Rosser on Keynes

Barkley Rosser asks did Keynes really favour central planning? He claims that the accusation that he did doesn't holds up.

However, I do find it disturbing that increasingly Austrians and some others have taken to charging Keynes with having supported "central planning," as indeed done in this video[for the video see here]. Is this correct? I think that the answer is largely "no," with it certainly being that answer if one means by that command central planning of the Soviet type that Hayek criticized in his Road to Serfdom (which Keynes praised, btw, when it first came out).

And Rosser's position is not a case of defending the indefensible. But Arnold Kling makes a good point when he says,

Still, Keynes was clearly less obsessed with the knowledge problem than was Hayek. And among the followers of Keynes and Hayek, the polarization seems to have increased. Contemporary Keynesians are committed to treating government as if it were a knight in shining armor prepared to slay the many dragons of market failure. Contemporary Hayekians are probably even more convinced than Hayek that localized knowledge, imperfect science, and public choice considerations argue in favor of markets.

Russ Roberts on Hayek

Russ Roberts, of Cafe Hayek fame, is interviewed here on what Hayeks' view of the budget deficit in the U.S. would have been.

The first question Roberts was asked is "What did Hayek believe about the role of government?" His answer:

In his 1974 Nobel Prize lecture, he said (and I'm paraphrasing),"I prefer imperfect knowledge that is true, to perfect knowledge that is false." Having perfect knowledge is impossible. As he got older, Hayek became increasingly skeptical of formal models to measure the impact of any of a particular project or program on the economy. So he was very skeptical of macroeconomic predictions.

Hayek was not an anarchist- he didn't believe there should be zero government. But he was also not a conservative. He was a classical liberal- he believed in personal freedom and responsibility. This idea that we'd need to increase the budget by $1 billion to "stimulate the economy", he would view with extreme skepticism. So he was very skeptical of macroeconomic predictions. He believed in the importance of bottom-up, emergent actions of individuals: planning for the future should be done by individuals, not by someone at the top.

He didn't believe that anyone can steer the economy. Hayek would also be skeptical of the idea that we'd need to keep spending to prop our economy up and to keep our economy going. He'd want to let entrepreneurs and individuals make decisions based on the knowledge available to them, rather than a top-down approach [by the government] that tries to micro-manage at a macro level.

He was skeptical of the idea that the Federal Reserve, through manipulating interest rates, could create prosperity or improve the economy. Hayek would argue in fact the Fed is a major reason we're in the mess we're in.

Soros on Hayek

George Soros writes,

Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations.

This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism.

That has to be one of the greatest misrepresentations of Hayek ever penned!

Hayek, "formalized and mathematical"? Hayek's thought is based on the "efficient market hypothesis and the theory of rational expectations"? Hayek and the Chicago School do at times reach similar conclusions but they get there via different routes. Hayek and the Austrian School in general see the market in terms of a process while the Chicago School see them is terms of equilibrium. And there are many other differences. Roger W. Garrison notes the difference between Hayek and Milton Friedman on monetary economics,

[...] Hayek’s Monetary Theory and the Trade Cycle ([1928] 1975) and Friedman’s Optimum Quantity of Money and Other Essays (1969) are worlds apart. [...] the methods and substance of the their economics, particularly the economics of money and business cycles, divide them.

I am not the only one who thinks Sorocs's view of Hayek is odd. Arnold Kling writes,

Soros equated Hayek with the Chicago school of economics. In particular, Soros blamed Hayek for promoting rational expectations and the efficient markets hypothesis. I doubt that anyone else on the panel or in the room shared this view of Hayek. However history views Hayek, I do not expect him to get credit for anticipating Fama or Lucas. In fact, as Frydman and Goldberg point out in Imperfect Knowledge Economics, rational expectations runs counter to Hayek's theory of local knowledge, which is one of his most important contributions. I do not see how Hayek could approve of any form of representative-agent modeling.

One wonders if Soros has ever read Hayek.

More on privatisation

At RogerKerr.wordpress.com Roger Kerr writes,

Recently the Treasury released a December 2010 paper Short History of Post-Privatisation in New Zealand, written by John Wilson, an experienced former Treasury official.

It records in a balanced and objective way the history of nine major privatisations by central and local governments.

Kerr continues

The paper notes the range of objectives of privatisation of governments around the world:

* Putting businesses under the full pressures of private capital markets, and thus making them more efficient.
* Reducing the exposure of the government balance sheet to risky debt financed assets.
* Removing the capacity of the businesses to seek government aid in bad times, thus both promoting better business management (to avoid that risk) and reducing risks to government fiscal outcomes.
* Promoting the development of local capital markets, and/or encouraging a broad ownership of shares in the community.
* Using the sale proceeds for higher priorities, typically to reduce government debt.

All of these objectives have been relevant at different times in New Zealand.

The basic point about privatisation is that it will depoliticise the firm. The aim is to have the greatest possible distance between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as feasible.

Kerr adds that,

On methods of privatisation, the paper comments:

Typically, in an asset sale, the best price is obtained by selling a controlling shareholding to a single entity that can control the destiny of the business (a trade sale). A float generally gets a lower price.

New Zealand governments mainly employed trade sales, with some floats or sell-downs. Privatisation was not ‘done the wrong way’, as some critics allege.

There are two points to keep in mind here. The first being that selling a controlling interest in a firm gives a higher price because it gives control over the firm. People are willing to pay more for control over a firm, so 51% of a firm is worth a lot more than 49%. This shows a problem with partial privatisation, ceteris paribus, it lowers the price a would be buyer will pay. It also leaves the business politicised since the government still has the controlling share.

The second point is that there will be times when you do not want to maximise the price you get for a SOE. One example as why it could want to do so is given by Anbarci and Karaaslan's idea of An Efficient Privatization Mechanism:

In this paper, we consider the privatization of State-Owned Enterprises (SOEs) that are legal monopolies but not natural monopolies; their markets can be opened to competition once privatization takes place and other competitors can emerge and compete successfully against them in a few years. But until that happens, these privatized SOEs can have a significant level of market power. The currently used “Revenue Maximization (RM)” privatization scheme maximizes the government revenue from privatization but does not provide sufficient incentives for the privatized SOE eiher to charge a price lower than the monopoly price or to improve production efficiency until competition arises. We propose a new scheme to privatize such SOEs. We term this new scheme the “Welfare Maximization (WM)” scheme. The WM scheme practically yields no revenue to the government from the privatization of any such SOE; however, it induces the privatized SOE to charge a competitive price in the absence of any regulation. It also turns out that the WM scheme provides greater incentives for post-privatization process invention (i.e., for post-privatization cost reduction) than RM scheme. (emphasis added)

This is a very specific situation but it helps make the point that just trying to maximise the price received for an asset is not necessarily a good idea. In the above example welfare is maximised while revenue is basically zero.

For successful privatisation it is more important to get the regulatory environment right so that competition can breakout in the industry than it is to maximise the price for which the asset is sold. Basically I'm arguing we should have lexicographic preferences, with price low on the list. Worrying about whether or not the ‘family silver’ was sold too cheaply misses the point, the price received can only be see as too high or low relative to the market structure the firm finds itself it. Just arguing that a higher price could be obtained with a different market structure is only useful if the new market structure improves welfare. 

Political bias at the New York Times

Volume 11 issue 1 of The B.E. Journal of Economic Analysis and Policy contains an article on Being The New York Times: the Political Behaviour of a Newspaper by Riccardo Puglisi, University of Pavia. The abstract reads:

I analyse a dataset of news from The New York Times, from 1946 to 1997. Controlling for the activity of the incumbent president and the U.S. Congress across issues, I find that during a presidential campaign, The New York Times gives more emphasis to topics on which the Democratic party is perceived as more competent (civil rights, health care, labor and social welfare) when the incumbent president is a Republican. This is consistent with the hypothesis that The New York Times has a Democratic partisanship, with some “anti-incumbent” aspects, in that—during a presidential campaign—it gives more emphasis to issues over which the (Republican) incumbent is weak. To the extent that the interest of readers across issues is not systematically related with the political affiliation of the incumbent president and the election cycle, the observed changes in news coverage are consistent with The New York Times departing from demand-driven news coverage. In fact, I show that these findings are robust to controlling for Gallup data on the most important problem facing the country, which I use as a proxy for issue tastes of Times’ readers.

How surprising is such a result?

Fight of the Century

Keynes vs. Hayek Round Two. The second rap video created by Russ Roberts and John Papola.

Econ students are nice people too!

A Staff Report from the Federal Reserve Bank of New York asks Is Economics Coursework, or Majoring in Economics, Associated with Different Civic Behaviors? The abstract reads,

Studies regularly link levels of educational attainment to civic behavior and attitudes, but only a few investigate the role played by specific coursework. Using data collected from students who attended one of four public universities in our study, we investigate the relationship between economics coursework and civic behavior after graduation. Drawing from large samples of students in economics, business, or general majors, we compare responses across the three groups and by the number of undergraduate economics courses completed. We find that undergraduate coursework in economics is strongly associated with political party affiliation and with donations to candidates or parties, but not with the decision to vote or not vote. Nor is studying economics correlated with the likelihood (or intensity of) volunteerism. While we find that the civic behavior of economics majors and business majors is similar, it appears that business majors are less likely than general majors to engage in time-consuming behaviors such as voting and volunteering. Finally, we extend earlier studies that address the link between economics coursework and attitudes on public policy issues, finding that graduates who studied more economics usually reported attitudes closer to those expressed in national surveys of U.S. economists. Interestingly, we find the public policy attitudes of business majors to be more like those of general majors than of economics majors.

I wonder how much of this is self section? Is it not likely that people who are interested in politics, for example, are also interested in economics? It may not just be what they are learning in their course work that is affect their decisions. Unfortunately it turns out that in the paper the authors state,

[...] we cannot say if our results reflect what individuals have learned in these courses and majors, or if the relationships identified here are due to self-selection among college graduates into different college majors and economics course taking.

So we don't really know.

Don Boudreaux's great fact

In a column in the Pittsburgh Tribune-Review Don Boudreaux discusses Deirdre McCloskey's book "Bourgeois Dignity". He opens by saying,

Economist and historian Deirdre McCloskey calls it "the Great Fact" -- the humongous increase in humans' standard of living that began about 200 years ago.

And what a Great Fact it is! It's great not only in the sense of being amazingly, resplendently good for ordinary men and women, but also in the sense of being the single most surprising and astounding change that we humans have experienced in our 70,000 or so years on this planet.

For 99.7 percent of the time that we bipedal, scantily haired, language-blessed apes have trod this globe, we did so under material conditions that you and I from 2011 would find utterly intolerable. As another economist, Todd Buchholz, correctly noted, "For most of man's life on earth, he has lived no better on two legs than he had on four."

Then all of a sudden, starting a mere 200 or so years ago in northwestern Europe, boom! Material riches start pouring forth not only into the castles and manor houses of royalty and the nobility, but into the humble homes of peasants, of hoi polloi, of human creatures who, generation after generation -- tracing back all the way to their single-celled ancestors -- lived lives poor, nasty, brutish and short.

What did our great-great-great-great-grandparents do to suddenly deserve access to new and remarkable goods such as underwear made of tightly woven cloth that could be vigorously washed without unraveling? What did our great-grandparents do to deserve access to "Tin Lizzy" Fords?

What did our grandparents do to deserve access to antibiotics and televisions? What did our parents do to win access to air conditioning and inexpensive jet travel? What did we do to deserve access to cellular telephony, GPS driving directions and supermarkets that routinely stock 50,000 different items?

So what happened to get us to these 50,000 different items.

Something else happened -- something else that has, until now, been overlooked.

That something else is what McCloskey calls "the Bourgeois Revaluation." Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

So unite with your local capitalist, you have nothing to lose but your poverty!

Say what??

Shamubeel Eaqub of the New Zealand Institute of Economic Research has a short comment on the "Economic Impacts of the Christchurch Earthquake: Lessons from Napier", in 'Asymmetric Information' the newsletter for members of the NZAE. In this comment Eaqub writes,

Despite the human and economic costs, there are some positives. In particular, the earthquake provided the catalyst to invest in infrastructure and new technology.

But wait! What catalyst is needed? Wasn't there incentives enough to invest in infrastructure and technology before the quake? And if the earthquake distorted infrastructure and "old" technological capital, how is this good? If it is good should we not go around distorting capital every few years in all cities in New Zealand to gain the payoffs from "the catalyst" on an ongoing basis?

And you have ask, Is it good? No being the answer is at least two reasons. First the owners of capital will have an optimal time to replace that capital and unless the earthquake occurs exactly at that time replacing capital at the time of the quake will be sub-optimal. Second the investment in "infrastructure and new technology" has an opportunity cost. The resources now going in infrastructure and technology would have gone into something else, which we now have lost.

As I have noted before, the literature on the economic effects of natural disasters like earthquakes show there are no long term increases in growth because of a quake. So where are the gains implied by Eaqub's claim?

Those Godless Canadians

A new study from the NBER looks at the The Effect of Education on Religion: Evidence from Compulsory Schooling Laws. The abstract reads,

For over a century, social scientists have debated how educational attainment impacts religious belief. In this paper, I use Canadian compulsory schooling laws to identify the relationship between completed schooling and later religiosity. I find that higher levels of education lead to lower levels of religious participation later in life. An additional year of education leads to a 4-percentage-point decline in the likelihood that an individual identifies with any religious tradition; the estimates suggest that increases in schooling can explain most of the large rise in non-affiliation in Canada in recent decades.

So are education and religion complements or substitutes? They could be substitutes in that both science and religion try to explain the world around us and as the population becomes more educated the understanding of the scientific explanation grows in the population and this drives out the religious explanation. But they could be complements since many religions place strong emphasis on education and learning. Just think of how many religious based schools and universities there are.

The evidence in the paper suggests that the two are substitutes .... at least for Canadians.

What can the government do about growth?

A new NBER working paper is out on Public Policy, State Business Climates, and Economic Growth. The paper, by Jed Kolko, David Neumark, Marisol Cuellar Mejia, has an abstract which reads,

State business climate indexes are a popular means of summarizing the "bundles" of state policies that might affect state economic growth. But the rankings of states' business climates vary wildly, raising questions about what these business climate indexes measure, and hence about which policies they capture are more important determinants of state economic growth. Business climate rankings tend to focus on policies related either to productivity, or to taxes and other costs of doing business. States that rank poorly along one of these dimensions often rank quite highly on the other. Business climate indexes that focus on productivity-related variables have essentially no predictive power for economic growth. In contrast, business climate indexes focusing on taxes and costs predict growth of employment, wages, and Gross State Product. Looking at sub-indexes that disaggregate the policies captured by the taxes-and-cost related indexes, two types of policies are associated with faster economic growth: less spending on welfare and transfer payments; and a more uniform and simpler corporate tax structure. But factors beyond the control of policy, like a state's industry mix, population density, and weather, have a stronger relationship with economic growth than even the tax-and-cost-focused business climate indexes. (emphasis added)

So state governments in the U.S. can do some things to help growth but the things that are outside the government's control are the big factors in growth. There could be a lesson there.

But may be the strangest finding is that productivity-related variables have essentially no predictive power for economic growth. After all isn't the whole argument made here in New Zealand that we need increases in productivity to increase growth?

Why would you want to set up a business in Washington?

Washington Business Journal reports,

Walmart foes on Thursday released a massive list of demands they expect the world's largest retailer to accept, in a legally binding contract, before locating in the District. The stipulations run the gamut from a living wage ($12.50 an hour) to transit benefits ($50 per employee per month) to parking minimums (up to 2.5 free or low-cost spaces per 1,000 square feet of building space).

[...]

Among the demands, the group wants Walmart to:

* Pay every employee the D.C. living wage, currently $12.50 per hour.
* Provide $50 a month in public transportation subsidy to every employee.
* Employ at least 65 percent of its D.C. employees on a full-time basis.
* Not ask job applicants about previous criminal convictions.
* Use project labor agreements to construct its stores.
* Fund all infrastructure improvements made necessary by its stores.
* Provide free shuttle transportation to and from the nearest Metro station to each D.C. store every 10 minutes.
* Commit to traffic alleviation studies.
* Provide up to 2.5 free or low-priced parking spaces per 1,000 square feet of building space.
* Provide secure, accessible bicycle parking, car sharing and bike sharing for workers and shoppers.
* Not sell firearms or ammunition.
* Employ no less than two off-duty D.C. police officers on its premises at all times.
* Abide by a "code of conduct with regard to its employees' freedom to choose a voice on the job without interference."
* Fund workforce training programs for D.C. residents, and use training programs as its primary avenue for hiring D.C. residents.
* Hire at least 40 percent of its employees at each store from the ward in which the store is located.
* Make "ongoing contributions to a fund managed by a council of community stakeholders" that will provide incentives and support to local small businesses.
* Make ongoing payments for community funds controlled by "community advisory councils" for education and faith-based programs.

Apart from anything else who demands traffic alleviation and free or low-priced parking? There does seem to be a contradiction here. You end up feeling sorry for Walmart.

Great leap forward?

There is an interview with Alexander J. Field, an economist at Santa Clara University, and the author of “A Great Leap Forward,” which argues that the terrible years of the Great Depression actually set the stage for the post-World War II boom, in the New York Times.

Q. You make the novel claim that the Great Depression years were good — or at least important — for the American economy. How so?

Mr. Field: In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input. Almost all of the increase in output per hour is attributable to technological and organizational advance. As I said in the title of my 2003 American Economic Review article, the 1930s were indeed the most technologically progressive decade of the century.

The conventional wisdom is that the war somehow magically transformed the doom and gloom of the Depression into the U.S. standing like a colossus astride the world in 1948. My counterargument is that potential output expanded by leaps and bounds between 1929 and 1941, and it was this expansion in capacity that both helped us win the war and established the foundations for postwar prosperity.

Q. What were the key innovations of the 1930s?

Mr. Field: What’s notable about the Depression years is the very broad range of advance. One can’t point to a single or even a few innovations that somehow defined the era. Nonetheless, notable new products included the DC-3, a plane introduced in 1936 that revolutionized commercial aviation; television, developed with venture capital funding during the 1930s and rolled out at the 1939-40 World’s Fair; and nylon stockings, introduced in May 1940, with 63 million pair sold the first year.

A number of products available in the 1920s moved from low-penetration boutique goods to mass-produced commodities. Case in point: mechanical refrigerators. Less than 3 percent of U.S. households had them in 1929, and they were expensive and unreliable, requiring extensive after-market service. In 1941, 44 percent of households had mechanical refrigeration, including 56 percent of urban households.

Automobiles saw major refinements in the 1930s. Heaters, radios, low-pressure balloon tires, and four-wheel hydraulic brakes all became standard. The decade saw the development of options we often consider standard today — power steering, automatic transmission, front-wheel drive, and V-8 engines. Aside from product innovation, significant process innovation occurred across the industrial sector.

And in contrast to the 1920s, advance was not limited almost entirely to manufacturing. Highway design in the 1930s excited engineers as much as did the information “superhighway” in the 1990s. The U.S. route system, built almost entirely during the Depression, represented a huge improvement over what had preceded it, with big benefits for transportation and distribution.

Organizational innovation also played a role. In railroads, treaties now allowed unlimited freight interchange. Rolling stock — railroad cars — from one road could move onto tracks owned by another, and while there, discharge and pick up cargo, and even be repaired in a “foreign” yard. The agreements and uniform tariff schedules that permitted this were critical in enabling U.S. railroads to carry more freight and almost as many passengers in 1941 as they did in 1929, using many fewer employees, cars, and locomotives.

Somehow I can't see everybody agreeing with Field, so it will be interesting to follow the debate on this book.

The economics of enough

In this audio from VoxEU.org Diane Coyle talks to Viv Davies about her new book 'The Economics of Enough: How to Run the Economy as if the Future Matters'. The book addresses the need to create a sustainable economy - how to consider tomorrow's needs as well as today's. It covers a broad range of issues, from the banking crisis to climate change, and sets out some of the initial, practical steps that will be needed to build a future economy that is based on a true sense of value.

EconTalk this week

Ariel Rubinstein of Tel Aviv University and New York University talks with EconTalk host Russ Roberts about the state of game theory and behavioral economics, two of the most influential areas of economics in recent years. Drawing on his Afterword for the 60th anniversary edition of Von Neumann and Morgenstern's Theory of Games and Economic Behavior, Rubinstein argues that game theory's successes have been quite limited. Rubinstein, himself a game theorist, argues that game theory is unable to yield testable predictions or solutions to public policy problems. He argues that game theorists have a natural incentive to exaggerate its usefulness. In the area of behavioral economics, Rubinstein argues that the experimental results (which often draw on game theory) are too often done in ways that are not rigorous. The conversation concludes with a plea for honesty about what economics can and cannot do.

Markets in everything

One effect of the growth in ICTs is the development of markets which otherwise would be difficult if not impossible to organise. This is from Bloomberg:

Lots of bandwidth and $5,000 can get anyone an hour with Nobel Prize-winning economist Gary Becker.

A couple more computer clicks can also remake a tennis serve, fix a golf swing and provide tips on how to out-bluff the poker world’s top pros.

Becker, a University of Chicago professor who won the Nobel Prize in Economics in 1992, will be selling his time on ExpertInsight.com, a website offering one-to-one video chats with leaders, which opened yesterday. He’ll join people such as economics professors Jeffrey Miron of Harvard University and Laurence Kotlikoff of Boston University, “Freakonomics” co- authors Steven Levitt and Stephen Dubner, poker celebrities Patrik Antonius and Tom Dwan, and tennis coach Jeff Salzenstein.

The U.S. - Europe productivity gap: lessons for New Zealand?

It has long been accepted that the U.S. has had a productivity growth boom since the mid 1990s. Average annual labour productivity growth (measured as GDP per hour of work) in the U.S. accelerated from 1.2 percent in the 1973-1995 period to 2.3 percent from 1995 to 2006. Conversely, the 15 European Union countries that constituted the union up to 2004 experienced a productivity growth slowdown between these two time periods. For these 15 countries as a group, labour productivity growth declined from an annual rate of 2.4 percent during the period 1973-1995 to 1.5 percent during the period 1995-2006. This raises the obvious question of, Why the difference in productivity performance?

A common answer to this question is that the European productivity slowdown is attributable to the slower emergence of the knowledge economy in Europe compared to the U.S. But this just moves the question back one step, Why has the U.S. invested more in the knowledge economy, mainly in the form of information and communication technologies (ICTs), than Europe?

van Ark, O'Mahony, and Timmer (2008) argue that the answer to this later question involves issues related to the functioning of European labour markets and the high level of product market regulation in Europe. The relevance to New Zealand should be obvious.

van Ark, O'Mahony, and Timmer (2008: 31-2) state,

When put into a comparative perspective, the productivity slowdown in Europe is all the more disappointing as U.S. productivity growth accelerated since the mid 1990s. The causes of the strong U.S. productivity resurgence have been extensively discussed [...]. In the mid 1990s, there was a burst of higher productivity in industries producing information and communications technology equipment, and a capital-deepening effect from investing in information and communications technology assets across the economy. In turn, these changes were driven by the rapid pace of innovation in information and communications technologies, fuelled by the precipitous and continuing fall in semiconductor prices. With some delay, arguably due to the necessary changes in production processes and organizational practices, there was also a multifactor productivity surge in industries using these new information and communications technologies-in particular in market services industries [...]

In Europe, the advent of the knowledge economy has been much slower since the mid 1990s.

So what is the relationship between the knowledge economy, ICT investment, and the labour market and market competition/regulation?

van Ark, O'Mahony, and Timmer (2008: 31-2) continue,

[...] a more flexible approach towards labor, product, and capital markets in Europe would allow resources to flow to their most productive uses. Crafts (2006) discusses the increasing evidence that restrictive product market regulations, in particular those limiting new entry, hinder technology transfer and have a negative impact on productivity [...]

Crafts (2006) argues that consistent with endogenous growth models, there appears to be quite strong evidence that regulations which inhibit entry into product markets have an adverse effect on total factor productivity (TFP) growth in OECD countries. He goes on to explain that regulation is likely to have its most important effects through changing the incentives to invest and to innovate. If regulation reduces the net returns to investment and innovation, then endogenous growth theory predicts that it will reduce TFP growth. An additional important reason for adverse effects on TFP growth is that regulation increases barriers to entry.

Bartelsman, Gautier, and de Wind (2010) show a relationship between labour markets, ICTs and productivity.

In their paper they argue that the extent to which a country can benefit from the advantages of risky technologies (in the main ICTs) depends on the institutional arrangements on firing and bankruptcy. The more employment protection there is, the more costly it is to exercise the job destruction or firm exit option. This mechanism can explain why the US was better able to explore the benefits of the new information technology starting in the mid 1990s. In the paper van Ark, O'Mahony, and Timmer argue that a change in the nature of technological opportunities in the mid 1990s interacted with cross region differences in employment protection to become a prominent cause of the observed divergence in productivity between the U.S. and the E.U. The emergence of accelerating improvements in computing power coupled with steepening adoption rates of communications technology resulted in a large variance in realised productivity and profits for firms choosing to use these technologies. The increase in variance is good for aggregate productivity and appealing to individual firms because good news is unbounded while bad news is bounded by the option to exit or fire workers. When in the mid-nineties these technological opportunities arose, the expected net benefits of exploring this technology were higher in counties with low employment protection legislation, e.g. the U.S, because the option to shut down was less costly. van Ark, O'Mahony, and Timmer give robust evidence that in countries with high employment protection legislation, high-risk innovative sectors (which are associated with intensive ICT use) are relatively small. The negative relationship also holds between other exit frictions (i.e. low cost recovery of capital for exiting firms) and the relative size of risky sectors. van Ark, O'Mahony, and Timmer explain the empirical findings using a matching model with endogenous technology choice, i.e. firms can choose between a risky (ICT related) and a safe technology. In this calibrated model, high firing or exit costs reduce the number of jobs in the risky sector, lower productivity in the risky sector, and lower aggregate productivity.

So the lessons for New Zealand? If we really do want to increase our productivity and catch-up with Australia then we should look at our use of ICTs and the relationship between that and competition in our markets, the way and how much we regulate markets, our bankruptcy laws and the amount of labour protection legislation we have in place.

• Bartelsman, Eric J, Pieter A Gautier, and Joris de Wind (2010), "Employment Protection, Technology Choice, and Worker Allocation", CEPR Discussion Paper 7806.
• Crafts, Nicholas. 2006. “Regulation and Productivity Performance.” Oxford Review of Economic Policy, 22(2): 186–202.
• Van Ark, B, M O'Mahony, and M Timmer (2008), “The productivity gap between Europe and the US: trends and causes”, Journal of Economic Perspectives, 22(1):25-44

In-house or market transaction?

For a multinational corporation one question relevant to the decision as to how to carry out production in a non-home market is whether to keep production inside the firm, by operating a wholly owned foreign subsidiary, or to outsource in some way, e.g. replying on a foreign supplier for components or to licence their know-how or brand image to a foreign party. Obviously there are advantages and disadvantages to both methods of production which in any given case have to be traded off. But will a company ever do both? Will it ever use both in-house production and at the same time use independent firms?

The answer is yes. An example is the Italian multinational Pirelli who manufactures both tyres and cables but its tyres are produced in wholly owned foreign plants and its cables are made by a foreign licensee. Why does one company use two different methods of production? After all if in-house (independent firms) is good for cables, why not tyres?

The answer seems to be to do with the dissipation of firm-specific assets, knowledge in this case. Pirelli developed a new method of manufacturing tyres, the Modular Integrated Robotised System (MIRS), which is a completely computer managed production process which requires no labour input. Foreign factories utilising this technology - in the UK, Germany and the US – are wholly owned subsidiaries. The reason for this is to protect proprietary knowledge in the MIRS technology. That is, Pirelli want to make it as difficult as possible for other firms to learn about their technology. In contrast when it comes to the production of their Afumex cables, which guarantee higher safety standard in case of fire than traditional cables, the technology is licensed to independent firms. In this case the basic technology is widely known and the innovative components of Afumex are protected by patents.

So when you have knowledge that you don't want other people to know you keep production in-house but where knowledge is already well known or can be protected in other ways, e.g. patent or copyright, then independent firms can be used.

Carpe Diem on earth day

Mark Perry at the Carpe Diem blog says,

"Of the estimated 1 billion people who will observe Earth Day worldwide this year, few will know about the progress that has been made. Fewer still will know how it was made. The media, uninterested in looking at the real story, will simply credit the environmental movement for the improvements.

Buried beneath all the badgering and fear-mongering about lavish Western lifestyles is a reality that the stuck-on-green left won't talk about and the average American isn't aware of: The world, especially in developed nations, is a cleaner — and greener — place than it was when the environmental movement began [...].

Topping the agenda of today's environmentalist groups is the pulling down of market economies, the raising up of central planning for egalitarian goals, forced lifestyle changes and the vilification — in hopes of the elimination — of signs of wealth.

None of these advance the planet's environmental health. But capitalism has. Through wealth generated by the free market, we have enough resources to move beyond the subsistence economies that damage the environment, enough disposable income to fund clean-up programs, enough wealth to scrub and polish industry.

Only in advanced economies can the technology needed to recycle hazardous waste or to replace dirty coal-fired power plants with cleaner gas or nuclear plants be developed. That technology cannot be produced in centrally planned economies where the profit motive is squelched and lives are marshalled by the state.

There's nothing wrong with setting aside a day to honor the Earth. In fairness, though, it should be complemented by Capitalism Day. It's important that the world be reminded of what has driven the environmental improvements since Earth Day began in 1970."

Environmental goods are normal goods: as we become wealthier we demand more of them. So if you want to improve the environment make people richer. This capitalism seems better at than any other economic system.

Cheese producer blames milk price for factory closure

This claim is being reported by RadioNZ

An award-winning cheese producer has closed one of its factories, blaming the rising price of milk and the system for charging for it.

Kaimai Cheese Company has closed its Te Mata factory and cafe in Havelock North.

Executive director Wyatt Creech says the state of the market makes it impossible for a company to be in anything except a very small artisan cheese business.

Mr Creech says the Fonterra dairy co-operative is able to back-charge if milk goes up during a season, which means the company has to sell a product without knowing what the final price of milk will be.

The first thing I find myself asking is why agree to a contract with a "back-charge" condition in it? And how long has this type of contract been used? If it is common type of contract which has been used for sometime then I can't see how the contract with Fonterra is the issue here. It seems more likely that the real issue is that world milk prices are high and cheese companies have to pay the market price for their inputs. Second if supply from Fonterra is the problem why not get milk from another source? Some entrepreneur could take advantage of the situation and offer an alternative supply of milk to firms like these cheese manufacturers. Third if companies are worried about supply then why not vertically integrate? Control over input supply is a common reason given for vertical integration.

A question

but not from me, its from Steven Landsburg and is about taxing the rich. Or more to the point not being able to tax the rich.

Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.

Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.

Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.

Ah, says Ms. Stevens — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of Ms. Steven’s confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.

So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else?

So, who pays the tax?

Hint: it isn't Mr Kendrick.
Hint 2: Money isn't wealth

Interesting blog bits

1. Matt Nolan on Black markets, crime, and costs

   Counting spending on illegal drugs as a “cost” to the economy is nonsensical – and that is what they have done hear. If the Australian government is annoyed it isn’t getting the tax revenue from it (which seems to be their focus), the solution is to legalise drugs and tax them.

2. Roger Kerr on Government Size And Economic Growth

   The Treasury’s focus is almost exclusively on deadweight costs and public sector productivity. The omission of any material discussion of rent-seeking, and public choice issues in general, is extremely important. The Treasury’s general framework presumes that governments spend money in order to overcome ‘market failures’ and fails to consider the more plausible proposition that they spend money in order to get re-elected or to favour their most important constituencies. There is no assessment of the level of spending that could be justified on genuine public interest grounds. Basically, incentives in the government sector are not a problem, so the paper implicitly assumes.

3. Lynne Kiesling on Next Restaurant: pricing and ticketing innovation redux

   Why are such savvy entrepreneurs as Achatz and Kokonas letting secondary sellers capture so much of the surplus that they have created?

4. Mark J Perry on Debunking the Mercantilist Trade Doctrine

   The general public, politicians, the media, and even some economists have bought into a false mercantilist doctrine that: a) exports are good for the economy and b) imports are bad for the economy, which therefore implies that: c) trade deficits are bad for the economy and d) trade surpluses are good for the economy.

5. Roger Kerr on Wages in China's Manufacturing Sector

   A positive relationship between productivity and wages. Or the days of cheap labour in China are coming to an end.

6. Peter Boettke gives Advice to Undergraduates
7. Tim Harford says Don’t blame the (mostly) efficient markets hypothesis

   The EMH has several forms. The weakest says that not only is past performance no guarantee of future performance, but nothing about the way a share’s price has bounced around in the past tells you anything about how it will move in the future. The strongest says that the market price is the correct price: that all privately and publicly available information that might be relevant to the value of a share is already reflected in today’s price. The weak form tells you not to listen to stock pickers who point to recently soaring shares. The strong form tells you not to bother doing any research into shares, because it cannot possibly do you any good.

8. Matthias Bauer, Peter Draper and Andreas Freytag on The “Seoul Consensus” on development: Substantial progress for sub-Saharan Africa or paperwork again?

   The global financial crisis also struck many developing countries, particularly in sub-Saharan Africa. In 2010, the G20 agreed on a “Seoul Action Plan”, which addresses the problems of the world’s poorest. This column analyses its message for sub-Saharan Africa. It argues that the G20 should really start energising the Doha round, taking fiscal stabilisation seriously, ensuring that exchange rates float, and guaranteeing that quantitative easing stops.

9. Matthias Bauer, Peter Draper and Andreas Freytag on After the “Seoul Consensus”: Ways to help sub-Saharan Africa return to pre-crisis economic performance

   The economic fate of developing countries since the global crisis has been in doubt. In the second of two columns on the “Seoul Consensus”, the authors argue that industrialised economies are not in a position to take the lead in initiatives to strengthen economic policy rationality on a global scale. Emerging economies should take the lead and push for the conclusion of the Doha Round.

10. Gary Becker on How to (and not to) Help Poor Families in Developing Countries Cope with Rising Food Prices

    During the current sharp run up in food prices, several food-exporting countries have banned, or greatly restricted, the ability of farmers to export their produce. This lowers the price of food to urban consumers in these countries, and thereby helps the urban poor. However, such bans reduce the prices received by poor farmers of these countries. This reduces their incentives to raise their production of food, and makes these farmers worse off. It also raises the cost of food to families in food-importing countries, and thereby hurts the poor in these countries. Since farmers in developing countries are generally much poorer than those who live in cities and other urban communities, the poor may overall be made worse off when countries greatly restrict their food exports.

Taming leviathan

The Economist magazine as an article noting that how to slim the state will become the great political issue of our times. An issue that governments in New Zealand could do a lot more about.

Attitudes to the big state have swung to and fro, from the liberal attack on patronage in the 19th century to the embrace of the social-democratic consensus after the second world war to Thatcherite privatisation in the 1980s. There are some signs that another rethink is imminent: witness the budget cuts in the euro zone, the battle between Wisconsin’s governor and the public-sector unions and David Cameron’s “Big Society” rhetoric. There is even the probability that the state’s share of GDP may slip back in the short term, as the recovery lifts the overall economy. But many efforts at reform are timid—witness the mendacious budgets produced in Washington by both Barack Obama and the Republicans and their refusal to touch entitlements. If nothing is done other than slimming a few departments, Leviathan will be on the march again.

Why? Because, despite all that rhetoric from the tea-partiers, big government is not just the fault of self-interested bureaucrats and leftist politicians. Conservative voters, even if they don’t like taxes, have kept on demanding that the state does more. Just as the left has built hospitals, announced endless programmes to help the poor and indulged the teachers’ unions, the right has built prisons, announced wars on drugs and terror, and indulged generals, farmers and policemen. And there are also two structural causes of big government. First, productivity in the state sector, especially in fields like education and health, has lagged behind the private sector. And second, there has been a huge increase in “social transfers”, especially benefits for the middle classes and the elderly.

To lose weight, governments have to do two things: learn how to do more with less, which means modernising the state, and cut back on what they offer, which among other things means tackling the social transfers. Both are inevitable, but the first offers the best chance of immediate gains.

The Economist ends the article by arguing,

Ideally, the next round of Western elections—especially the presidential one in America—will focus on that. Slimming the state is not an easy conversation. But consider the alternative: an ever fatter state, ever less freedom and ever higher taxes. In the 1990s much was made of the idea that capitalism had got so footloose that states were bound to get slimmer to compete for corporate favours. In fact companies proved more loyal than expected—and the state went on one last splurge. But talent and capital are getting more mobile; and the demographic pressure of those ageing populations is mounting. The ever larger state cannot go on for ever. It will stop.

One only hopes that the Economist is right.

What motivates entrepreneurs?

For pot entrepreneurs it appears to be a combination of money and a cause:

In many ways, medical marijuana entrepreneurs are no different than any other business start-ups: They need a business plan, venture capital and a fair dose of fortitude.

They also are likely to have something not generally found in most small-business owners: an activist streak.

More than half (58 percent) of those in the burgeoning industry say they started their businesses to promote expansion of medical marijuana or outright legalization, according to a report released last month analyzing the growing market. Only 12 percent said “financial opportunity” was their primary motivation.

As a comparison a survey conducted by the National Federation of Independent Business looking a business in general found that 29 percent of people making money was their primary motivator for starting a business.

Jeffrey Miron, director of undergraduate studies at Harvard's Economics Department, finds the data on cannabis entrepreneurs interesting — but not surprising.

"This has been a suppressed industry for decades. People have had to worry about jail time and asset forfeiture. So it is understandable that the people in this industry have a passion for social change," said Miron, who has studied and written extensively about drug prohibition. "And let's be very clear here: Making money and activism aren't mutually exclusive. They can do both."

So pot growers are entrepreneurs, both economically and socially.

There are no solutions only trade-offs

or so said Tom Sowell. At Offsetting Behaviour Eric Crampton notes that, Some days, you just can't get rid of a dictator. He writes,

The New York Times suggests one impediment to getting rid of Qaddafi is that there's no place to which he can flee and consider himself safe from prosecution.

Qaddafi of course should be prosecuted in a first best world. But if we're choosing among second best worlds, the one where he has an exit option and lives on without being punished - and his people are freed - rather likely dominates the one where he doesn't and has to fight on 'till the end.

The trade-off here seems to be between making sure that would be dictators know they will be held accountable for their actions which (hopefully) will make it less likely that they will become dictators in the first place and the fact that holding dictators accountable makes it less likely they will want to give up power.

A trade-off for which there is no first-best solution.

Does economic growth reduce poverty?

Not according to the OECD. Sam Bowman at the Adam Smith Institute blog writes,

The OECD’s annual Society at a Glance report was released this week. The TUC’s Touchstone blog had a post up earlier, highlighting the OECD’s claim that economic growth has not reduced poverty:

However, economic growth and poverty have not been strongly related within the OECD in the past generation. There is little evidence of a relationship between poverty and household income growth in either a positive or negative direction. For example, Ireland has had very rapid income growth over the period and a large rise in poverty, while income growth has stagnated in Belgium in combination with a considerable reduction in poverty.

Bowman then highlights one odd feature of the OECD study,

A bigger problem is the definition of poverty, which is relative and considered within single countries. It’s quite misleading to claim that Irish economic growth didn’t reduce poverty. The OECD uses a relative definition of poverty – the "percentage of persons living with less than 50% of median equivalised household income". Poor people in Ireland (and Belgium) are a lot less poor than they were thirty years ago with regard to the options they have available to them. The gap between them and the rich might be wider, but this matters less to most people than their life expectancies, economic security levels, and other absolute values. Saying that economic growth made poor people a lot richer but rich people even more rich is quite different to saying that “economic growth and poverty have not been strongly related within the OECD in the past generation”.

With a relative measure of poverty the poor will always be with us, no matter how rich we all are.

Bowman ends by pointing out,

The standard measure of inequality, the Gini coefficient, gives Tanzania and Malawi a more “equal” score than New Zealand and Japan. I know where I’d rather be, rich or poor. The measure of inequality itself is not worthless, but defining poverty as inequality within one country certainly is. By any measure of actual outcomes, economic growth is good for the poor. And if a measure of poverty doesn’t reflect that, it’s a bad measure.

A free book well worth your time

at least according to Gregory Mankiw. The book is Policy and Choice: Public Finance through the Lens of Behavioral Economics by William J. Congdon, Jeffrey R. Kling, and Sendhil Mullainathan. It is available from the Brookings Institution Press here.

An interesting question is what effect will making it available free on the web will have on sales of the "real" book version.

Rational voters & democratic failure

A video of the famous (infamous?) 2007 debate between Bryan Caplan and Donald Wittman on "Rational Voters & Democratic Failure" is now available.

Bryan Caplan-Donald Wittman Debate from GMU Econ Society on Vimeo.

Is anyone surprised by this result?

From a new NBER working paper, Coups, Corporations, and Classified Information by Arindrajit Dube, Ethan Kaplan and Suresh Naidu. NBER Working Paper No. 16952

We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves.There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.

It will come as no surprise to anyone to learn that during the Cold War covert operations conducted by intelligence agencies were a key component of superpower foreign policy. In particular in the case of the U.S., many of these operations were carried out with the expressed goal of replacing "unfriendly" regimes. Such regimes were often ones that had expropriated multinational U.S. based corporate property. These operations were planned under extreme secrecy. Given corporate property was always restored to the multinational after a successful regime change, these operations were potentially profitable to companies which had been nationalised previously.

If foreknowledge of these operations was truly secret, then pre-coup asset prices should not reflect the expected future gains - assuming the coup would be successful. However, what this paper shows is that not only were U.S.-supported coups valuable to partially nationalized multinationals, but also, asset traders arbitraged supposedly "top-secret" information concerning plans to overthrow foreign governments.

Price gouging interview on the radio

Michael Giberson of the Knowledge Problem blog was interviewed April 15, 2011, by Mark Edge, of the Free Talk Live radio show. They talked about price gouging.

Be warned he interview starts at about the 2:05:00 mark in the program.

Estimating the return to college selectivity over the career using administrative earning data

This is the title of a new working paper by Stacy Dale and Alan B. Krueger.

The abstract reads:

We estimate the monetary return to attending a highly selective college using the College and Beyond (C&B) Survey linked to Detailed Earnings Records from the Social Security Administration (SSA). This paper extends earlier work by Dale and Krueger (2002) that examined the relationship between the college that students attended in 1976 and the earnings they self-reported reported in 1995 on the C&B follow-up survey. In this analysis, we use administrative earnings data to estimate the return to various measures of college selectivity for a more recent cohort of students: those who entered college in 1989. We also estimate the return to college selectivity for the 1976 cohort of students, but over a longer time horizon (from 1983 through 2007) using administrative data.

We find that the return to college selectivity is sizeable for both cohorts in regression models that control for variables commonly observed by researchers, such as student high school GPA and SAT scores. However, when we adjust for unobserved student ability by controlling for the average SAT score of the colleges that students applied to, our estimates of the return to college selectivity fall substantially and are generally indistinguishable from zero. There were notable exceptions for certain subgroups. For black and Hispanic students and for students who come from less-educated families (in terms of their parents’ education), the estimates of the return to college selectivity remain large, even in models that adjust for unobserved student characteristics. (emphasis added)

So being smart is what its all about. The university you go to may not add much.

EconTalk this week

Mike Munger of Duke University talks with EconTalk host Russ Roberts about microfinance. Munger argues that cultural forces make it difficult for some families to save, and the main value of microfinance is to allow a higher level of savings. Families are willing to save via microfinance even though returns can be negative. Munger argues that this counterintuitive result is possible when other means of savings are unavailable. Munger also discusses microfinance that is used for entrepreneurship and the potential role for microfinance in development.

Do cellphones cause brain damage?

From Alex Tabarrok at Marginal Revolution.

Siddhartha Mukherjee, author of the acclaimed The Emperor of All Maladies: A Biography of Cancer, asks do cellphones cause brain cancer? Mukherjee does a good job laying out different research designs–experimental, epidemiological, retrospective and prospective case-control studies–and their potential confounds. The best extant studies find little, no, or even a small beneficial effect, and thus Mukherjee concludes that as of now the evidence remains “far from convincing.”

One less thing to worry about. So don't worry, be happy!

Milk price regulation would be 'collective suicide'

Well 'collective suicide' may be going too far, but this article from stuff.co.nz does make some good points. It is not yet clear that milk price regulation is a good idea.

The article states,

New Zealand would be committing 'collective suicide' if the government agreed to demands for an independent commission to set the domestic milk price, claims Fonterra chief executive Andrew Ferrier.

"It would be an astonishing backward step for New Zealand – every aspect of our international trade policies is around free markets," Ferrier said in response to industry campaigners taking their call for a milk price regulator to Minister of Finance Bill English. "It would be a massive step back to the dark ages. There are internally established milk prices in the US and Europe and it is commonly known to be their failure. It is everything we have been lobbying against for 30 years [in overseas markets]."

Apart from getting the government some brownie points with voters it's not clear what problem regulation of milk prices is going to fix.

The stuff article continues,

A complaint to the Commerce Commission alleging Fonterra is artificially inflating the milk price, thereby distorting wholesale and retail prices, proved the tipping point for the competition watchdog, which has announced a preliminary investigation of the domestic market.

As I have said before I'm not sure how "artificially inflating the milk price" is anti-competitive. The higher the price, the more competition is attracted.

"When governments intervene in industries they cause enormous secondary problems that are not easy to foresee."

He cited the example of Argentina, about four years ago. When world prices were too high for the domestic market's liking, the government set a domestic market price.

"Literally within weeks, all the major dairy companies figured 'we can't afford to sell at that price' so they started exporting more. Why wouldn't they? To stop the exporting [increase] the government put on an export tax ... it actually bankrupted some companies. The legal implications are mind-boggling."

If you can sell in two markets, one of which pays you more than the other, it seems obvious which one you will sell in.

"The question is, what problem are they trying to solve? The Fonterra milk price is really very simple. It is the returns [to Fonterra] of the world market, minus the costs of making the powder to sell in world markets."

And this is the real question: are we paying the world price? If so, what is the problem?

The folly of the Economics of Happiness

Over at the IEA blog Paul Ormerod makes a simple point about the folly of the economics of happiness.

The fact is that the measured happiness data over time does not tell us very much at all. People have to fill in a survey on a scale of 1 to 3, 1 to 4 or even 1 to 10, of how happy they are. In prosperous Western societies, most people are fairly content most of the time. And this is reflected in the answers. But the key thing here is that almost by definition, the average happiness across a sample of such people cannot go up very much. This simply reflects the way it is measured. No-one can be more happy than the top number on the scale, so once you have answered ‘3’ or ‘10’ or whatever, there is nowhere for you to go but down!

So if we are happy now it's not clear that we can ever be more happy in the future,simply because of the way we measure these things.

Lies, damn lies and politicians

From Russ Roberts over at the Cafe Hayek blog:

A Congressional Budget Office analysis of the fiscal 2011 spending deal that Congress will vote on Thursday concludes that it would cut spending this year by less than one-one hundredth of what both Republicans or Democrats have claimed.

A comparison prepared by the CBO shows that the omnibus spending bill, advertised as containing some $38.5 billion in cuts, will only reduce federal outlays by $352 million below 2010 spending rates. The nonpartisan budget agency also projects that total outlays are actually some $3.3 billion more than in 2010, if emergency spending is included in the total.

And so says you can't believe what politicians tell you?!!

Is economic theory inherently pro-market?

An interesting question asked by rauparaha over at TVHE. The answer is, unfortunately, no. To put it simply, as was pointed out in the socialist calculation debate, if you accept the basic general equilibrium model and replace the auctioneer with a central planner, socialism works very nicely thank you.

Rauparaha goes on to say,

So when I was reading an article in the JPE today it was refreshing to come across this:

The question whether – and why – markets may perform better than governments has fascinated economists for a long time, at least since the work of Hayek (1945). However, despite the importance of this question for economics and beyond, it is still hard to find formal arguments for why markets may be able to outperform a benevolent government. Instead, the benchmark result is still provided by standard welfare theorems according to which a benevolent government can always replicate the market outcome, or even improve upon it if the market is affected by failures such as adverse selection or externalities.

A point worth making here is that the "standard welfare theorems" assume complete contracts. But as Oliver Hart has noted,

[...] if the only imperfections are those arising from moral hazard or asymmetric information, organisational form – including ownership and firm boundaries – does not matter: an owner has no special power or rights since everything is specified in an initial contract (at least among the things that can ever be specified). In contrast, ownership does matter when contracts are incomplete: the owner of an asset or firm can then make all decisions concerning the asset or firm that are not included in an initial contract (the owner has ‘residual control rights’).

So under complete contracts any organisational form can mimic any other organisational form so that the fact that the government can do as well as the private sector under these conditions is no great surprise. To show that private and government ownership differ in their outcomes requires an incomplete contracts framework. This is, of course, why the formal theory of things like privatisation and the theory of PPPs now works from within an incomplete contracts model.

Thus for rauparaha to get "formal arguments for why markets may be able to outperform a benevolent government" it will be necessary to think about the welfare theorems under incomplete contracts, and I don't know if anyone as moved GE in this direction yet.

CFP: Economics and Strategy of Entrepreneurship and Innovation

Picked up from the Organizations and Markets blog:

CALL FOR PAPERS

Journal of Economics & Management Strategy (JEMS)
Economics and Strategy of Entrepreneurship and Innovation III

JEMS is planning a third special issue on the economics and strategy of entrepreneurship and innovation. JEMS welcomes both empirical and theoretical contributions.
Possible topics include:

• Economics of entrepreneurship
• Innovation and entrepreneurship
• R&D and the entrepreneur
• Intellectual property rights and the entrepreneur
• Entrepreneurship and the theory of the firm
• Entrepreneurship and finance
• Entrepreneurship and industrial organization
• Entrepreneurship and economic growth

Submissions to JEMS will be subject to the standard peer-review process. The submission deadline is July 1, 2011.
To submit a manuscript to JEMS, visit ScholarOne at http://mc.manuscriptcentral.com/jems
If you have any questions about JEMS, please contact Susie Caruso at editjems@kellogg.northwestern.edu.

Interesting blog bits

1. Tim Worstall On George Soros and Keynes
   

   This is going to sound very conspiratorial so it’s an observation, not an insistence that this is some new found truth.

2. Tim Harford on Why banks are going to auction
   

   In 1873, Walter Bagehot famously argued that in a banking crisis, the Bank of England should be willing to lend “freely and readily” in exchange for good collateral. This view seemed quaint five years ago, when international capital markets were willing to pay cash for the most illiquid-seeming assets, but it quickly became relevant during the credit crunch.

3. Matt Nolan In defence of the “low wage advantage call”

   I can’t say I agree with the attacks on Bill English’s comment that NZ has a comparative advantage over Australia because labour is cheaper.

4. Robert Higgs on why Mexicans Are Fed Up with the War on Drugs

   A few days ago, tens of thousands of Mexicans in scores of Mexican cities participated in public protests against the War on Drugs and the use of the Mexican army as anti-drug warriors. The violence that has accompanied the Mexican government’s attempts to defeat the drug dealers during the past several years has claimed perhaps as many as 40,000 lives. Some cities, especially Ciudad Juarez, across the river from El Paso, Texas, have become virtual battlefields.

5. Not PC on Swimming in the path of progress

   So a ragtag bunch of anti-industrialists has headed out to sea in boats made with petro-chemicals and powered by fuel oil to protest about oil exploration and the prospective production of petro-chemicals 30km off the coast of New Zealand.

6. Yuqing Xing on How the iPhone widens the US trade deficit with China

   What can the iPhone tell us about the trade imbalance between China and the US? This column argues that current trade statistics greatly inflate the value of China’s iPhone exports to the US, since China's value added accounts for only a very small portion of the Apple product's price. Given this, the renminbi’s appreciation would have little impact on the global demand for products assembled in China.

7. Nicholas Bloom, Aprajit Mahajan, David McKenzie and John Roberts on “The Office” goes to India: Why bad management is keeping India poor

   “The Office”, a popular British television programme, has been shown in more than 50 countries. Its international appeal likely stems from its universal theme: managerial incompetence. This column looks at the case of India and shows how the poor management of its companies is holding the country back.

8. Not PC on a Snail’s pace

   When will temporary housing be built in Christchurch?

9. Roger Kerr on The truth about privatisation: blog #9

   Last week’s National Business Review (April 8) carried an excellent article by Duncan Bridgeman based on an interview with Professor William Megginson of the University of Oklahoma who was attending a conference in Queenstown.

10. Gavin Kennedy On Adam Smith’s Alleged theism

    Was he or wasn't he religious?

The role of independent fiscal policy institutions

Economist Lars Calmfors, of the Institute for International Economic Studies, at Stockholm University, has been look at this issue. He has a new paper out on The Role of Independent Fiscal Policy Institutions

The abstract reads:

The paper analyses how independent fiscal watchdogs (fiscal policy councils) can strengthen the incentives for fiscal discipline. Several countries have recently established such institutions. By increasing fiscal transparency they can raise the awareness of the long-run costs of current deficits and increase the reputational costs for governments of violating their fiscal rules. Councils that make also normative judgements, where fiscal policy is evaluated against the government's own pre-set objectives, are likely to be more influential than councils that do only positive analysis. To fulfil their role adequately, fiscal watchdogs should be granted independence in much the same way as central banks. There are arguments both in favour and against extending the remit of a fiscal policy council to include also tax, employment and structural policies. Whether or not this should be done depends on the existence of other institutions making macroeconomic forecasts and analysing fiscal policy, the existence of institutions providing independent analysis in other economic policy areas, and the severity of fiscal problems.

An independent fiscal watchdog is another idea the New Zealand government could consider if it really does want to improve the country's economic outlook.

Lessons for New Zealand

Brink Lindsey has a new study out: Frontier Economics: Why Entrepreneurial Capitalism Is Needed Now More Than Ever.

According to the Kauffman Foundation,

Lindsey's analysis focuses on the evolving requirements of economic growth as countries grow richer. "Imitative growth," which comes from applying existing knowledge, becomes less important; "innovative growth," which comes from new ideas, becomes more important. The world economy has entered an era of "frontier economics," Lindsey says in the report, as growth is increasingly something that takes place at the technological frontier.

According to the paper, when countries are poor and less advanced, the economic future is relatively predictable. The example of rich countries allows policymakers in less developed countries to peek into the future and see the economic changes that need to be made. Consequently, there is less need for market competition to guide the course of development. But as countries successfully pursue "catch-up growth" and approach the technological frontier, the future grows increasingly uncertain. Now innovation, rather than imitation, is the key to continued progress, and the ceaseless trial-and-error experimentation of competitive markets becomes indispensable.

and

The richer nations get, the more they "rely on innovation to keep growth going – and, therefore, the more we need free-market policies that foster the creation of new businesses and the implementation of new ideas," Lindsey said in the report. "If we are to rise out of the current slump and launch a new, 21st-century boom, it is in the direction of freer, more competitive markets that our policies must turn."

So we need policies supporting innovation, policies that allow markets to work in developing new ideas, business and products. I just hope the new productivity commission is taking note.

Macro is not having a good day

Over at the Stumbling and Mumbling blog Chris Dillow writes,

Paul Walker wonders whether we need macroeconomics at all. He says: “Maybe aggregate economics just doesn't work, we lose too much valuable information in the process.”
I agree. Today’s labour market numbers show the point.
They show that, in the three months ending in February, aggregate hours worked rose by 1.2%, thanks to a 1.1% rise in full-time employees. However, the NIESR estimates (pdf) that in this period, real GDP grew just 0.1%. This means that productivity fell sharply in the quarter, and rose by just 0.2% in the last 12 months.
Conventional macroeconomics says this shouldn’t have happened. Productivity fell in the recession because firms hoarded labour. But they should have unwound this in the upturn with the result that productivity should have risen, with a smaller rise in employment.
So why hasn’t this happened? One possibility is that the aggregate data hides sectoral shifts.

See here for more on Chris's example.

Antitrust as industrial policy: lessons from the Intel case

Alberto Mingardi has been blogging on this subject at the AEI blog. He writes,

Intel has been the last in a series of antitrust cases targeting hi-tech companies: the European Commission found it guilty of abusing its dominant position, for its conduct towards a group of Original Equipment Manufacturers (OEMs) and a German retailer. The ruling is based on the principle according to which a supplier enjoying a dominant position should not bind to itself customers or distributors: its conduct is considered abusive.

Picture yourself entering a shop and being granted a conspicuous discount by the seller. Would you feel abused? The Commission’s allegation is that, since the discount was given to you by the shop which is already the most prominent in town, competition is negatively affected as others won’t be able to compete in a stronger way. And if your demand is met by the dominant seller’s supply, competitors will be slower at getting to the market with their new products.

The microchip market is now dominated by two participants, Intel and AMD. But has consolidation negatively affected competitive development? Looking at prices [...] it doesn’t really seem so, as the trend shows declining prices. Performances increased sharply too: as anybody who had a computer in 1996, and has one now, can easily testify.

Would innovation have been faster under another market structure? The question is interesting, but should we allow political authorities to determine market structures, assuming that they know better?

So the European Commission thinks lowering price is wrong and I'm guessing that they would also consider raising prices wrong as well, so what is left? I'm reminded of the following quote from William Landes on why Coase gave up antitrust,

“Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.”

–William Landes, “The Fire of Truth: A Remembrance of Law and
Econ at Chicago”, JLE (1981) p. 193.

How can Intel be accused of anti-competitive behaviour when it was giving "hidden discounts" to to computer makers? A real anti-competitive monopolist, with real market power, acting in a truly anti-competitive way, would be in a position to raise prices, not lower them.

The death of macroeconomics

Like me Tim Worstall has been thinking about the death of macroeconomics and makes a good point:

But there’s another reason I’m really not all that fond of macro: the uses to which it is put. Or the use, which is to tell politicians what they should do. And given my entire lack of trust in politicians to do the right thing, I’d rather they didn’t even try. I’d prefer that they concentrate on those micro things, most especially that they concentrate on not screwing up prices, incentives and all the rest, as a result of their grand plans.

It’s all a bit John Cowperthwaite really. He wouldn’t let anyone collect GDP figures for Hong Kong because he was aware that people would only try and do things with them. Given that everything seemed to be going just fine without anyone doing anything with GDP figures, best to not let the fools have any peg to hang their hats for action on.

So it is with macroeconomics in my more cynical moments. We don’t want to study it because politicians will only use it as an excuse to do things.

The last thing we need to do is to encourage politicians to do ... anything.

The end of macro?

Over at the EconLog blog Arnold Kling writes,

I was born at the wrong time. I attended graduate school near the peak of ultramasculine economics (my term). The math was almost too much for me (in fact, five years later it would have been too much for me). I have always doubted the value of the theorem-proving approach to economics. I note that these days many people are sharing my doubts about the mathematical macro that emerged during what Paul Krugman calls the "Dark Age." However, unlike Krugman, I do not think that we can simply go back to old Keynesianism. I think that there were many problems with Keynesianism circa 1970 that were not solved by coming up with mathematical solutions for the Lucas critique. The Leamer "con" of econometrics problem and the "unit root" problem are what caused me to "lose my religion" regarding macroeconometric models.

Here's a thought. May be the problem is not with the maths or stats of macro but with the actual idea of macro itself. May be aggregate economics just doesn't work, we lose too much valuable information in the process. May be the costs of aggregation are just too high, we need to look at the micro level for solutions to so-called macro problems. For example unlike the macro-level data, micro-level data provides little evidence in support of Solow's productivity paradox to do with the effects of computers in the economy. While the macro level data can tell us that something has changed, as it did mid-90s in the U.S., it can not tell us what changed and why. The productivity data is the aggregated result of changes at the micro level, in this case at the level of the firm. Such changes require a microeconomic explanation. Would it not be better if we were to go back to thinking about issues like unemployment and monetary theory as microeconomic issues. We could see unemployment as a problem to do with labour markets and interest rates as relative prices, monetary policy as having to do with the supply and demand of money etc. Do away with teaching students AD/AS analysis from day one and just teach them about markets and consumers and producers instead.

Jeff Miron on healthcare reform

Relative prices v. inflation

At Offsetting Behaviour Eric Crampton writes,

RBNZ rightly looks through the one-off hike in price levels that came with the GST increase. That's not inflation. But that level shift working its way into wage settlements would be.

From the latest survey of employers:

* Roughly a third say that the GST increase has been or is expected to be a factor in future wage negotiations (see Table 68)
* A majority of large (50+ employee) firms say wages and salaries either take account of past inflation outcomes, take account of expected future inflation, or are contractually linked to inflation (Table 67). Note that headline inflation numbers will include the GST hike.

I don't get it. Why would the RBNZ worry about a change in wages. Such a change is a change in a relative price, not a change in the price level. Or does the RBNZ believe in cost-push inflation. Oh dear!

EconTalk this week (updated)

Dani Rodrik of Harvard University talks with EconTalk host Russ Roberts about trade, the labor market, and trade policy. Drawing on a recent paper with Margaret McMillan on trade and productivity, Rodrik argues that countries have very differing abilities to respond to increases in productivity that allow production to expand using fewer workers in a particular sector. When workers are displaced by productivity increases, what is their next best alternative? Rodrik discusses how this varies across countries and policies that might improve matters. He argues that poor countries should subsidize new products as a way of overcoming uncertainty and externalities from new ventures.

Update: See also Rodrik and externalities.

The bailouts of General Motors and Chrysler

Bad, very bad, for both the economy and the rule of law. Todd Zywicki, who is in the George Mason University School of Law, writes on The Auto Bailout and the Rule of Law in National Affairs.

The bailouts of General Motors and Chrysler have been held up by President Obama and his supporters as a great success story — proof that, by working together, government and business can save jobs and strengthen the economy. But this popular narrative is dangerously misleading. Far from a success story, the events surrounding the bailouts offer a cautionary tale of executive overreach. And their example clarifies the Obama administration's broader approach to economic policy — an approach that is both harmful to economic growth and dangerous to the rule of law.

and

Of course, this "success narrative" is based on a particular reading of the events surrounding the bailout. According to that reading, the nature of the '08 financial crisis — as well as the economic importance of the auto industry — meant that the government simply could not let GM and Chrysler go under. But at least the unprecedented cooperation between the government and the automakers was undertaken in a deliberate, careful way — using the government's special authority to contend with the economic crisis in order to guide the companies through an orderly re-organization (rather than the dreaded chaotic collapse). As a result, the companies were saved, and now they have a chance to thrive again.

Unfortunately, every part of this reading of events is wrong.

Zywicki contiues

Every piece of the "success story" of the auto bailout would thus seem to be in error. The bailout was not absolutely necessary and was pursued by means of dubious legality; the bankruptcies were highly irregular and inefficient; and the companies that have emerged from bankruptcy are far from lean and fit. They are certainly in no position to repay taxpayers for the generous loans they were given.

But as bad as the facts of the story are, the implications are much worse. Through their actions, both the Bush and Obama administrations have set dangerous precedents — and made it much more difficult to reverse the trends of executive overreach and excessive government entanglement with private business.

As a matter of policy, the Bush interventions early in the process were more ad hoc affairs, motivated largely by panic in the midst of the economic crisis. This was particularly true of Treasury Secretary Henry Paulson, whose performance in the final months of the Bush administration was disgraceful. But it is hard to avoid the conclusion that, at its core, the Bush approach was also influenced by the imperious view of executive power that had developed in the course of the war on terror and had been supported by some conservative thinkers for much of Bush's presidency. The notion that the president simply must do whatever he judges necessary in an emergency — regardless of whether he has the formal legal authority to do it — is among Bush's foremost legacies. The concluding months of his presidency should offer a cautionary tale to conservatives inclined to adopt that view of executive power.

The Obama administration's role in this story, however, is far more troubling. One cannot explain away Obama's overreach as a panicked response to an emergency; rather, his actions toward GM and Chrysler were part of a considered, coherent approach to the relationship between government and private industry. And this approach — defined by broad government power unchecked by legal constraints and possessing sweeping authority to pick winners and losers — has guided the administration's policies well beyond the auto bailout. The aim of this approach is to rejuvenate the New Deal vision of the regulatory state, in which regulators are seen as disinterested experts with the factual knowledge, practical wisdom, and unwavering integrity to manage the economy. They alone are presumed to be capable of steering the nation toward prosperity.

It was this approach that clearly animated, for instance, the financial-reform legislation enacted by President Obama and the Democratic Congress last year. Just as the government was seen as having the wisdom to micromanage the restructuring of Chrysler and General Motors, so the new financial-reform law creates a vast web of regulatory bodies and presumes that they will have the know-how to successfully reshape America's entire financial system. The same basic pattern can be seen in several of the Obama administration's other legislative achievements — from the massive 2009 stimulus package to the health-care reform bill to a host of environmental regulatory initiatives.

Taken together, these laws have dramatically worsened the entanglement of government and the private sector, and have thereby led to an increase in lobbying activity by special interests seeking government favors or protection. The financial-reform law, for instance, is littered with special-interest provisions intended to entice major corporations into supporting the administration's new approach to economic policy. Auto-finance lenders are inexplicably exempted from the jurisdiction of one of the law's new creations, the Consumer Financial Protection Bureau, thereby sparing them (and the influential auto dealers they work with) from the regulatory costs and hassles caused by the CFPB. The nation's biggest banks, too, ultimately came to support the creation of the CFPB, as they recognized that its heavy regulatory burdens would be borne much more easily by large institutions — which can more readily afford to hire lobbyists and lawyers to help navigate the law's complexities — than by their smaller competitors.

Other examples abound; among them, the most outrageous is probably the sweeping health-care law enacted last year. The legislation had the support of America's major health insurers — likely because the law made them the first suppliers in American history to see the federal government mandate the purchase of their product by every single citizen. The opposition of pharmaceutical manufacturers, too, was significantly dampened; presumably this had something to do with the administration's promises of increased market demand for their products. Even the American Medical Association — which should have been representing the interests of doctors, who will face enormous difficulties under the law — rolled over, partly to obtain a repeal of rules that had limited certain Medicare reimbursements. Again and again, large corporate actors and other organizations have been willing to sell some freedom of action in return for a competitive advantage provided by the government.

Zywicki ends by noting,

The Obama administration's economic policy, therefore, returns us to the thinking of the 1950s and '60s — to an economy in which big business, big labor, and big government are tied together in a relationship of mutual succor and support.

The auto bailouts exemplify this new reality. Sold as a means of revitalizing the economy, they are in fact a means of transforming the relationship between the state and the market in a way that empowers large players at the cost of economic growth. The overall effect of such state capitalism is a kind of controlled stasis, in which the preservation of old jobs takes priority over the creation of new ones. Managed decline, rather than dynamic growth, is the defining feature of the Obama economy.

There are good reasons why you want a separation of Church business and State. Business backed by the power of the state may be good for business, but its hard to believe it will be good for growth, entrepreneurship or the consumer. This is something worth keeping in mind given the way the current New Zealand government seems to want to intervene in business.