Crampton on NZ

Eric Crampton gives us his NZ Roundup over at Offsetting Behaviour. I have to say he has a much rosier view of things than I do. This government can, in my view, do a lot better than it is.

Inappropriate stimulation

Mario Rizzo writes at the ThinkMarkets on Inappropriate Stimulation. He writes

As we now know, job losses have been far greater than average in construction. But financial services, American automobiles, retailing (based on consumer credit), computer services, technical consulting, research and development and other areas dependent directly or indirectly on cheap credit have also lost jobs.

“This rapid deterioration [in employment] has prompted talk that some industries are being partly dismantled.”

What is happening is a massive re-allocation of resources mainly due to the excessively low interest rate policy of the past few years – but also partly due to certain sectoral shifts. The American car manufacturers, for example, are suffering both from the contraction in credit and from their own long-term inefficiencies.

The fiscal stimulus program is designed to stimulate where economic activity has deteriorated and there are job losses. Many of these areas are those that had over-expanded. As we have been saying for some time on the blog, the effect of this kind of stimulation is to slow down the re-allocation of resources. It will not succeed, however, in preventing it. What it will do is prolong the recession.

There is no denying that some areas of economic activity are depressed simply because of overall pessimism and fear, including among lenders. This is reflected in the widespread diffusion of job losses.

These areas do not need to contract in the long run. Yet planners do not have the knowledge to know exactly which ones are in this category. The way to dissipate the general pessimism, for example, is to prevent outright deflation (which is not in sight) and to allow individual markets to equilibrate quickly. Delay causes uncertainty.

The necessary re-allocation of resources that must be a part of any recovery should not be hampered in the name of aggregate stimulus. The neglect of issues such as this is why the crass “Keynesianism” that is being peddled in the media and by those who should know better is grossly inadequate to the solution of our economic problems.

As I have argued before the whole point about falls in profits is that it signals that companies should change what they are doing and how they are doing it, or cut back on production or exit the industry or some combination of these things. That is, some areas of the economy need to contract and government handouts and stimulus measures just delay this necessary adjustment. Resources need to be reallocated and market pressures and discipline are the quickest way of achieving the necessary changes. Removing market discipline via government interference gives businesses a reprieve that the market wouldn't give them and prevents adjustment, to our long-run cost.

Favouring a flat tax

Richard A. Epstein writes on Favo[u]ring A Flat Tax at Forbes.com.

Epstein writes

But by the same token, sensible libertarians are not anarchists, and thus, in funding public projects, have to choose that form of taxation that is least intrusive on individual liberty. Their uniform answer: the flat tax.

On the private side, a flat tax reduces the distortions that otherwise arise when two individuals receive different after-tax returns on their labor or investment. The flat tax also eliminates private incentives to concoct wasteful schemes to shift their income onto the ledger of their poorer relatives

On the public side, the flat tax limits political discretion by making it harder for the government to single out "the rich" for special treatment. It also crimps government spending by denying any group the luxury of supporting government expenditures entirely at someone else's expense.

This last point may help explain why we don't have a flax tax, it helps stop governments taxing one group to enrich another, in the hope of gaining votes from the transfer.

What is the difference between Keynesians, Monetarists and Austrians?

From the Adam Smith Institute blog

For Keynesians, government is the spender of last resort;
For Monetarists, government is the lender of last resort;
For Austrians, government really is the last resort!

EconTalk this week

Jimmy Wales, founder of Wikipedia, talks with Russ Roberts, the EconTalk host, about the birth and growth of Wikipedia. He talks about the role of Hayek's insights into the design of Wikipedia, how Wikipedia deals with controversy, the reliability of Wikipedia relative to traditional reference sources and the future possibilities for projects that rely on voluntary contributions of time and creativity.

Interesting blog bits

1. Offsetting Behaviour on Experiments with the minimum wage.
2. Save the Humans on Have we forgotten half of capitalism.
3. The Inquiring Mind on SOEs are they businesses or social agencies.
4. Free exchange asks How much unemployment is here to stay?
5. MacDoctor says I’ll Get Back to You.
6. Bryan Caplan asks Is Greed in the Genes?

Lessons from the great depression for economic recovery in 2009

A talk by Christina D. Romer, head of the US Council of Economic Advisers on Lessons from the Great Depression for Economic Recovery in 2009 (pdf).

One interesting comment to keep in mind:

To start, let me point out that though the current recession is unquestionably severe, it pales in comparison with what our parents and grandparents experienced in the 1930s.

(HT: Greg Mankiw)

Private prisons

There has recently been much heat generated over the issue of private prisons, but I would argue very little light has been shed on the topic, see for example, MacDoctor here, Not PC here, Kiwiblog here, Whale Oil here, The Standard here, Keeping Stock here, Liberty Scott here. So I will see if I can let in a little light, although this is not guaranteed!! The question as to which goods or services the government should provide has been addressed in a paper by Oliver D. Hart, Andrei Shleifer and Robert W. Vishny, published in 1997. The paper is 'The Proper Scope of Government: Theory and an Application to Prisons'. "Quarterly Journal of Economics", 112(4) November: 1127-61.

The HSV model considers the choice between in-house production and contracting out. The provider, government or private, can invest in improving the quality of service or reducing cost. Given incomplete contracts, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality. Cost are always lower under private ownership but quality may be higher or lower under a private owner.

Hence the focus of the HSV model is on quality. Here quality has a broad interpretation. It can stand for how well prisons treat prisoners, how clean utilities keep the water, how well schools educate their pupils, how long it takes for a letter to reach a remote area or how innovative car makers are etc. The basic idea is that the provider of the service, whether it be the government or a private firm, can made an investment to increase the quality of the service or a investment to reduce the cost of the service. It is important to note that quality is reduced by any cost reductions. Neither of these two investments are ex ante contractible. But to implement either of the innovations requires the agreement of the owner of asset. The asset can be thought of as, say, a school or a hospital or a prison. If the owner of the asset is the government then the provider of the service, who will be a government employee, requires the approval of the government to invoke either investment since, in this case, the residual control rights reside with the government. As a result, the employee will receive just a fraction of the returns to either innovation, even if implemented.

If on the other hand the provider is a private sector contractor, then the contractor has the residual control rights and thus does not need the government's agreement for a cost reduction. However, if the contractor wishes to improve the quality of the service and receive a higher price for it, then they have to renegotiate with the government since the government is the purchaser of the service. Under the assumption that the contractor is successful in obtaining an increase in price they capture all such gains. Thus a private contractor will generally face stronger incentives, than a government employee, to improve quality and reduce costs but the incentive to reduce costs can be too strong since the contractor ignores the negative impact this has on quality.

HSV examined the conditions that determine the relative efficiency of in-house provision versus outside contracting of government services. Their theoretical arguments suggest that the case for in-house provision is generally stronger when noncontractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant, and when corruption in government procurement is a severe problem. In contrast, the case for privatisation is stronger when quality reducing cost reductions 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.

They then apply this analysis to several government activities using the available evidence on the importance of various factors. They conclude that the case for in-house provision is very strong in such services as the conduct of foreign policy and maintenance of police and armed forces, but can also be made reasonably persuasively for prisons. In contrast, the case for privatisation is strong in such activities as garbage collection and weapons production, but can also be made reasonably persuasively for schools.

With regard to prisons HSV write (p. 1152-4)

Prisons seem to fit reasonably well into our framework. Although in some respects prison contracts are very detailed, they are still seriously incomplete. There are significant opportunities for cost reduction that do not violate the contracts, but that, at least in principle, can substantially reduce quality. Moreover, from the available evidence we have the impression that the world may not be far from the assumptions of Proposition 4. First, the welfare consequences of quality deterioration might be of the same magnitude as those of cost reduction (b(e) and c(e) are comparable). Second, the opportunities for quality innovation are limited (beta(i) is small). Under these conditions, Proposition 4 suggests that public ownership is superior.

Would ex post competition between prisons for inmates strengthen the case for privatization? One possibility is that convicts themselves choose the prison in which to serve their sentences, but this is probably a bad idea, since prisoner choice would encourage contractors to attract customers by allowing gangs, drugs, and perhaps even easy escapes. A more plausible alternative is to have judges choose a private prison to send a convict to, with the idea that judges would send more inmates to higher quality prisons and fewer to lower quality prisons. Private contractors would then have the appropriate incentives to invest in quality improvements, and to avoid excessive cost reductions, to bring in more business. At the moment, such schemes have not been tried, in part because there is a shortage of prison capacity in the United States, but it is possible that they could be tried in the future. One potential disadvantage of such judge choice is that some judges might actually choose lower quality prisons because they want the inmates to get a stiffer penalty, whereas other judges might choose prisons that are soft on inmates. Contractors would then cater to the preferences of the judges, which need not coincide with social welfare.

Finally, the choice of whether to privatize prisons depends on the importance of corruption and patronage. Patronage does not appear to be a huge problem in prison employment in the United States, since the union premium as of this writing is not large. Corruption appears to be a greater concern, at least judging from the available anecdotal evidence. To begin, private prison companies are very active politically. For instance, ESMOR evidently lobbies politicians and makes political contributions to receive contracts {The New York Times, July 23, 1995}. The wife of Tennessee governor Lamar Alexander invested early and profitably in the stock of Corrections Corporation of America, which subsequently got involved very deeply in the privatization of Tennessee prisons with the governor’s endorsement {The New Republic, March 4, 1996, p. 9}.

A related problem is that contract enforcement cannot be taken for granted. The INS report concludes that ESMOR’s changes in policies “hindered INS ability to effectively perform its oversight functions.” The report also notes that ESMOR told its guards not to share information with the INS officials working on the premises, and in one instance encouraged the INS to reassign an officer who complained about the performance of the Elizabeth, New Jersey, facility several months prior to the riot. The report indicates that ESMOR violated the contract in some instances, and also pursued policies preventing the INS from enforcing the contract. But it is also clear from the report that the INS did not do what it could to enforce this contract. The INS report vividly illustrates how a government bureaucracy with relatively weak incentives has trouble enforcing a contract with a private supplier determined to reduce its costs, even if this involves violations of the contract and not just the issues on which the contract is silent.

In sum, our model suggests that a plausible theoretical case can be made against prison privatization. This case is weakened if competition for inmates can be made effective, but strengthened by the relevance of political activism by private contractors. One instance in which the case against prison privatization is stronger is maximum security prisons, where the prevention of violence by prisoners against guards and other prisoners is a crucial goal {The New York Times Magazine 1995}. In many cases, the principal strategy for preventing such violence is the threat of the use of force by the guards.We have shown that it is difficult to delineate contractually the permissible circumstances for the use of such force. Moreover, hiring less educated guards and undertraining them—which private prisons have a strong incentive to do—can encourage the unwarranted use of force by the guards. As a result, our arguments suggest that maximum security prisons should not be privatized so long as limiting the use of force against prisoners is an important public objective. Consistent with this view, only 4 of the 88 private prisons in Thomas’s {1995} census of private adult correctional institutions in the United States are maximum security. In contrast, private half-way houses and youth correctional facilities, where violence problems are less serious, are common {Shichor 1995}.

So there is a case to be made for private prisons, but it may not be as strong as for other services currently provided by the government, and it is at its weakest for the case of maximum security prisons.

Russ Roberts and Arnold Kling at Bloggingheads

Russ Roberts and Arnold Kling talk about economics and the current financial crisis at Bloggingheads.tv.

(HT: Brad Taylor)

Did post-communist privatisation kill?

An interesting question and one for which the medical journal Lancet argues the answer is "yes". An article, by David Stuckler, Lawrence King and Martin McKee, "Mass Privatisation and the Post-Communist Mortality Crisis: A Cross-National Analysis", Lancet, published online, January 15, 2009, argues that there is a robust correlation between the extent of privatisation and the adult male mortality rate using country-level data for about 24 economies of Eastern Europe and the former Soviet Union.

The paper has been controversial and there are legitimate questions that can be raised about various aspects of the methodology of the article, including the use of country-level data to study death and ownership – phenomena that are inherently microeconomic. Related issues concern possible confounding effects – alternative explanations for the correlation.

But there is a very obvious question to do with causality: How could changing ownership from state to private have raised mortality? The authors of the Lancet article put forward the theory that privatised firms cut employment and then refer to the extensive evidence on the negative impact of unemployment on health to link job loss to mortality. This idea in turn raises the question: Did privatisation systematically lead to substantial job loss? If not, then the causal mechanism of the paper breaks down and the article's results are open to question. Note that the Lancet article provides no evidence on this question.

So did privatisation lead to substantial job loss? In a column at VoxEU.org John S. Earle says the answer is a clear "no". The column, "Mass privatisation and mortality: Is job loss the link?", looks at the results of a study forthcoming in the Economic Journal. This study is "Employment and Wage Effects of Privatisation: Evidence from Hungary, Romania, Russia, and Ukraine" by David J. Brown, John S. Earle and Almos Telegdy.

Earle discusses, in his VoxEU.org column, differences between the data used in the Lancet paper and the EJ paper and the advantages of the EJ paper's dataset:

Our analysis is not at the country level, as in the Lancet article. The problem with such aggregated data is that a variety of confounding influences may explain the results – just the sort of issues that have heated up the blogosphere, but that may never be resolved simply because they cannot be measured. Instead, our analysis uses data on nearly every manufacturing firm inherited from the socialist period in four major transition economies, Hungary, Romania, Russia, and Ukraine.

The firm is the level at which decisions on employment are made, and with our data we directly observe ownership, employment, and many other variables. Equally important, we observe firms for many years (up to 20 years in these databases), so we can follow the path of employment and other variables for long periods both before and after privatisation takes place. We also observe firms that are never privatised, which together with those that are not yet privatised (but will be) can form a control group in examining the effect of privatisation on employment within a particular industry and year. The ability to compare firms within industries and years – apples with apples, rather than apples with oranges – is another benefit of analysing data at the level of the decision-maker, rather than the aggregate.

The important result in the EJ study that Earle notes his VoxEU.org column is

Analysing these data with several statistical methods to control for possible biases due to selection of firms for privatisation, we find no evidence that privatisation systematically lowers firm-level employment.

Figure 1, which comes from the VoxEU.org column, shows results from two methods.

One incorporates firm fixed effects to control for selection bias in the level of employment, and the other adds firm-specific trends to control for selection bias in the growth of employment (labelled “without trends” and “with trends” in the figure, respectively). The estimated effects of privatisation to domestic owners are generally positive, and where they are negative the magnitudes are very small and usually statistically indistinguishable from zero. The estimated effects of foreign privatisation are almost always positive, large, and statistically significant, generally implying a 10-30% expansion of employment following the foreign acquisition.

The estimated foreign privatisation effect in Romania is the largest negative value, but it is only -7.1%, and statistically insignificantly different from zero. In the country with the most (in)famous mass privatisation, Russia, the domestic privatisation effects are positive, and, when estimated with trends, the effect is the largest of any of these four countries. Analysis of the long time series in the data shows that the absence of negative employment effects of privatisation is the consequence neither of delayed restructuring several years after privatisation nor of pre-privatisation downsizing, which is negligible in these economies.

Earle goes on to look at the possibility that the reason for the lack of job losses is that privatisation simply doesn't really matter for firm behaviour – new private owners do not restructure and therefore do not lay off workers. He writes

Our [Brown, Earle and Telegdy] research investigates this possibility by decomposing the employment effects of privatisation into two components, which we label “productivity” and “scale” effects. Holding the firm’s scale – its level of production – constant, an increase in productivity tends to lower employment. Holding constant the level of productivity, an increase in scale tends to raise it.

The empirical analysis of these mechanisms finds that privatisation tends to raise both productivity and scale. The results are displayed in Figure 2, which again comes from the VoxEU.org column.
This figure shows that

Both effects are much larger in firms privatised to foreign investors, with 10-25% increases in productivity, and 15-40% increases in scale. The dominance of the scale over the productivity effect implies the positive impact of privatisation on employment that we observe.

and that

Privatisation to new domestic owners in Hungary and Romania also yields positive productivity and scale effects, but they are smaller (6-10%) than the corresponding foreign effects, and the productivity effects slightly dominate the scale effects, resulting in the very small negative impacts of privatisation on employment in these cases. The productivity and scale effects of domestic privatisation are also positive but very small in Ukraine, and they nearly exactly cancel, leaving a tiny positive impact on employment. Domestic privatisation in Russia is the outlier, with negative estimated effects on both productivity and scale, but the drop in productivity exceeds the fall in scale, resulting in a positive net employment impact.

The important overall result is that in no cases are there substantial job loses showing up in the data and thus the causal link put forward by the authors of the Lancet article is not supported by the firm-level data.

Earle ends his VoxEU.org colum by saying

Of course, it is possible that some other link, not suggested by the article and unrelated to employment outcomes, could explain the observed privatisation-mortality correlation at the country level. Our analysis suggests that further progress on this question would benefit from analysis of data at the level where the action occurs – individual data in the case of death and firm data in the case of privatisation.

Glaeser on trade

Edward L. Glaeser writes in the Boston Globe on Building walls with US trading partners. He says

FREE TRADE is a child of economic confidence; protectionism is pessimism's progeny. In today's fearful economic climate, policy-makers have again cried "buy American," and embraced interventions that support domestic producers at the expense of our trading partners. Protectionism is bad economics and worse foreign policy, for many of our trading partners have only a tenuous link to peaceful democracy. To avoid the terrible path of the 1930s that led to prolonged depression and global conflict, the United States must maintain its commitment to globalization.

and a little later

The United States had adopted the Smoot-Hawley Tariff, setting off a global tariff war. Between 1929 and 1934, world trade declined by two-thirds. In the dark years that followed, thuggish dictators snuffed out nascent republics and Europe descended into the madness of war. Today as we contemplate an international recession, it is worth remembering that worse terrors than double-digit unemployment have stalked human history.

The link between economics and foreign policy was perhaps best put by F.D.R.'s Secretary of State Cordell Hull, when he said

If soldiers are not to cross international borders, goods must do so.

Glaeser remakes the link between the two in his closing paragraph

Other countries provide us with clothes, cars, markets for exports, and lending for the government and banks. Shutting our markets will make life more expensive for us and hurt the rest of the world. In the 1930s, legislators embraced high tariffs, but putting America first led to a devastating world war. Today, US lawmakers need to choose hope over fear, and stick with free trade.

So free trade is not only good for the economy, it's also good for peace.

(HT: Cafe Hayek)

Article on John Key in the WSJ (updated x2)

An article on John key has appeared in the Wall Street Journal, see You Can't Spend Your Way Out of the Crisis: New Zealand's prime minister wants to give his country a competitive advantage instead.

The report says

These days, you have to travel far to find a national leader who is talking about market-based approaches to the global recession. All the way to the other side of the world.

"We don't tell New Zealanders we can stop the global recession, because we can't," says Prime Minister John Key, leaning forward in his armchair at his office in the Beehive, the executive wing of New Zealand's parliament. "What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with."

That idea -- growing a nation out of recession by improving productivity -- puts Mr. Key and his conservative National Party at odds with Washington, Tokyo and Canberra. Those capitals are rolling out billions of dollars in stimulus packages -- with taxpayers' money -- to try to prop up growth. That's "risky," Mr. Key says. "You've saddled future generations with an enormous amount of debt that then they have to repay," he explains. "There is actually a limit to what governments can do."

Fine words, I just wish his actions backed them up.

I would add that there are no "other countries we compete with". We don't compete with other countries, this is a false analogy that comes from thinking that countries are like firms, they're not. As Paul Krugman, of all people put it, A Country Is Not a Company. The point is that Coke and Pepsi, for example, do compete, one gains at the others expense, but New Zealand and Australia don't, their loss is not our gain. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

Why? Well in the Coke/Pepsi case, Coke gain a lot, in terms of sales and profits, from not having Pepsi to complete with and lose little since Pepsi doesn't buy much , if anything, from Coke. Or Coke from Pepsi. This is not true of the New Zealand/Australia example. We may gain some sells if Australia stopped producing, but we would lose much more. Australia is our biggest export market and if they "went out of business", they would stop importing, and that would hurt us a lot. Also they are suppliers of much of our useful imports and that would stop too, which would hurt us even more.

The relationship between countries is very different from that between companies. Anyway read the whole article and see what you think.

Update: For a good discussion of the whole 'countries compete' idea see Paul Krugman's essay - written when he was still an economist - Competitiveness: A Dangerous Obsession.

Update 2: The Adam Smith Institute in the UK has picked up on the WSJ piece on Key.

The Economist and drugs: 20 years apart (updated x2)

The Economist magazine on drugs: legalise them.

The Economist (1989): Drug prohibition cruelly compounds the problems it was meant to solve. So end it. Legalise, control, discourage: those are the weapons for U.S. Drug Czar Bill Bennett's war.

The Economist (2009): Next week ministers from around the world gather in Vienna to set international drug policy for the next decade. Like first-world-war generals, many will claim that all that is needed is more of the same. In fact the war on drugs has been a disaster, creating failed states in the developing world even as addiction has flourished in the rich world. By any sensible measure, this 100-year struggle has been illiberal, murderous and pointless. That is why The Economist continues to believe that the least bad policy is to legalise drugs.

(HT: Carpe Diem)

Update: TVHE comments here while Johan Norberg comments here. Norberg adds an argument against legalisation as well.

"I do not want to see anything done that would change the status of illegal drugs [...] It is a comforting thought to know that the opportunity exists for me to saddle up the ol´ airplane and roll the dice for a million-dollar-plus payday if I so choose. That´s the real American dream."

Hawkeye Gross, Drug Smuggling : The Forbidden Book, 1992.

Update 2: Annie Fox comments here.

Let them fail

Earlier I argue that troubled auto makers should be allowed to go bankrupt. Now I see that Russell Roberts at Cafe Hayek is also arguing that troubled companies should be allowed to fail. He writes

We're going to run out of money.

We can't keep GM and AIG and Fannie and Freddie and every insolvent bank and every mortgage afloat. It can't be done. It's not a strategy. It's just desperation to avoid pain.

We're going to have to start letting them fail.

Sooner is better than later. Otherwise, we continue to throw good money after bad.

Let them fail.

When you're in a hole, the first lesson is to stop digging. Let's start by putting down the shovel and admitting we are heading in the wrong direction.

Let's taste some bankruptcy. Let's let some resources and capital get out of the hands of the people who are misusing it and into the hands of people who can use it more productively, wisely, and prudently.

Well said that man.

Cullen and SOEs (updated)

From this report on stuff.co.nz we find out that Michael Cullen is being tipped as the next chairman of a top SOE.

Michael Cullen is being tipped for a six-figure salary as chairman of one of the country's top state-owned enterprises.

Top of the likely list is power generator Mighty River Power, Government sources say.

One of the main reasons private firms out perform SOEs is that SOEs are more politicised than a normal company. A standard firm has the incentive to maximise profits by producing what people want, in the less cost, most efficient manner possible. Politicised firms don't, they have incentives to do what the government wants, regardless of the economic consequences of their actions.

This highlights one of the problems with our SOE set-up. Basically the SOE model is unstable. SOEs have two conflicting pressures on them: 1) to be completely privatised, since the productivity and efficiency gains achieved by an SOE are in danger of being eroded over time. Privatisation is a way of both cementing in the commercial orientation of enterprises and wringing out further gains resulting from the high powered incentive and control mechanisms which can be bought to bear in privately owned and publicly traded companies. 2) to be pulled back into the public sector where social and political objectives can be more readily be meet.

The appointment of someone like Cullen, with no commercial knowledge or experience, at least in recent times - if at all, but a lot of political experience signals that the government is more interested in following political agendas than they are in pursuing commercial objectives. If this is the case then outright privatisation of the SOE must be called for.

Again this government is looking very Muldoonish.

(HT: Whale Oil)

Update: Kiwiblog comments here, The Inquiring Mind comments here, Homepaddock comments here and gives links to a number of other, mostly negative, discussions of the, maybe, Cullen appointment.

Interesting blog bits

1. Not PC on John Banks sticks his hand in your pocket.
2. Save the Humans on Recycling: 5 Year Plan Fails. We Must Redouble Efforts.
3. Richard Baldwin and Simon J Evenett on Don't let murky protectionism stall a global recovery: Things the G20 should do

   This column introduces a new Ebook presenting in-depth analysis of i) the collapse of global trade, and ii) the new, murkier protection emerging as governments around the world massively increase their role in the economy. A negative protection-recession spiral is one of the few things that have not yet gone wrong in this crisis. The book presents concrete steps that G20 leader should take to avoid such a spiral and the threat it would pose to global recovery.

4. Elisa Gamberoni and Richard Newfarmer on Trade protection: Incipient but worrisome trends

   Trade protection is on the rise around the world and risks pushing the economy into prolonged contraction. Officials have proposed more than 60 new trade restrictions since the beginning of the financial crisis. While a serious outbreak of protectionism has yet to occur, vigilance and leadership are required.

5. William Easterly on Affluence and Ethics. Helping the poor: What can be done must be done. So what truly can be done? This is a review of Peter Singer's new book "The Life You Can Save".
6. Kiwiblog on the Crown Accounts.

Demand curves slope downwards

MacDoctor writes

It comes as no surprise to me that one of the biggest blow-outs in the ACC bill (proportionally,that is) is the physiotherapy bill. In the first place, making anything “free” will always see its usage maximized. Anyone with even basic economic literacy would have known that. But the denizens of Labour’s health think tanks apparently thought that setting aside a paltry $9 million would be sufficient. One would have thought that it would have been prudent to rethink their policy when the bill actually turned out to be $58 million.

Yes, lower the "price" and quantity demanded goes up. Lower it to zero and ... oh dear.

More on political ignorance

Earlier I posted on work on political ignorance by Eric Crampton. Well now Eric has started his own blog, called Offsetting Behaviour, and has started posting on his work on in this area, see here and here. This will be a blog worth keeping track off, make it a regular read.

Political ignorance and policy preferences

A new paper from Eric Crampton, using an interesting New Zealand data set, on Political ignorance and policy preferences. The abstract reads:

Large proportions of the electorate can best be described as politically ignorant. If casting a competent vote requires some basic knowledge of the incumbent’s identity, the workings of the political system, one’s own policy preferences and the policy preferences of the main candidates, many voters cannot vote competently. Wittman (1989) suggests that, if ignorance is unbiased, overall results will be determined by informed voters as the ignorant cancel each other out. Lupia and McCubbins (1998) provides a mechanism whereby voters with little information can take cues from more informed colleagues in order to vote as if they had the requisite information. Using data from a uniquely useful dataset, the 2005 New Zealand Election Survey, I show that both mechanisms fail. Political ignorance is not unbiased: rather, it strongly predicts policy and political party preferences after correcting for the demographic correlates of ignorance. Moreover, membership in the kinds of organizations held to allow the ignorant to overcome their deficiencies fails to improve outcomes. Voter ignorance remains a very serious problem.

On the relationship between ignorance and party support we learn

In the party support specifications, I restricted the sample to those reporting having voted. When they get to the polls, the ignorant are significantly more likely to support the Labour Party (4% increase in predicted probability for a standard deviation increase in ignorance) and significantly less likely to support the Green party (1% decrease in predicted probability) and United Future (0.5% decrease in predicted probability). Understanding economics strongly predicted supporting National in 2005, which comes as little surprise: the National Party leader was former Governor of the Reserve Bank of New Zealand. A standard deviation increase in our “economic thinking” index correlates with a 5.7% increased probability of voting National, a 1.5% decreased probability of voting NZ First, and a slight decrease in the probability of voting United Future and Maori.

From the conclusion we find out

Using a dataset allowing for testing of ignorance’s effects, I here have shown that ignorance correlates reasonably strongly with policy and party preferences and with failure to understand economics. Moreover, the effects are not trivial, often well outpacing the effects of education. Even worse, membership in the types of organizations most likely able to provide adequate cue-givers fails to substantially attenuate ignorance’s effects. We can perhaps take some comfort in that the politically ignorant also are somewhat less likely to vote.

Does respecting the individual promote prosperity? (updated)

Over at Aid Watch William Easterly asks Does Respecting the Individual Promote Prosperity? Easterly writes

To drastically oversimplify, values across different cultures lie along a spectrum between two separate poles: (1) valuing individual autonomy, believing in equal treatment of individuals, reliance on formal law, the same moral standards apply to all, enforcement of morality is between individuals vs. (2) seeing the individual mainly or only as part of the group, different standards of treatment for group insiders and outsiders, morality only applies to interactions within the group, group enforcement of moral standards, reliance on informal rather than formal institutions.

To continue the drastic oversimplification, the values closer to the first pole are more consistent with the kind of good government associated with democratic capitalism, while values closer to the second pole are more associated with authoritarian and collectivist politics and economics.

[...]

So the bottom line (again drastically oversimplified) could be something like “the value of individual liberty promotes prosperity.”

Should this surprise us? Individual liberty, among other things, helps get the incentives for people to innovate and produce right. The institutions that a society develops to help protect the individual and property rights also help to give the right incentives for people to become entrepreneurs, to develop new technologies, to improve productivity and therefore promote growth. The development of these political, social and economic institutions depends on ideology, in that ideology represents the beliefs and values which underlie these institutions.

Update: Brad Tayor comments on the Easterly piece here and Art Carden does so here.