker Nanjing Automobile bought up famed British car brand MG Rover, while Huawei, boosted by massive loans from state-linked Chinese banks, has expanded around the globe, even trying to take over US tech giant 3Com, a deal essentially scuttled by Congress.

The results of this has been some of the most staggering economic development in modern history, albeit from a very low base,

... all with a firm government hand on the tiller, and without the liberal political reforms considered by many in the West essential to economic growth. China has become the third-largest economy in the world; the city of Shanghai has transformed into a soaring business district packed with skyscrapers and luxury hotels. Even smaller provincial cities have grown into high-rise centers whose shopping malls are packed with moneyed Chinese buying up cars, lattes, and all the other fruits of capitalist prosperity.

In Russia

... Vladimir Putin essentially has shut down most of Russia's privately held natural resources companies in order to build up the national gas firm Gazprom and other state companies. Gazprom alone controls roughly one-fifth of all gas production in the world, far larger than any private sector rival. (And its financial power translates into political power: Presumptive next Russian president Dmitry Medvedev, anointed by Putin, previously ran Gazprom.) Under Putin, the Kremlin also has extended its reach into industries from titanium manufacturing to aviation.

The implications of this are far reaching.

Many authoritarian governments realize that, in the post-Cold War era, a wealthy nation can extend its power very effectively without trying to build an army to compete with the US in military force in the short term. In Beijing, policy makers have developed a definition of China's strength called "comprehensive national power," which goes far beyond military strength to include economic might. China is now becoming a major aid donor across Africa, which it can than leverage to help Chinese companies win access to African resources.

But as Kurlantzick also notes

The modern record of state-controlled business, by contrast, was chiefly one of failure. When the fascist and communist governments of the 20th century seized the reins of domestic industries, they ended up undermining development and bringing misery to millions of their own citizens. As private enterprise flourished in the West, the end of the Cold War and collapse of the Soviet Union were widely seen as a repudiation of the idea that governments could successfully control the business sector.

Kurlantzick goes on to point out that

Though it may seem as unstoppable as the rise of private corporations in the 20th century, today's shift to authoritarian capitalism may actually contain the seeds of its own demise.

State capitalism of this type fosters corruption, allowing smaller circles of state-connected elites to control more wealth.

In China, state dominance has meant that "princelings," relatives of leading Communist Party members, have gained control of some of the nation's most powerful companies. Even one Chinese government study of 3,000 of the nation's richest businesspeople admitted that a significant majority are related to top officials.

In Venezuela, growing state control has made the national oil firm less productive and more opaque, one reason why the country now ranks near the bottom on Transparency International's index of the world's most corrupt nations. Across Central Asia, too, state dominance of national oil companies has led to a spout of graft, including a US Justice Department indictment that fingers Kazakhstan's president, identified as "Official #2," for receiving millions in bribes.

In addition despite the amount of national resources that can be poured into business growth these state firms still have to compete in the global market and they are likely to suffer because of it. These firms have no exposure to domestic competition and therefore their managers have little experience on how to compete on an open market. They will also suffer since they have no pressure to adopt real corporate governance and oversight measures. International markets will demand more openness and transparency.

There is also the issue that these countries are authoritarian, as people demand more social and political rights the economic advantages of the few who control the state owned companies will also become increasingly under attack.

Kurlantzick ends the article on a positive note,

There is already some indication that openness has its advantages: India has more globally competitive multinationals than China. It is a slightly smaller country, and far poorer, but unlike China it is a true democracy.

"Authoritarian capitalism", if not actually an oxymoron, may be workable in the short run but it doesn't look like it's sustainable over the longer term.

Jeremy Siegel interview

Finance professor Jeremy Siegel, of the Wharton School at the University of Pennsylvania, is interviewed about Bear Stearns, the Fed rate cuts, and inflation risks.

Party pills (updated)

Daniel Hamermesh is blogging on the ban on party pills that will come onto force in New Zealand on April 1 on the Freakonomics blog. When thinking about the affects on the supply of and demand for pills he writes,

Sellers need to unload their soon-to-be-illegal stocks of the pills, and the short-run increase in supply that results will drive prices down. But pill consumers, knowing the price will eventually rise, will want to buy now when the pills are still available, causing a short-run increase in demand.

I agree about the increase in supply but the demand side looks more complicated. There is a own-price effect. As supply increases the price drops and the quantity demanded increases. But there is also a future price effect. If people think the future price will be higher then the future quantity demanded will be less and as current consumption is relatively cheaper current demand increases. The current demand curve is parameterised by the future price. If people do not want to consume the pills when they are illegal they will decrease their future demand but in so far as legal current consumption is a substitute for illegal future consumption, current demand increases. It could also be, as Hamermesh seems to want to suggest, that if you think there will be no supply in the future, you increase demand now, while the pills are still available. Another factor in the increased demand could be "speculators" who are willing to take the risks of selling when the pills are illegal buying now as they are cheap, to sell later when they are dearer.

An interesting question is what will happen to the profits of those who are willing to supply when the pills are illegal?

Here's one factor I'm sure Hamermesh hasn't thought of. Kiwiblog alerts us to this NZPA story,

Wellington, March 20 NZPA - Moves by young ACT supporters to boost membership by selling cut-price party pills are "grossly irresponsible", Associate Health Minister Jim Anderton says.

The group ACT on Campus sold the pills last month for $1 each to Auckland University students who joined their organisation.

Party pills will be illegal from April 1, after legislation classifying them as a class C1 drug was passed this month. ACT, the Green and Maori parties voted against the legislation.

But ACT on Campus Auckland president Ben Smith said the pills were still legal and there was nothing wrong with the successful promotion, which had signed up 500 people.

But Mr Anderton, who is the minister in charge of the Government’s drugs policy, told NZPA the promotion was grossly irresponsible and ACT needed to rein in its youth wing.

Update: Not PC is up set because "Libz on Campus hadn't thought of it first".

New Zealand's productivity (updated)

Frederic Sautet has a good posting on New Zealand's productivity statistics at The Austrian Economists log. He notes

The recent productivity figures in NZ show that for the period covering the current Labour government's term of office (2000-2007), labor and multifactor productivity growth have fallen compared to the 1990s. For instance multifactor productivity growth fell to 0.4% p.a. during 2000-2007 from 2.3% p.a. during 1992-2000 (these are annual averages, point-to-point).

Also he points out

The current Labour-led government has criticized the "failed policies of the past" (i.e. the reform period and the deregulation of the 1980s and 1990s) for not delivering enough. Instead of continuing to improve the institutional context for socially-beneficial entrepreneurship, Prime Minister Helen Clark decided, among other things, to increase government spending (and the number of government bureaucrats), re-regulate the labo[u]r market, increase taxes (i.e. distort the tax structure, thereby rejuvenating the tax planning industry), intervene in utilities markets, provide more welfare, reintroduce corporate welfare, and renationalize businesses. All this is surely reflected in the weak growth in multifactor productivity, and eventually in economic growth statistics. As time goes by, statistics seem to show how wrong this position was.

The whole post is well worth a read, see The "Failed Policies of the Past" vs. the Bad Policies of the Present: Can Productivity Figures in NZ Tell Us the Truth?

The problem with our productivity figures has also been noted by Roger Kerr in this media release Dismal Productivity Figures: We Could Do So Much Better (pdf).

Kerr makes the point that

On present trends there is no prospect that the government's former 'top priority' goal of getting New Zealand back into the top half of the OECD income range will be achieved. Annual productivity growth rates of 3 percent or more on average would be needed for fast economic growth.

The issue is that productivity growth is the key to long-term increases in material standards of living. Given that we have slow labour productivity growth we can have little in the way of real wage growth. That could hurt a lot of people.

Update: Not PC comments on The failing policies of the present.

Three interviews

Tom Keene of Bloomberg's On The Economy interviews Edmund Phelps, Allan Meltzer and Barry Eichengreen.

Nationalisation of Air New Zealand? (updated)

Over at The Standard - the Labour Party's semi-official blog - they are calling for the nationalisation of Air New Zealand. We are told

Here we have a company that's 80% owned by us, the New Zealand public, and yet because it is structured as a private company it’s allowed to act unethically and even undermine our national interests in the pursuit of short-term profit.

First, it isn't a "company that's 80% owned by us, the New Zealand public". Is a zero percent owned by the New Zealand public. The important point here is that without control you don't have ownership. As Oliver Wendell Holmes Jr. put it,

But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))

Clearly the "public" does not have the rights Holmes refers to. The government has these rights. Following Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", 'Journal of Political Economy', 94:691-719) economist's tend to define the owner of an asset as the one who has residual rights of control over the asset; that is whoever can determine what is done with the asset, how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Under the current ownership structure of Air New Zealand it isn't the "public" who has the control rights, its the government.

Secondly maximising profit is the ethical thing to do. Doing otherwise amounts to stealing from the shareholders of the company. The profits not made are profits that should have gone to the owners of the firm.

Third, why would we ever want a government to own an airline? None of the reasons for government ownership apply to the case of an airline. As O. Hart, A. Shleifer and R. W. Vishny ("The Proper Scope of Government: Theory and an Application to Prisons", Quarterly Journal of Economics, 112(4):1127-61, November 1997) show the case for government provision of goods or services is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant and when corruption in government procurement is a severe problem. It has been argued that the case for government production is strong in such services as the conduct of foreign policy, police and armed forces. The case can also be made reasonably persuasively for the case of prisons. But it can not be made for airlines. The case for private sector provision is stronger when quality reducing cost reduction can be controlled through contract or competition, and the airline industry is very competitive, when quality innovations are important, and we want a high quality and innovative airline industry, and when patronage and powerful unions are a severe problem inside the government, which are things we wish to avoid with an airline.

And what exactly are our "national interests" that are being undermined? How do we determine the "national interest", other than whatever will get the most votes for the government? As I noted in a previous message, Why do governments back losers? Two parts of an answer, we should worry when political groups or governments start talking of "national champions" or the "national interest" since the odds are things will end badly.

So 'The Standard' is right in that the ownership structure of Air New Zealand as it stands is wrong but so is their solution. They should be calling for privatisation not nationalisation.

Update: Not PC comments here: "Nationalise it!"

New book from Jeffrey Sachs

Jefffrey Sach's new book is Common Wealth: Economics for a Crowded Planet. Tyler Cowen's reaction to it,

But my browsing of this book never gave me the feeling that I had access to the mind of Jeffrey Sachs. It doesn't even read like a popularization. Imagine a smart and diligent but not insightful or self-reflective person doing a "color by numbers" version of what a Jeffrey Sachs book should read like.

Ouch!

Cowen on Monetary Policy at EconTalk (updated)

This week at EconTalk, Tyler Cowen of Marginal Revolution fame and George Mason University talks with Russ Roberts about money, inflation, the Federal Reserve and the gold standard. Cowen argues that alternatives to the current Federal Reserve system promise more risk than return.

Update: Arnold Kling comments on the discussion, see Monetary Theory and Policy.

The Fed and Bear Stearns (updated x2)

Megan McArdle comments on the JP Morgan buy out of Bear Stearns.

Yes, this is creating moral hazard that we'll have to deal with, probably unpleasantly, down the road. But whatever the moral hazard, it is hard to see how it could be worse than the full-blown financial crisis the Fed is trying to avert.

Trying to avert, just how far will the Fed go the avert such an event. The further it does the bigger the moral hazard problems. The more the Fed tries to help Bear Stearns the more it signals that risk taking behaviour is ok with it and thus the more risk will be taken. If firms think they have some of their downside risk being covered by the Feb, you will get riskier behaviour.

Update: Over at the The visible hand in economics they are not so worried by moral hazard, see Moral hazard in the Bear market. But see Matt Nolan's view in the comments.

Update 2: The Economist takes the view that

... the moral hazard police are almost certainly overstating their case. It's very difficult to call the Bear buyout a bailout, given the paltry sum for which it the firm was sold, and no one has been hurt as bad by the collapse as Bear employees and shareholders (often the same people). The lesson here is not that excessive risk taking will be rewarded by a nice government safety net. Moreover, JP Morgan could, potentially, be the big winner from this deal. If anything, the weekend purchase is a message that firms who avoid overexposure to dangerous risk may be given the opportunity to cherry pick assets from their more foolhardy competitors, with Fed assistance.

Incentives matter: personal responsibility file

Successful attempts to shift the responsibility for bad decisions toward others and to society more generally create a "moral hazard" in behavior. If individuals are not held accountable for decisions and actions that harm themselves or others, they have less incentive to act responsibly in the first place since they will escape some or all of the bad consequences of their actions. It does not matter greatly whether this moral hazard resulted from the shifting of blame for unsuccessful actions to the "small print" in a contract, to an abused childhood, to a mental state, or to many other efforts to shift responsibility away from oneself.

That's Gray Becker on The Erosion of Individual Responsibility. Richard Posner's comments are here.

Public service numbers (updated)

Kiwiblog draws our attention to an editorial in The Dominion Post which backs the National Party's policy of freezing staffing levels in the non-operational areas of the public service. The Dominion writes,

National Leader John Key is right to target waste in the public service, and right to draw attention to the blossoming in numbers and wages that has taken place under Labour. The spend-up on mandarins has been large, the pay packets bloated and much of the work produced of, at best, dubious value, The Dominion Post writes.

However, it is also right to draw attention to his double standards, and to caution that he should use a scalpel, not an axe, in seeking savings.

The statistics highlighted by Mr Key underscore what has been apparent for some time: The Government, flush with cash from taxes that have been too high for too long, has spent that money with the insouciance that comes from having full pockets and an insufficient regard as to whether it is getting value for the spending.

Mr Key has been at pains to say that National will not be going to cut what he calls front-line staff - teachers, doctors, nurses, social workers and so on. Instead those numbers on the front line will increase. But National will "pull hard on the handbrake" to stop any more growth in the bureaucracy.

That is a laudable goal, and one which deserves to gain public support.

But should it not be pointed out to the Dominion and John Key that we could reduce the bureaucracy, save money and get a better service out of "front-line staff" by turning their operations over to the private sector. As Andrei Shleifer has written,

The benefits of private delivery-regulated or not-of many goods and services are only beginning to be realized. Health, education, some incarceration, some military and police activities, and some of what now is presumed to be "social" insurance like Social Security, can probably be provided more cheaply and attractively by private firms. It is plausible that 50 years from now, today's support for public provision of these services will appear as dirigiste as the 1940s arguments for state ownership of industry appear now. A good government that wants to further "social goals" would rarely own producers to meet its objectives.

Update: Not PC comments on Bureaucrats: Flip Flop Boy promises "more with the same".

Mankiw on trade

N. Gregory Mankiw has a article in the New York Times on Beyond the Noise on Free Trade. Mankiw opens his piece by noting

NO issue divides economists and mere Muggles more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the market's invisible hand, Joe Sixpack sees a threat to his livelihood.

He goes on to make the point

Economists are, overwhelmingly, free traders. A 2006 poll of Ph.D. members of the American Economic Association found that 87.5 percent agreed that "the U.S. should eliminate remaining tariffs and other barriers to trade."

When it comes to the general public however Mankiw notes thing are very different.

In the recent poll, however, only 28 percent endorsed globalization, while 58 percent opposed it.

As Mankiw also points out

The benefits from an open world trading system are standard fare in introductory economics courses. ... The basic lessons can be traced back to Adam Smith of the 18th century and David Ricardo of the 19th century: Trade between two countries creates winners and losers, but it leaves both nations with greater overall prosperity.

This lesson seems so obvious to economists that I think they struggle to understand why non-economists don't see it. Arnold Kling argues that the challenge is to make an argument for free trade in terms that everyone can understand. He offers a parable along the lines of,

Perhaps we could start with "Once upon a time," and describe an economy that works like ours today. But we decide that free trade has gone too far.

First, we enact national protectionism. Then, the "buy local" movement catches on and leads to effective elimination of the Constitutional provisions against trade barriers within the United States. Cities and states start enacting tariffs, quotas, and trade subsidies.

Finally, the movement moves toward its logical conclusion: only buy products made in your own household. People give up computers, cars, packaged food, electricity, and plumbing. We go back to subsistence farming and hunter-gathering.

Here in New Zealand Martin Richardson tried to make the case, for trade and against protection, to the layman by arguing

There are at least two ways to produce a Toyota in New Zealand. First, we can import some steel, rubber and glass, employ workers, use a lot of power, set up an expensive production line and trot out some shiny new Toyotas. A second way, however, is to breed some sheep, employ workers to rear them, shear them and slaughter them, sell the products abroad and use the proceeds to buy some shiny new Toyotas from Japan. The first way only works if we force consumers to pay 22.5% more for their cars than the Japanese are willing to sell them for, which is what we pay in the second case. Again, it's not obvious to me that the orchardists of Central Otago with Toyotas ripening on their trees or the farmers of those cuddly Mitsubishis grazing on the Canterbury plains should be punished to benefit their less efficient competitors in Porirua and the Thames Valley.

One needs to be very clear on this: NZ's most efficient producers of cars are farmers, boat-builders, foresters, horticulturists and other exporters.

Is this really so difficult to get?

Why people give

David Leonhardt an article in the New York Times on What Makes People Give? The article looks, in part, at the work of economists John List and Dean Karlan on trying to work out, What makes people give their money away? What Karlan and List did was work with a little known Liberal (US meaning) group to help them raise money.

Late in 2004, List and Karlan started working on different solicitation letters for the liberal group. The letters were similar except for the part that mentioned (or didn’t mention) a match. In one letter, sent to the control group, there was no match. Another letter said that a donor had agreed to match any gift, dollar for dollar. In a third, the match was increased to two to one, and in a fourth it was three to one.

The idea here is simple enough. The effective cost of giving is lowered by a marching gift.

Without a match, you would have to spend $400 to make your favorite charity $400 richer. With a three-to-one match in place, it would cost you only $100 to add $400 to the charity’s coffers.

What happened?

When Karlan and List got their results, however, they realized that the conventional wisdom about matches was only partly right. The existence of a matching gift did very much matter. In their experiment, 2.2 percent of people who received the match offer made a donation, compared with only 1.8 percent of the control group. That may not seem like a big difference, but it is — more than a 20 percent gap between the two response rates, which is certainly large enough to justify making the effort to solicit a hefty matching gift.

But the size of the match in the experiment didn’t have any effect on giving. Donors who received the offer of a one-to-one match gave just as often, and just as much, as those responding to the three-to-one offer. That was surprising, because a larger match is effectively a deeper discount on a person’s gift. Yet in this case, the deeper discount didn’t make an impact. It was as if Starbucks had cut the price of a latte to $2 and sales didn’t increase.

But there is still the question, Why do people give?

Is it really to make the world a better place, to give back to the community as a token of gratitude? Or is giving instead about something less grand, like seeing your name on a building, responding to peer pressure or simply feeling good about yourself? To put it bluntly, is charitable giving a high-minded form of consumption?

Economist James Andreoni argues that the internal motives for giving are important. In his view there is a "warm glow" effect - people don't give money just to save the kiwi or whatever; they're also giving money to feel the glow that comes with being the kind of person who's helping to save the kiwi. The Karlan and List experiment suggests that Andreoni's idea is correct.

One result of the the warm-glow theory is that philanthropy may not be a zero-sum game. If we were strictly rational, the announcement of a big donation might lead us to give less on the grounds that the charity no longer needs our money as much. But thanks to the warm glow a large donation may make us more likely to donate. We can then have the sense that we're joining forces with someone else and have become part of a larger cause.

(HT: Greg Mankiw)

Populism (updated x2)

That Robert Muldoon was a populist is in little doubt. As Roger Kerr wrote recently,

As prime minister, 'Rob' Muldoon was often described as an economic 'populist'.

He claimed to be on the side of "the ordinary bloke". Economic historian Gary Hawke described him as "an inveterate meddler, an overconfident, self-proclaimed economic manager with a demagogic streak."

Muldoon disdained the ordinary person's understanding of economics. Right up to his political demise he was claiming that the economy was "in remarkably good shape".

Standard economic reasoning was of little interest to him: he justified protectionist policies by saying he would not sacrifice efficient industries for the sake of a theory – an oxymoron if ever there was one.

When Muldoon published his book "The New Zealand Economy: A Personal View" a copy was sent to the economics journal, New Zealand Economic Papers, for review. In the 'Books Received' section of the journal the following note appeared below the entry for the book,

'Not a book which is likely to appeal to economists for, in Sir Robert's view, they are all disqualified from offering advice because they are either academic (and therefore theoretical), foreigners (irrelevant), Treasury officials (inexperienced) or Reserve Bank employees (inclined to panic). Sir Robert doesn't need economic advice because he alone possesses the experience, common sense, social concern, understanding of the New Zealand way of life and knowledge of the people which enable him to make "the judicious use of the widest range of weapons that are available"!'

I guess Roger Kerr must have been one of the "inexperienced" ones at the time.

But the days of Muldoon should make us wary of populist politicians - and their policies - in general. But it seems we are not so wary. As Kerr notes

The Muldoon government's National Superannuation scheme was a massive electoral bribe, of the kind that largely disappeared from New Zealand politics until the recent interest-free student loans and Working for Families initiatives.

This return to politics by bribe is not encouraging as far as the future of politics and economic policy in New Zealand is concerned. Again Kerr notes,

However, as the Muldoon era and many periods of Latin American history showed, a series of populist policies can eventually lead to economic ruin. Far from protecting "the ordinary bloke", they depress wages, increase taxes and ultimately make painful reform unavoidable.

But if this is so, then there is a problem. What does the "the ordinary bloke" vote for it? Why can't the "the ordinary bloke" see the likely outcome of these bribes and vote accordingly? It seems unlikely that people want depressed wages, increased taxes and painful reform. So why vote for the very policies that bring these things about?

Politicians go down the populist route for the very simple reason that it works. Why? Again the rational voter looks like a myth. Where's Bryan Caplan when you need him? Is this another example of where the greatest obstacle to good economic policy is the popular misconceptions, irrational beliefs, and personal biases held by the "ordinary bloke"? Are we seeing politicians who either share the "ordinary blokes" biases or at least pretend to being elected. This would explain bad policies winning again and again .... by popular demand. Caplan argues that democracy fails precisely because it does what voters want. He makes the case that voters suffer from four prevailing biases: they underestimate the wisdom of the market mechanism, distrust foreigners, undervalue the benefits of conserving labour, and pessimistically believe the economy is going from bad to worse. The government's decision to further restrict overseas shareholding in Auckland airport would be the latest example of politicians taking advanced of the "distrust of foreigners" bias.

Kerr argues

Good policies are sometimes like medicine – they may taste bad for a while, but they are necessary in order to get better. We need political leaders who can resist populist pressures and lead the electorate in necessary directions.

Maybe its not political leaders who can resist populist pressures that we need. It seems more likely that what we really need are voters who can resist, or overcome, such pressures.

Update: It has been pointed out to me that one way to interpret Caplan is that what he's saying is that it's remarkable that policy isn't much worse than it actually is. One thing that could explain this is that where politicians have discretion, they're apt to use it to mitigate the worst consequences of stupid voter preferences because economic retrospective voting still holds.

Update 2: As to the government taking advanced of the "distrust of foreigners" bias. This is from a NZPA report on the bid for Auckland International Airport by the Canada Pension Plan Investment Board.

But political analysts believe the ministers -- Land Information Minister David Parker and associate finance minister Clayton Cosgrove -- could reject CPP on naked political grounds because foreign ownership is unpopular and the Government trails heavily in opinion polls.

Information and traffic accidents

From the Freakonomics blog we learn of an interesting experiment to do with traffic accidents at intersections. Freakonomics reports on a story they received from Jeffrey Mindich, a senior news anchor at International Community Radio in Taipei. Mindich wrote,

About a year ago in Taiwan, they started installing countdown timers at traffic lights at a number of intersections. Some counted down the amount of time remaining 'till a green light turned yellow and then red, while others counted down the amount of time remaining before a red light turned green. Some intersections had both. .... Ostensibly, the reason for the timers was to give people more precise information about exactly how much time they had remaining before the light changed, in the hope of reducing accidents.

The results,

A research institute within Taiwan’s Ministry of Transportation released a report showing that at 187 intersections which had the timers installed, those that counted down the remaining time on green lights saw a doubling in the number of reported accidents, with a 33 percent increase in the number of injuries, while those that counted down until a red light turned green saw a halving in both the number of reported accidents and injuries. Intersection that had both red and green light timers saw a 19 percent increase in reported accidents and a 23 percent increase in injuries.

The rule of law

The Economist magazine has an interesting article on the concept of the "rule of law". The article points out that rule of law has become a big idea in economics. But it has had its difficulties. It is noted that people use two quite different definitions, which can be called "thick" and "thin".

Thick definitions treat the rule of law as the core of a just society. In this version, the concept is inextricably linked to liberty and democracy. Its adherents say a country can be spoken of as being ruled by law only if the state's power is constrained and if basic freedoms, such as those of speech and association, are guaranteed. The "declaration of Delhi" drawn up by the International Commission of Jurists in that city in 1959 followed this line in saying that the rule of law "should be employed to safeguard and advance the civil and political rights of the individual" and create "conditions under which his legitimate aspirations and dignity may be realised." Among other proponents of a thick definition are Friedrich Hayek, an Austrian economist, and Cass Sunstein of the University of Chicago. In their view, the rule of law includes elements of political morality.

Thin definitions are more formal. The important things, on this account, are not democracy and morality but property rights and the efficient administration of justice. Laws must provide stability. They do not necessarily have to be moral or promote human rights. America's southern states in the Jim Crow era were governed by the rule of law on thin definitions, but not on thick.

It may seem that having competing definitions of the rule of law would undermine its usefulness. If you argue that the rule of law is vital to growth, you give rise to the question which definition do you mean. Is the one that defends human rights or the one that guarantees property rights? But economists love competition in the market for ideas as in the market for goods. The different definitions of the rule of law reflect competing explanations of what drives economic growth.

One account of growth—associated with Douglass North of Washington University in St Louis, Missouri—is "institutional". It focuses on the importance of property rights, transaction costs and economic organisation. On this view, stable, predictable laws encourage investment and growth. Thin definitions of the rule of law fit this well. The other—associated with Amartya Sen of Harvard—says that if you expand people's "capabilities" (Mr Sen's term), they will do things that help countries grow rich. Freeing people to take advantage of their capabilities usually means lifting the oppressive burden of the state and guaranteeing certain basic rights—a much thicker concept.

The distinction between the different versions of the rule of law overlaps another distinction between legal traditions.

Starting in 1997, a group of economists led by Andrei Shleifer of Harvard and Robert Vishny of Chicago started to compare the economic performance of common-law countries (such as America and Britain) with that of civil-law ones (France, Germany and Scandinavia). They argued that common-law countries have more secure property rights, better protection of shareholders and creditors, more diversified share ownership, and tougher disclosure and liability laws—to the benefit, they claimed, of stockmarket performance.

Other research has found strong evidence that

... civil-law countries encourage government ownership of the media and banks, a higher burden of entry into business, more labour-market regulation and greater formalism of court procedures—to their detriment, they claim

The article ends by noting that the more economists find out about the rule of law, the more desirable it seems and the more problematic as a universal economic guide it is. Research over the past few years have thrown up mixed messages. Some suggests the rule of law can be improved sharply; that rule-of-law reform is at root a political not a technical undertaking; and that it is linked to growth. But other work goes against the assertion that the rule of law is an underlying prerequisite for growth. The whole article is worth the time to read.

(HT: Not PC)

The RMA ..... again

The title of this news report says it all: Ikea not coming - because they'd be too popular. The story points out that

The Environment Court has banned the Swedish-headquartered furniture business from being a tenant in Redwood's new Mt Wellington venture because its stores are so popular it is feared traffic chaos will ensue.

So what stores will the Environment Court allow? Ones that no one goes to, so there is no traffic? Or may be ones that people only bike to.

Even if the court is right and traffic problems could occur doesn't the fact that people are willing to pay both the price of the goods they buy and the costs of traffic congestion mean that they must really value those stores? How much consumer surplus must be generated if consumers are willing to pay both in terms of price and congestion? Why ban stores people actually want to go to? Also if people turn up to go to the Ikea will they not go to other stores nearby as well? Isn't having people shop at a mall the whole idea of malls? What logic/cost-benefit analysis did the court use to come to this decision?

(HT: Not PC)

Proposed law gets to the bottom of a problem

This report shows just how politicians can get the bottom of a problem,

A proposed law currently making its way through the Florida legislature might help you with what can be an embarrassing problem. Here's the bottom line, the bill would be a mandate that all eating establishment must have enough toilet paper when you go into the restroom.

But it appears that the bill doesn't dictate how much toilet paper is "enough." What court cases could arise over what is "enough".

And who says the state isn't your friend.

Stephen Marglin on EconTalk

Stephen Marglin of Harvard University and author of The Dismal Science: How Thinking Like an Economist Undermines Community is on EconTalk this week. He talks with Russ Roberts about issues to do with markets and community. Marglin argues that markets and commercial transactions undermine the connections between us. He wants people to pay more attention to what is lost and not just what is gained by the pursuit of material well-being. Topics discussed include the nature of community, the role that voluntary associations play in our lives, the costs and benefits of mobility, the role of insurance in reducing our dependence on each other, and the nature of knowledge.

Administrators v. faculty

The Inside Higher Ed magazine has an interesting fact on higher education in the US,

...the majority of full-time professional employees in higher education are in administrative rather than faculty jobs.

One wonders how this improves the quality of research and teaching in US universities. As Arnold Kling has noted,

A university consists of a faculty attached to a fundraising apparatus, where it used to be the other way around.

Is New Zealand really any different?

The sins of economics (updated)

The visible hand in economics has written here on, in part, the question, Has the Catholic church become anti-economics? The Catholic church has added a set of new sins to the list we all already know about. The new sins are:

• Environmental pollution;
• Genetic manipulation;
• Accumulating excessive wealth;
• Inflicting poverty;
• Drug trafficking and consumption;
• Morally debatable experiments; AND,
• Violation of fundamental rights of human nature.

As the visible hand points out this list does have an anti-economics look to it. Who will want to point out that there is an optimal, and most likely positive, level of pollution? Or what to argue in favour of economic growth, during which people may accumulate wealth? Or argue in favour of a cut to the top tax rates? Also in the short term at least, environmental pollution may increase due to economic growth. Economists may also support the use of genetic manipulation, to increase crop yields for example. A number of economists have argued against the war on drugs and in favour of drug legalisation, how does this sit with the sin of drug trafficking and consumption? You do have to wonder if the implications of these sins have been thought about fully.

As to the sin of "accumulating excessive wealth", what of the wealth of the Catholic church itself?

It is also noteworthy that the BBC report on these new sins contains the following,

The Vatican has brought up to date the traditional seven deadly sins by adding seven modern mortal sins it claims are becoming prevalent in what it calls an era of "unstoppable globalisation".

A reading of the Findlay and O'Rourke article, Lessons from the history of trade and war, on VoxEU.org, would have the Vatican thinking as to just how unstoppable globalisation really is.

Update: Not PC comments on New 'sins' for a new century.

Innovation fund (updated x2)

This report tells us that the government is planning

A massive funding boost to New Zealand's food industry [which] aims to help sell more of the country's produce overseas.

The idea is that

The innovation fund will target pastoral and food industries in an effort to make New Zealand's products more attractive to international markets.

But why spend taxpayer money on this? Is the government trying yet again to pick winners? If New Zealand has a comparative advantage in this area, as we may well have, then why is this money necessary? Why can't the firms involved, like Fonterra, fund such development themselves? Those in the industry have the best information as to what is most likely to be profitable in the future and forcing them to fund development themselves gives them the strongest incentives to develop the best available options. If they are unwilling to do so then doesn't that tell us that they don't believe such innovations are worthwhile.

Also if the government wishes to help industry why this particular way of doing it? Would it not be better to return an equivalent amount to firms via a reduction in the corporate tax rate and let the firms themselves decide how best to use the money. As note above, the firms in the industry have the best information as to what is likely to be the best strategy for the future. Let them decide on their strategy and back it themselves.

There is also the issue of what criteria have been laid down to determine whether the policy has been a success or failure. I'm guessing there are none. There never are with government policy.

On the other hand if New Zealand no longer has a comparative advantage then surely the last thing we need is taxpayer money being used to artificially prop up a sunset industry. Better to let the market work to signal to those in industry to move out of the sector.

There is also the issue that these funds seem to be aimed toward exports. Is this another example of a mercantilist mindset in government. The exports good, imports bad view of the world. Adam Smith showed the shortcomings of such a view more than 200 years ago, it would be nice to think the New Zealand government wasn't that far behind the times.

Update: Not PC comments here, Innovation fund isn't.

Update 2: A friend has just emailed me to point out that if you don't like current account deficits, or capital account surpluses, then increasing exports is "good". Remember more exports "helps" the trade balance, which in turns "helps" the current account balance and governments seem to think a current account deficit is "bad", very "bad".

Fiscal scoundrels

Willem Buiter discusses an UK government plan for a "quasi-fiscal energy subsidy" to poorer energy consumers in an article on his FT.com blog. But Buiter opens his piece, Quasi-fiscal scoundrels 3: Energy tariffs in the UK, with a more general point,

Gutless politicians prefer paying subsidies to favoured special interest groups by tinkering with the price mechanism to doing it through explicit budgetary transfers. The reasons are obvious. Explicit budgetary transfers can be observed and measured objectively. The transfer of resources is transparent. Explicit budgetary transfer payments have to be financed, either by increases in current taxes or current cuts in public spending, or by government borrowing, that is, by increases in future taxes or cuts in future public spending. Explicit budgetary transfers are on-budget. They can cramp the government’s room for fiscal maneuver through budget rules (the UK government’s golden rule, the budget deficit norms of the EU’s Stability and Growth Pact etc.). Explicit budgetary transfers imply a measure of accountability. For all these reasons, governments prefer to engage in quasi-fiscal operations that are off-budget and off-balance sheet, and that achieve the government’s distributional objectives mainly by mucking about with prices, rules and regulations under the control of the government.

Use of measures such as "tinkering with the price mechanism" rather than the use of "explicit budgetary transfers" allows politicians to create an information asymmetry between themselves and the voters. Voters get the see the "good bits" of a policy while remaining ignorant about the true costs involved with that policy. Deliberately induced voter ignorance helps politicians avoid the possibility of the costs of a policy resulting in them being punished at the next election.

Demand and supply in daycare

There is an interesting post on the Economic Logic blog on the effects of Quebec's daycare policy. The post points out that

In 1997, Quebec introduced the C$5-a-day daycare, heavily subsidizing existing daycares. The fee was increased to C$7 in 2004.

The obvious economic outcome, an excess demand.

... with such a drastic reduction in price, the quantity demanded increases tremendously. And it did. People who had found other arrangements, for example within the family, do not to bother the grand-mother anymore if it costs only a few bucks a day to put a child in daycare. Parents who did not even need daycare now find it convenient to get free time at little cost. Now, was the supply subsidized enough to meet the demand? Of course not. One could think that the under-supply would be only temporary, in particular as new daycares need to be certified, manpower needs to be trained. But a decade after the introduction of the policy, the government is still struggling to provide anything near what demand would require, and at a huge cost.

And yes, what looks like a black market has developed.

The less obvious outcome,

... the policy in Quebec is that everyone has equal access to public services (health care, schools, daycare, etc). Given that there must be rationing, who actually gets to use the subsidized daycare centres? Those with higher incomes, that is those who could have paid for the daycare anyway.

It turns out that daycare utilisation rates (and subsidies received) increase with income. Some some plausible explanations for this

• High-skilled women are more likely to choose to work than those with fewer skills.
• The daycare system is almost entirely designed for those with 9-to-5 jobs, the sort that low-income workers are less likely to have.

And according to this report

The cost of Quebec's subsidized daycare won't go up as long as there remains a shortage of spaces, says the Family Minsiter.

So not increasing the price will remove an excess demand?????

But here's another approach to dealing with an excess demand for childcare,

(HT: Greg Mankiw)