EconTalk this week

Richard Epstein of the University of Chicago talks with Russ Roberts the host of EconTalk about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature.

New iPredict stock

iPredict has a new stock on offer to do Ron Mark winning the Rimutaka seat.

RIMUTAKA.MARK: This stock pays $1.00 if Ron Mark wins the Rimutaka electorate in the 2008 New Zealand General Election, $0 otherwise.

Currently trading at around 0.10

Fun ...

This chart comes from Mark Perry at Carpe Diem. It shows GRE scores by graduate field, ranked by the total score. Economics 4th, business 22nd.

Bryan Caplan asks Are Economists As Smart as They Think They Are? And given the chart above he answers,

Probably even smarter - only physics, math, and c.s. have higher average GRE scores. We even beat electrical engineers. Sorry, dad, but facts are facts. :-)

But he goes on to note that the fact that economists are smart is much less important that the fact that smart people think like economists (doc).

Good politics is not good economics

Peter Boettke at The Austrian Economists blog writes,

Politics may be the art of compromise, but economic policy is not. In fact, compromised economic policy is arguably what caused the economic insecurity we are currently dealing with.

This was written with reference to President-Elect Obama and the difficult problems he will face when he assumes office in January. But it could equally have been written about whoever wins the next election here in New Zealand. Comprise just to get a coalition together just to be able to govern may be good politics, but it can also lead to very bad economics. Coordination of different areas of economic policy is important if they are not to end up working at odds with each other. Unfortunately politics always beats economics.

Socialism explained

This from Mark Perry at the Carpe Diem blog.

Food miles go nowhere (updated)

"Food miles" are an important issue for New Zealand given that we sell a lot of food and there are a lot of miles between us and our customers. Hiroko Shimizu and Pierre Desrochers have a new publication out on food miles, Yes We Have No Bananas: A Critique of the 'Food Miles' Perspective

As modern food production and distribution becomes ever more complex and globalized, a “buy local” food movement has arisen. This movement argues that locally produced food is not only fresher and better tasting, but it is also better for the environment: Because locally produced food does not travel far to reach your table, the production and transport of the food expend less energy overall. The local food movement has even coined a term, “food miles,” to denote the distance food has traveled from production to consumption and uses the food miles concept as a major way to determine the environmental impact of a food.

This Policy Primer examines the origins and validity of the food miles concept. The evidence presented suggests that food miles are, at best, a marketing fad that frequently and severely distorts the environmental impacts of agricultural production. At worst, food miles constitute a dangerous distraction from the very real and serious issues that affect energy consumption and the environmental impact of modern food production and the affordability of food.

The course of the debate over food miles is nonetheless instructive for policy makers. It highlights the need to remain focused on the issues that are important—in this case, the greenhouse gas emissions of highly subsidized first-world agriculture, the trade imbalances that prevent both developed and developing countries from realizing the mutual benefits of freer trade, biofuel subsidies, and third-world poverty. With the population of the planet growing rapidly, numerous food-policy issues other than food miles should preoccupy policy makers.

Update: Following the release of their Mercatus Policy Series piece, Pierre Desrochers and Hiroko Shimizu have an Op-Ed in The National Post on the food-mile perspective, Buy global: The 'food mile' perspective severely distorts the environmental impacts of agricultural production.

Guaranteeing too much means you guarantee nothing

Given that New Zealand has just introduced a deposit insurance scheme, they may do well to read Arnold Kling on Those Wild and Crazy Markets. Kling writes

Uwe Reinhardt writes,

Iceland's problem, like that of the rest of the world, is rooted in the unquestioned belief in the free market doctrine that swept the world during the past two decades...Iceland's liberal government thought it was safe to let the island's bankers loose in a global market of debt and asset financing.

...under European regulations, Iceland is obliged to pay 20,000 euros to each individual foreign depositor in Icelandic banks.

Kling then makes an important point,

It's interesting how often it turns out that where there is a failure of the wild and crazy markets, somewhere in the background is a government guarantee. Maybe governments that try to guarantee too much wind up guaranteeing nothing. Maybe the U.S., too, will learn this lesson the hard way. (emphasis added).

What about New Zealand?

Evidence on privatisation

Having looked, briefly, at some of the theory of privatisation in a previous post, I thought I would take a quick look at the evidence on the subject. The following comes from the summary of chapter 4, 'Empirical Evidence on Privatization's Effectiveness in Nontransition Economies', from William L. Megginson's book The Financial Economics of Privatization, New York: Oxford University Press, 2005,

The 87 studies from nontransition economies discussed in this chapter offer at least limited support for the proposition that privatization is associated with improvements in the operating and financial performance of divested firms. Most of these studies offer strong support for this proposition, and only a handful document outright performance declines after privatization. Almost all studies that examine post-privatization changes in output, efficiency, profitability, capital investment spending, and leverage document significant increases in the first four measures and significant declines in leverage.

The studies examined here are far less unanimous regarding the impact of privatization on employment levels in privatized firms. All governments fear that privatization will cause former SOEs to shed workers, and the key question in virtually every case is whether the divested firm's sales will increase enough after privatization to offset the dramatically higher levels of per-worker productivity. Three studies document significant increases in employment [Galal, Jones, Tandon, and Vogelsang (1992); Megginson, Nash, and van Randenborgh (1994); and Boubakri and Cosset (1998)], but most of the remaining studies document significant-sometimes massive- employment declines. These conflicting results could be due to differences in methodology, sample size and make-up, or omitted factors.

However, it is more likely that the studies reflect real differences in post-privatization employment changes between countries and between industries. In other words, there is no "standard" outcome regarding employment changes.

Perhaps the safest conclusion we can assert is that privatization does not automatically mean employment reductions in divested firms, though this will likely occur unless sales can increase fast enough after divestiture to offset very large productivity gains. Since the empirical studies discussed in this chapter generally document performance improvements after privatization, a natural follow-up question is to ask why performance improves. For utilities, the need to introduce competition and an effective regulatory regime emerges as key, but there is no "silver bullet" answer for what makes privatization successful for firms in competitive industries. As we will discuss in the next chapter, a key determinant of performance improvement in transition economies is bringing in new managers after privatization. No study explicitly documents systematic evidence of this occurring in nontransition economies, but Wolfram (1998) and Cragg and Dyck (1999a,b) show that the compensation and pay-performance sensitivity of managers of privatized U.K. firms increases significantly after divestment. Studies that explicitly address the sources of post-privatization performance improvement using data from multiple nontransition economies tend to find stronger efficiency gains for firms in developing countries, in regulated industries, in firms that restructure operations after privatization, and in countries providing greater amounts of shareholder protection.

Sunita Kikeri and John Nellis write in their article, An Assessment of Privatization, "The World Bank Research Observer", vol. 19, no. 1 (Spring 2004)

This article takes stock of the empirical evidence and shows that in competitive sectors privatization has been a resounding success in improving firm performance. In infrastructure sectors, privatization improves welfare, a broader and crucial objective, when it is accompanied by proper policy and regulatory frameworks.

Mary M. Shirley and Patrick Walsh write in Public versus Private Ownership: The Current State of the Debate, Working Paper, The World Bank,

Our review found greater ambiguity about ownership in theory than in the empirical literature. In the debate over the effects of competition, theory suggests that ownership may matter and if so, that private firms will outperform SOEs. The empirical studies squarely favor private ownership in competitive markets. Theory’s ambiguity about ownership in monopoly markets seems better justified, since the empirical literature is also less conclusive about the effects of ownership in such markets. Theories that assume a welfare maximizing government suggest that SOEs can correct market failures. In contrast, public choice theories are skeptical of the benevolent government model. Corporate governance theories suggest that even well intentioned governments may not be able to assure that SOE managers do their bidding. The empirical literature favors those skeptical of SOEs as a tool to address market failures. In studies of industrialized countries, where we might expect more developed political markets to motivate greater government concern with welfare maximization or better information and incentives to overcome corporate governance problems, private firms still have an advantage. The private advantage is more pronounced in developing countries, where market failures are more likely.

Value of KiwiRail (updated)

This news story tells us that

The value of KiwiRail - a central plank in Labour's election billboards - has taken a $242 million knock just three months after it was bought.

This to me raises two questions; one general, one specific.

The general question has to do with Why does the government own a asset like KiwiRail at all? What should a government own and what shouldn't it own. When is privatisation efficient, when is nationalisation efficient? The specific is, Why has KiwiRail lost so much value so quickly?

As to the second question I really have not idea, other than this is the true value of the firm and the government just paid too much for it. This does not mean that government is ownership is bad as such, it may just mean the government negotiated a bad deal. The first point is relevant to the, is government ownership good or bad question.

On this first point, as a general guide, Hart, Shleifer and Vishny ("The Proper Scope of Government: Theory and an Application to Prisons", Quarterly Journal of Economics, 112(4): 1127-61, November 1997) argue that the case for government provision of goods or services is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant and when corruption in government procurement is a severe problem. It has been argued that the case for government production is strong in such services as the conduct of foreign policy, police and armed forces. The case can also be made reasonably persuasively for the case of prisons. The case for private sector provision is stronger when quality reducing cost reduction can be controlled through contract or competition, when quality innovations are important and when patronage and powerful unions are a severe problem inside the government.

Its not clear that the government's interventions have been in areas where the Hart, Shleifer and Vishny arguments would suggest the government should be involved. Rail or banking, for example, are not a areas where cost reduction come at the expense of quality, where innovation is unimportant or where there are any problem with government procurement. So why have the government owning KiwiRail or Kiwibank? Also government involvement in Air New Zealand is hard to justify on these grounds. As noted above, the case for private sector provision is stronger when quality reducing cost reduction can be controlled through competition, and the airline industry is very competitive, when quality innovations are important, and we want a high quality and innovative airline industry, and when patronage and powerful unions are a severe problem inside the government, which are things we wish to avoid with an airline. Here private provision makes sense.

The Hart, Shleifer and Vishny argument applies to contracting out as well as outright privatisation. A question that arises therefore is, Why would private ownership ever be more efficient than public? As to why private provision is superior, there are two results that need to be explained. Williamson's well known idea of selective intervention and the Fundamental Theorem of Privatization by Sappington and Stiglitz. (Sappington, David E. M. and Stiglitz, Joseph E. (1987). 'Privatization, Information and Incentives'. Journal of Policy Analysis and Management, 6(4): 567-82.) These tell us that there should be no differences in efficiency between a privatised and a nationalised firm. Thus any explanation of the relative efficiency between the two must explain why these ideas cannot be applied.

The first notion, of selective intervention, argues that the government can reach the same level of productive efficiency as the private sector by mimicking the private owner. If the government organises the firm in exactly the same way as a private owner would, if it gives the same incentive schemes to managers and workers, and if it deviates from such a policy only if there is the possibility of doing something strictly better than a private owner, then a nationalised firm should produce at least as efficiently as a privatised one. Think about what the SOE model was all about.

The second idea is concerned with allocative efficiency and says that a public firm will choose a socially more efficient production level because the government cases about social welfare and internalizes externalities, whereas a private owners just maximizes private profits. However, this argument implicitly assumes that the government cannot regulate the firm. Sappington and Stiglitz suggest a privatization and regulation procedure that perfectly overcomes the problem of different objective functions. The government could auction a contract that entitles the private owner to receive a payment for the firm's output that exactly equals its social valuation. Thus, the owner fully internalizes social welfare and chooses a socially efficient production level. Furthermore, if the bidding process is competitive, the government will extract all the rents form the contract through the auction ex ante even if it doesn't know the cost function of the firm.

At this point the argument tells us that efficiency should be the same for both private and state firms. Why then does the empirical evidence tell us otherwise? Well, both arguments are based on the implicit assumption that it is possible to write a comprehensive contract for the entire horizon of the firm - otherwise the involved commitment problems could not be overcome. To illustrate this point, consider again the auction suggested by Sappington and Stiglitz. For such an auction to work, the government must be able to commit at the stage of privatization to actually pay the social valuation of output to the private owner in the (possibly distant) future. That is, it must be possible to specify unambiguously in a contract the social benefit of production for all possible state of world such that this agreement can be enforced by the courts. Otherwise, the private owner will rationally expect that once she has made a relationship specific investment the government will exploit the fact that investment costs are sunk and will expropriate her quasi-rents; therefore she will not invest efficiently. However, if comprehensive contracts are feasible, it is not surprising that there is no difference in efficiency, since it is well known that any organizational mode can be copied by any other organizational mode through a comprehensive contract. Therefore, if there is any difference, it must be due to the fact that only incomplete contracts are feasible at the stage of privatization.

A simple example is the paper by Klaus Schmidt, "The Costs and Benefits of Privatization: An Incomplete Contracts Approach". (The Journal of Law, Economics & Organization, 12(1): 1-24, 1996.) The intuition is roughly as follows: Suppose the manager of the firm has to make a private investment in cost reduction before production takes place. For example, he may have to expend effort to restructure the firm and to organize production more efficiently. Assume also that the manager derives some private benefit from a higher production level, either because he is an "empire builder" or because he is afraid of the firm being liquidated, in which case he loses his job and his reputation may be damaged. To improve the manager's incentives, the government may want to commit ex ante to a subsidy scheme that punishes the manager if costs are high by cutting back production or even closing down the firm. However, under nationalization this commitment is not credible. If the government could observe the cost function - and it can in this case -, it would always choose a production level that is ex post efficient, thus forgiving high costs and paying more subsidies than announced ex ante. Anticipating this, the manager has little incentive to save costs because he faces a "soft budget constraint". Under privatization, however, the government is not informed about the costs of the firm whereas the private owner is. It is shown that the optimal subsidy scheme under incomplete information distorts production below the socially efficient level if costs are high. Furthermore, there is a positive probability that the firm will be liquidated, even though this is inefficient ex post. Thus, under privatization allocative efficiency is clearly lower than under nationalization. The more surprising result is that productive efficiency may be enhanced. The manager faces a harder budget constraint because he rationally foresees that subsidies will be cut back if costs turn out to be high. Thus he has a stronger incentive to invest in cost reduction to avoid the low production level or possible liquidation. To summarize, there is a trade-off between a less efficient production level (lower allocative efficiency) and better incentives for the manager to save costs (higher productive efficiency).

This article makes a very strong assumption about the role of government. The government is modelled as a benevolent, fully rational, and unitary decision maker. There are no conflicts of interest between politicians, ministries, and regulatory agencies; no rent-seeking lobbyists trying to get subsidies; and no self-interested politicians struggling for power, bribes or a larger share of the electoral vote. This assumption is clearly unrealistic. therefore the main result of the paper should be seen as an existence theorem: It shows that privatization can be can be strictly superior to nationalization even in the best of all words for government. Thus, even if it were possible to fix all the deficiencies of the political system a case for privatization could still be made.

The empirical evidence shows us that private ownership is by and large superior to state ownership, Nellis ("Privatization—A Summary Assessment", Center for Global Development Working Paper Number 87 March, 2006.) for example, summaries this evidence as

The vast majority of economic studies praise privatization's positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Moreover, contrary to popular conception, privatization has not contributed to maldistribution of income or increased poverty - at least in the best-studied Latin American cases. In sum, the technical picture is generally positive.

We also have an understanding as to why this is the case. The thing that is hard to understand therefore is, Why is state ownership so common? It would appear to have little to do with sound economics.

Update: The Inquiring Mind warns us that a Black Hole sighted in Wellington

Interesting blog bits

1. The visible hand in economics has Credit crunch jokes.
2. Gary Becker asks "Does the Free Market Corrode Moral Character?"
3. Richard Posner comments on Does the Free Market Corrode Moral Character?
4. Arnold Kling has his Anti-Democratic Thought for the Day.
5. Thomas Sowell on Ego and Mouth.
6. Freakonomics on The Iraqi Housing Boom.
7. Luc Laeven on The cost of resolving financial crises.

   A new IMF database, which covers the universe of systemic banking crises from 1970 to 2007, shows that the average fiscal cost was about 15% of GDP, or three times the US’s $700 billion. This column points out that quick action often lowers the ultimate cost. Moreover wishful thinking teamed with regulatory forbearance and bank liquidity plans often raises the cost by delaying vital, but politically painful, government action.

How will the financial crisis affect the economics profession?

Or so asks Tyler Cowen over at Marginal Revolution. He answers

I believe that demand for economics classes will rise, as it often does in economically troubled times. Some of this will be "shaman demand" rather than "knowledge demand." The consulting incomes of finance economists will fall and fewer talented people will go into finance. Speaking fees will fall since fewer economists will give talks at hedge funds. The relative status of macroeconomists will rise and the relative status of microeconomists will fall. Economists will gain in fame and lose in income.

At the EconLog Arnold Kling thinks

[...] that macroeconomics has suffered a crash. As recently as six months ago, the consensus was that it was sufficient for monetary policy to engage in inflation targeting or to follow a Taylor rule. Now, Brad DeLong refers to this view contemptuously as "Greenspanism."

If you look closely, you will find that there is no consensus now. Olivier Blanchard's triumphal history of the last thirty years of economics is exactly wrong.

What will emerge? What the public wants is a theory of control. That is, the demand is for a theory that includes ways for policymakers to control booms and busts. To satisfy that demand, my guess is that the economics profession will put most of its effort into rationalizing or tinkering with the consensus. The leaders of the profession have too much invested in New Keynesianism to be able to back away or acknowledge that it has been refuted.

I would not be surprised to see unorthodox theories of control gain traction. Perhaps, to justify current policy trends, a theory that socialized investment is necessary for stability.

To me. the logical thing for the economics profession to do is admit that we are nowhere near understanding what is happening. However, taking that position will not get you invited to panels.

I think that there are two questions. First, what are the generic causes and consequences of bubbles? Second, why did the specific bubble in real estate and mortgage finance occur? The first question is harder. But I would say that 99 percent of the economics profession cannot even correctly answer the second.

I'm not sure that Tyler is right when he writes that relative status of macroeconomists will rise and the relative status of microeconomists will fall. The current mess has highlighted just how many problems there are with macro, and that won't help its status. It could however bring people into the subject since it's clear there are big questions that need to be answered. Arnold's two questions are a good place to start.

Tullock doesn't vote

Who would have guessed?!

Here is a great little video from the PBS in the US featuring Gordon Tullock - Eric Crampton's favourite economist - on why he doesn't vote and why you shouldn't either. Take note New Zealand voters.

(HT: Marginal Revolution)

Key's economic understanding

Over at Kiwiblog David Farrar writes

John Key, if he wins the election, may be the most economically literate Prime Minister New Zealand has had in recent decades. I think he will have a far greater understanding of business and the economy, than most people realise. Why do I say this?

A good question. I have to say given what I have heard of Nationals economic polices I could not vote for them. Why?

To take a couple of examples. First, Nationals redundancy package. I have to ask why do we have such a scheme? Why do we want to treat unemployment during a recession and unemployment outside of a recession differently? (Vote buying aside, of course). Secondly, National's plan for more of the Cullen fund to flow into domestic investment projects. Not good. Such an idea has to reduce the return to the fund. If investment in New Zealand made the highest return, then we wouldn't need to legislate a 40% local investment rule, as the Cullen Fund managers would already have invested that amount here anyway. As a result, by "forcing" the fund to keep 40% here, we are reducing the return on our investment. Also what will the extra Cullen Fund investment do to the local market? Will this extra government investment just crowd out private investment, both from within New Zealand and from overseas. So the total amount of investment in New Zealand may not change much at all. And then there is the issue of what happens if politicians start to take an even more hands on approach to the fund. The last thing we need is for investment decisions to be made, not for good economic reasons, but purely for party political reasons. In addition as Matt Nolan has noted

Someone might say that “we are making job, and we’re making money” but they would be practically illiterate - just like the buy NZ made campaign. “Employment” and “domestic production” are not a positive externality. If we are investing money overseas and getting more goods back in return, then we are effectively getting “something” for “nothing” - what is wrong with that.

My colleague Eric worries that 40% Superfund investment in New Zealand seriously exposes the fund to the risk of correlated shocks. To wit: the government must use tax funds to pay superannuitants when the returns from the Superfund aren’t enough to cover obligations. If the Superfund is invested broadly, shocks to New Zealand’s tax revenues should be relatively uncorrelated with shocks to the Superfund’s returns, barring global shocks about which not much at all can be done. But if the Superfund has supernormal investments in New Zealand securities, shocks to Superfund returns are likely to hit precisely when tax revenues are at a low ebb, exposing the fisc to serious downside risk.

Thirdly there is National's approach to infrastructure investment. I have argued here that infrastructure is a loose term covering a collection of very different industries and assets and, importantly, that the government does not have a major role to play in many of them. There is also Matt Burgess's guest post as to why National's plan to spend $1.5 billion building fibre to the homes of 75% New Zealanders is not a good idea. I agree with Matt on this issue. Lastly there is National Party's decision not to move any state-owned enterprises to the private sector in, at least, its first term. I again I think is a mistake. The evidence we have on state ownership of business shows that in most cases private ownership is more efficient. Nellis (2006) for example, summaries this experience as

The vast majority of economic studies praise privatization's positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Moreover, contrary to popular conception, privatization has not contributed to maldistribution of income or increased poverty - at least in the best-studied Latin American cases. In sum, the technical picture is generally positive.

These are just four issues, but they are important ones where I think National has got it wrong. My view would be that good economics is not driving National's economic policy, vote buying is. And that is the worst possible basis for government policy of any kind.

So a dilemma, who to vote for? Perhaps the only thing worse that National's stated policies are Labour (and their coalition partners) policies over the last nine years. So voting Labour is out. What of Act? Their policies are the most sound, but a candidate vote is wasted vote anywhere outside Epsom. A party vote could help.

This does raise a question for me. Are bad economic policies necessary to be elected? Is Key right to put forward bad economic policies since he has come to the realisation that voters, unfortunately, like bad policies? If we take Caplan's "Myth of the Rational Voter" seriously then this could be the optimal approach to an election. Then we have to hope Key is lying as to his true intentions. If not, then neither of the major parties are worth voting for. Perhaps then the issue should be decided upon who the major parties are most likely to go into coalition with in the hope a coalition partner can mitigate the worst excesses of its major partner.

• John Nellis (2006) "Privatization—A Summary Assessment", Center for Global Development Working Paper Number 87 March.

Eric's handy excel spreadsheet

On the iPredict blog Eric Crampton writes

I've uploaded my handy excel spreadsheet that works out what the price of PM.National would be if the prices in the underlying markets are correct and if my bold simplifying assumptions aren't too bold. Though the spreadsheet contains much that is apocryphal, or at least wildly inaccurate, if the calculations show a big gap between the calculated price and the current market price, there's likely an arbitrage opportunity playing around somewhere in the prices. Either in the prices in the underlying markets, or in the PM markets themselves.

Be warned: the file is 24 MB, mostly because I cribbed somebody else's Sainte-Lague spreadsheet and because my Excel coding skills are padawan-level at best, I copied those sheets four times over to work out the seat shares in four relevant cases: Act returns (or doesn't) and NZ First returns (or doesn't).

All very useful if you want to make money trading on election stocks on iPredict.

Comparative advantage explained

Steve Horwitz has been serving as the "professor" at the Fraser Institute's "Ask the Professor" monthly column/blog for the last several months. The November essay is now up and the topic is "Comparative Advantage." This seems to be a topic people find difficult to understand so hopefully this short explanation will help.

(HT: The Austrian Economists)

Minimum wages

There is a new book out on the effects of the minimum wage, Minimum Wages by David Neumark and William L. Wascher, MIT Press, 2008.

David Neumark is Professor of Economics at the University of California, Irvine. He is also a Research Associate at the National Bureau of Economic Research, a Senior Fellow at the Public Policy Institute of California, and a Research Fellow at the Institute for the Study of Labor. William L. Wascher is Associate Director in the Division of Research and Statistics at the Federal Reserve Board.

Minimum wages exist in more than one hundred countries all around the world. The United States passed a federal minimum wage law in 1938, in New Zealand the minimum wage was introudced in 1894, and has increased the minimum wage and its coverage at irregular intervals ever since; in addition, as of the beginning of 2008, thirty-two states and the District of Columbia had established a minimum wage higher than the federal level, and numerous other local jurisdictions had in place "living wage" laws. Over the years, the minimum wage has been popular with the public, controversial in the political arena, and the subject of vigorous debate among economists over its costs and benefits.

In this book, David Neumark and William Wascher offer a comprehensive overview of the evidence on the economic effects of minimum wages. Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions, Neumark and Wascher discuss the effects of minimum wages on employment and hours, the acquisition of skills, the wage and income distributions, longer-term labour market outcomes, prices, and the aggregate economy.

Based on their reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

Stalin as a rational dictator

Stalin's mass killings are often viewed as the acts of a deranged dictator. But according to Konstantin Sonin of the New Economic School in Moscow, such violence may have reflected the Soviet leader's rational efforts to avoid losing power. In this interview with Romesh Vaitilingam, from VoxEU.org, Sonin discusses his research and its implications for thinking about modern day dictators.

Block versus Caplan (updated)

Over at the lewrockwell.com Walter Block has posted an exchange of emails between him and Bryan Caplan on Fractional Reserve Banking.

The present debate got started when Block read that Caplan had characterized Murray Rothbard's position on fractional reserve banking as "crazy." Adding insult to injury, Caplan denoted Rothbard's position as too easy of a target to hit out against. These claims upset Block who then emailed Caplan.

Now read on .....

Update: Arnold Kling writes on Fractional Reserve Banking from a Modern Finance Perspective.

Cool interviews!

The Liberty Fund has put online several interviews from its Intellectual Portrait Series. Of particular interest - to me anyway:

• Armen Alchian, interviewed by Dan Benjamin
• Ronald Coase, interviewed by Richard Epstein
• Israel Kirzner, interviewed by Tibor Machan
• Friedrich August von Hayek
• Milton Friedman, interviewed by Gary S. Becker

and lots more. Enjoy!

(HT: Organizations and Markets)

Selgin interview

From the Mises Economics Blog comes this audio interview of George Selgin by Jeffrey Tucker. George Selgin is author of Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821.

This book is about the true and remarkable story of private coinage and banking in Britain in the early years of the Industrial Revolution (1775-1850). Making money was a business in demand. The needs of business for small denominations were changing. Merchants needed small denomination coins in copper and silver. The Royal Mint couldn't be bothered. It made coins to serve the elites, not the new and burgeoning working class. Free enterprise stepped in with a new industry that truly saved the day—before the Crown cruelly stamped it out and ended one of the most beautiful experiences with private money in world history.