Are rights always right?

The Winter 2020 issue (vol. 34, no. 1) of the Journal of Economic Perspectives contains an article that looks at The Consequences of Treating Electricity as a Right, by Robin Burgess, Michael Greenstone, Nicholas Ryan and Anant Sudarshan (pp. 145-69).

Abstract

This paper seeks to explain why billions of people in developing countries either have no access to electricity or lack a reliable supply. We present evidence that these shortfalls are a consequence of electricity being treated as a right and that this sets off a vicious four-step circle. In step 1, because a social norm has developed that all deserve power independent of payment, subsidies, theft, and nonpayment are widely tolerated. In step 2, electricity distribution companies lose money with each unit of electricity sold and in total lose large sums of money. In step 3, government-owned distribution companies ration supply to limit losses by restricting access and hours of supply. In step 4, power supply is no longer governed by market forces and the link between payment and supply is severed, thus reducing customers' incentives to pay. The equilibrium outcome is uneven and sporadic access that undermines growth.

Making something a "right" can have negative unintended consequences.

Peter G. Klein on government and big business

This video was recorded at the Mises Institute in Auburn, Alabama, on 29 July 2016.

Does a CEO have a duty to lobby?

This question is asked by Luigi Zingales at the Pro-Market (irony anyone) blog. Zingales writes,

If we limit ourselves to describing what businesses do (what we call positive economics), then the answer is obvious. Most CEOs lobby heavily. Not only do they do it, their main investors tell them to do so, as confirmed here by Larry Fink, CEO of Blackrock and one of the largest institutional investors in the world. They lobby not just to redress grievances, but to shape the rules of the game to their own advantage. Alphabet (Google) is not a regulated company (at least in the classical sense of the word), but it is one of the companies spending the most on lobbying. Why? Not only to defend the right to use the massive data it collects, but also to proactively shape the business environment in its favor. Whether one supports “net neutrality” or opposes it, he has to agree that net neutrality greatly favors Google, which fears being charged directly for the massive internet use it generates, while it penalizes telecom companies, which cannot price-discriminate to recover the fixed costs of the network they build. Not surprisingly, Google lobbies very heavily in favor of net neutrality, while telecom companies lobby against it.

Now notice how a socialist like Zingales frames this issue. The problem here is the actions of the evil CEOs out to rape, murder and pillage his way around the world in the name of corporate profits [insert Vincent Price evil laugh]. The evil CEO forces the poor hapless but nice, caring and social welfare maximising politician  [insert mental images of bambi frolicking through the forest]  to do his evil bidding.

But wait. The CEO only lobbies to increase corporate profits [insert more Vincent Price evil laughs], so if the politician [more mental images of bambi frolicking through the forest] took the US government's advice and "just said no" the whole problem would go away. With no payoff to lobbying but still having to pay the costs of lobbying, the CEO [more Vincent Price evil laughs] would find lobbying loss making and thus stop. To take the Google example above, if the government just ignored Google on net neutrality what is the point of lobbying?

The problem with the loony left approach here is that it is framed as a problem with the actions of the firm (of course) and not as a problem with the actions of government. The question that Zingales should have asked is, Does a politician have a duty to ignore lobbying? For a trade to take place there has to be both a supply and a demand. Firms supply lobbying only because politicians demand it.

In addition note that Zingales is against firm's lobbying but makes no comment on lobbying by any other group. Why? If lobbying by firms is wrong why isn't lobbying by trade unions or professional bodies or churches or ....... Why just firms?

Four principles for an effective state

The following four principles come from the 2014 Nobel prize winner in economics Jean Tirole. The original column was posted at VoxEU.org on 16 July 2007 (reposted 13 October 2014). Tirole argues that for the French state to meet the expectations of its citizens the state will have to become more effective. To do this requires, in Tirole's view, a four-pronged approach: restructuring, competition, evaluation and accountability.

Restructuring
Many countries have undertaken fundamental governmental reforms based on a consensus between political parties and unions. In the 1990s, the Swedish Social Democrats government made large cuts in the civil service. Ministers, who formulate overall strategy and make decisions on resource allocation, have to rely on a small number of civil servants. Operational details must therefore be delegated to a large number of independent agencies, each of which can recruit and remunerate their employees as they choose. These independent agencies operate under strict budgetary limits that ensure the sustained delivery of public services.

Around the same time, Canada cut government expenditure by 18.9% without social turmoil – and without greatly reducing health, justice, or housing programmes. They did this while maintaining tax levies, so the result was a reduced public deficit and falling public debt. Spending that could not be clearly justified in terms of the resulting service to the public was pruned. Subsidies for entrepreneurial projects and privatisation facilitated the elimination of one in six positions in the civil service. Indeed the sort of government reorganisation undertaken in Canada could only be dreamed of in France with its often nightmarish collection of laws and fiscal regulations. The Canadians have a single service for the calculation and collection of taxes and a one-stop-shop for government-business relations.

Competition
Contrary to common beliefs in France, head-on competition can produce high quality public services. In telecommunications, most countries, including France, have put a universal service obligation fund in place, which is compatible with competition between providers. It protects the smallest firms while ensuring that services are available in all regions of the country or to poor consumers.

When it comes to education, several countries (Belgium, the UK, Sweden) have tried voucher systems that give everyone access to education but create competition among schools for students. Such a system must be accompanied by clear and openly available information on schools so parents can make informed choices and “insider-ism” can be avoided (something that arose from the competition among the tracks in the French education system).

Competition can also be created via standardisation. In the healthcare realm, using more systematic comparisons between hospitals, or between the private and public sectors could help control costs. Sometimes the cost of treatment for a given disease varies by a factor of 2.5 with the variation having nothing to do with patient selection.

Evaluation
Every action of the State must be subject to a double independent evaluation. The first should be before the action: Is public intervention necessary? What are the costs and benefits? The second is after. Did it work? Was it cost effective? On this point, it would be necessary to require that the audit recommendations (for example, those of the Audit Court) be either followed according to a strict schedule, or rejected with a convincing justification.

Accountability
The 2001 Law (LOLF), adopted on the basis of a left-right consensus, is a small revolution in a country accustomed to the logic of budgetary processes. Embracing the logic of effectiveness, the law aims to transform public sector managers into true owners where their obligation to produce results goes hand in hand with the freedom to manage. Putting this principle into practice is certainly difficult. First of all, the objectives need to be clear and easily verifiable. Then, “accountability” must be introduced. For that, the objectives can’t be collective (as the failure of control of health expenses has shown), but must be the subject of rewards or sanctions. Lastly, one should be wary of the pernicious effects of “multi-tasking”. Incentives that are related to an easily measured objective (for example, the cost per student for a university, which can be easily reduced by teaching large numbers of students in large lecture halls) can cause one to ignore equally important objectives that one has neglected to measure (such as the quality of teaching or research). In other words, to construct good incentives, one has to evaluate actions comprehensively. That way, it’s clear that giving regulated enterprises more responsibility should go hand in hand with stricter safety and quality controls. The need for such controls is clear from the experience of British telecoms in 1984 and more recently, of British railways.

The French state does have something of a bad history when it comes to effectiveness. For example the French SOEs have not always been run well. In 1997, for example, the Economist magazine (`Banking's Biggest Disaster', vol. 344 issue 8024 July 5: 69-71) noted the near-bankruptcy of the then state-owned bank Credit Lyonnais. The magazine pointed out that the then French finance minister Dominique Strauss-Kahn had to admit that the bank had probably lost around Ffr100 billion (around US$17 billion). The bank had to be bailed out three times in the 1990s. The total cost to the French taxpayer of the whole debacle has been estimated at between US$20 and US$30 billion. Improving on such a record shouldn't be too difficult.

Dishonesty and selection into the government sector

An often stated reason for going into the government service is to "do good", in some sense. That is, people who enter the government sector are driven by high prosocial and ethical standards.

Or are they?

For India at least the answer may be no. Rema Hanna and Shing-Yi Wang have an NBER working paper where they look at Dishonesty and Selection into Public Service. The abstract reads,

In this paper, we demonstrate that university students who cheat on a simple task in a laboratory setting are more likely to state a preference for entering public service. Importantly, we also show that cheating on this task is predictive of corrupt behavior by real government workers, implying that this measure captures a meaningful propensity towards corruption. Students who demonstrate lower levels of prosocial preferences in the laboratory games are also more likely to prefer to enter the government, while outcomes on explicit, two-player games to measure cheating and attitudinal measures of corruption do not systematically predict job preferences. We find that a screening process that chooses the highest ability applicants would not alter the average propensity for corruption among the applicant pool. Our findings imply that differential selection into government may contribute, in part, to corruption. They also emphasize that screening characteristics other than ability may be useful in reducing corruption, but caution that more explicit measures may offer little predictive power.

The importance of these findings is that they demonstrate that the variation in the levels of observed corruption may, in part, be driven by who selects into government service, the more corrupt enter into the government sector. Hanna and Wang argue that there are two key policy insights that follow from their work. First, the recruitment and screening process for bureaucrats may be improved by increasing the emphasis on characteristics other than ability. So the brightest may not be the best. It is important to note that individuals may not want to reveal their characteristics, especially their propensity for dishonesty, so the method of measurement matters. The simple, experimental measure that Hanna and Wang employed predicted the corrupt behaviours of the government employees, but the game in which corruption was explicitly framed and the fairly standard attitudinal questions had little predictive value. Second, while recent empirical papers have shown that reducing the returns to corrupt behaviour decreases the probability that bureaucrats engage in corruption, the work by Hanna and Wang suggests that these interventions may have had even broader effects by changing the composition of who might apply.