Incentives matter: the government is here to help file

From Greg Mankiw's blog we get a sad story told by economist Jeff Liebman about the incentive effects of government programs aimed at helping the poor:

... the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Like so many government programmes the incentives are not what were intended. This woman is trapped by the very schemes set up to help her. The real question is do you do about it? Means-tested benefits have to be phased out at some point and at some time, so how and when? As long as you keep the benefit system in place, its not clear that there is anyway to remove benefits from people and keep the correct incentives in place. Jeff Liebman makes three recommendations, for the US case at least:

First, make child-related tax benefits equal for all families (now they are high at the bottom because of the EITC and high at the top because the dependent exemption is more valuable the higher the tax bracket you are in, and the dip in the middle raises marginal tax rates by 21 percent for a family with two kids — so eliminating the dip would get rid of this 21 percent portion of the effective marginal tax rate). [...] Second, in designing universal health insurance, we need to be very careful not to phase out income-related premium subsidies over the same income range where all of these other benefits are being phased out. Third, implement a delay between income increases and rent increases in section 8 — allow people to save up a bit before they are hit with the rent increase (I believe I read that some states have been trying out something like this recently, but I am not up to date on these policies).

Would these ideas really help? They could mitigate some of the worst aspects of the current system, but the main problem remains, the very system provides strong incentives for people to remain in it.

Blog readability test

I subjected this blog to the Blog readability test, which we are told, tell us what level of education is required to understand the blog. And the result is:

Make of that what you will.

(HT: Economic Logic)

The Candidates and Trade

David Ranson has a commentary in the Wall Street Journal on The Candidates and Trade. He looks at the views of the presidential contenders in the US on trade. And its not pretty.

The worst however may be Hillary Clinton about whom Ranson says writes,

Hillary Clinton has taken an even stronger stance against free trade, suggesting that the economic theories underpinning it no longer hold.

A long talk with Jagdish Bhagwati seems in order. Recently Bhagwati made the point, that,

[t]he truth of the matter is that free trade is alive and well among economists, their analytical arguments in favor of it, developed with great sophistication in the postwar theory of commercial policy, having hardly been dented by any original arguments by the few economists, including Alan Blinder in today's debate, arrayed against it.

Ranson ends his commentary by making an important point,

Government policy can influence trading patterns, but it can't force them. Politicians like Mr. Romney tend to feel most at home in a command-and-control environment. But they are living in a dream world if they think they can either dictate or enforce the patterns of trade. The rough justice of the markets will decide.

It's widely assumed that trade opportunities will be unfair unless balance is negotiated with foreign governments. Not so. U.S. imports and exports are tied into an integrated market system. The economy must export goods (or sell off assets) to pay for the imports it chooses. Because the system pays for its imports with exports, reciprocity is automatic. If imports are taxed or obstructed, that acts as an obstruction to exports too. We need a president who is wise enough to recognize that protectionism impedes our exports as well as our imports.

All countries need all politicians to be wise enough to recognise this.

White on the Gold Standard (updated x2)

Lawrence H. White has a new Cato Briefing Paper out which addresses the leading criticisms of the gold standard. The Executive Summary reads:

Critics have raised a number of theoretical and historical objections to the gold standard. Some have called the gold standard a "crazy" idea.

The gold standard is not a flawless monetary system. Neither is the fiat money alternative. In light of historical evidence about the comparative magnitude of these flaws, however, the gold standard is a policy option that deserves serious consideration.

In a study covering many decades in a large sample of countries, Federal Reserve Bank economists found that "money growth and inflation are higher" under fiat standards than under gold and silver standards. Nor is the gold standard a source of harmful deflation. Alan Greenspan has testified before Congress that "a central bank properly functioning will endeavor to, in many cases, replicate what a gold standard would itself generate."

This study addresses the leading criticisms of the gold standard, relating to the costs of gold, the costs of transition, the dangers of speculation, and the need for a lender of last resort. One criticism is found to have some merit. The United States would not enjoy the benefits of being on an international gold standard if it were the first and only country whose currency was linked to gold.

A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money. From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.

Update: Tyler Cowen comments at Marginal Revolution: Should we consider a gold standard?

Update 2: Larry White responds to Cowen at Division of Labor: Reply to Tyler Cowen on gold.

The usefulness of Budget statements

Roger Kerr has an interesting article in the Otago Daily Times of Friday, 8 February 2008 highlighting some of the inconsistencies in budget statements made by the current government since 1999. Each budget seems to have different goals and objectives with no obvious aims or themes running through them. (Ok maybe the major theme is keeping the government in power.)

In the 2000 budget, for example, "Closing the Gaps" was all the rage but by the time the 2001 budget rolled around, economic growth was the all important issue. But as China is finding out right now rapid economic growth - and yes China unlike New Zealand really does have rapid economic growth - can at least initially increase income inequality. As economist Kenneth Rogoff has recently written,

... income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem.

So was "Closing the Gaps" really important in 2000 but unimportant in 2001, when suddenly economic growth became so important that it had to be archived despite the fact that it could, at least in the short term, "Widen the Gaps"?

And this is just one example of an apparent inconsistency in budget statements. Given the ease with which Roger Kerr seems to be able to find such inconsistencies I wonder why journalists have not been raising this issue. A rational, organised, well articulated economic vision for the country would seem to be desirable if we are to achieve what ever economic goals it is that the government has. It would also be nice if the government could spell out, and stick to, these goals in a consistent manner. But the lack of interest by journalists may be related to another recent Kerr article in the ODT on the standard of economic journalism in this country.

But perhaps the major reason for ever changing budget statements is that the government is just pandering to what it perceives as the current concerns of voters. After all, the main concern of any government is remaining the government, no matter what the cost to the country at large. Just think of the current situation in Zimbabwe for an extreme example.

Ban cheap imports?

At the Adam Smith Institute blog they deal with a common error in many people's economic thinking, namely that "We should ban cheap imports made possible by low wages and poor working conditions." They open their discussion with the observation that

The opportunity to sell us goods gives some people in poorer countries their start on the road to economic growth. The wages which might look like "subsistence" to us, might look like survival to them.

Exactly. The whole article is well worth reading.

GDP growth the hard way.

In capitalist economies, firms pay higher wages to motivate workers who fear unemployment. In Soviet Russia, Stalin used the Gulag to discipline workers. The economic rationale of the ‘efficiency wage’ model helps explain the cruel brutality of Stalin’s prison camps. Marcus Miller and Jennifer Smith have a summary of their research looking at the economics of the Gulag at VoxEU.org. The research itself is available as CEPR Discussion Paper 6621: Punishment Without Crime? Prison as a Worker-Discipline Device.

In the 1930s Stalin faced a problem, If the labour discipline needed for creating a Socialist Utopia was not to be the threat of unemployment - as in the West - what else could it be? His answer, the Gulag.

Estimates by Miller and Smith imply that about half of one percent of the civilian labour force was incarcerated each year, and around one fifth of existing prisoners released (or died in custody). These flows average just under 400,000 per year. Under Stalin's rule the implied equilibrium for the size of the Gulags was about 2 million persons, i.e. almost three percent of the working population in labour camps.

It has been argued that work incentives in capitalist countries are preserved because those caught shirking face the threat of unemployment and loss of income. The 'No Shirking Condition' for wages constitutes the effective labour supply curve for the economy. Labour demand is given by its marginal productivity. Millar and Smith apply the same broad logic to the Soviet system with two significant alterations.

First, in deriving the No Shirking Condition for labour supply, custodial sentences replace spells of unemployment-on-benefit as the worker-discipline device', so the supply price of labour falls not with the numbers of unemployed but with the population of the Gulag. Second, wages are set below the marginal productivity of labour as the dictator exercises monopsony power in the labour market to maximise investible funds.

Miller and Smith point out that

The economic rationale for the Gulag does not encompass randomised terror for political ends: by raising the supply price of labour, it is economically counter-productive. So too is random application of coercive labour laws, exemplified by Stalin’s ‘five per cent rule’ for denunciation.

What the are the main features of the Soviet system?

It is a society where everyone works and substantial resources are generated either for investment or for military expenditure – whatever the dictator decides. The state commands a goodly share of national resources, but wages are pushed down to ‘efficiency’ levels – just high enough to prevent shirking. No-one is unemployed, but many are in labour camps.

Next Miller and Smith look at coercion versus capitalism: survival of the fittest? They provide an overview of their argument using Figure 2 from Punishment without crime? The Gulag as a worker-discipline device.


In Miller and Smith's Figure 2 each system, Russian and the West, are represented by two schedules:

a downward-sloping marginal productivity of labour schedule, MPL; and an upward-sloping curve showing the effective supply price of labour (labelled NSC to denote the lowest wage consistent with the No Shirking Constraint).

In the Russian case, shown by the bold curves, the No Shirking Constraint is based on imprisonment. Wages are kept down by the fear of being sent to the Gulag. These wages are set to maximise the resources available to the state. This results in wages being below the marginal product of labour since civilian employment is restricted due to the state's domination of resources.

In the Western case, where those not in work are unemployed on benefit. There is a higher supply price of labour (shown by the dotted line NSC'), and higher labour productivity (MPL'): but equilibrium depends, in the Miller and Smith model, on whether or not there is demand deficiency.

The demand deficiency case is represented by the dotted vertical line in Miller and Smith's Figure 2. With such a demand constraint limiting the quantity of output that can be sold, the labour market equilibrium is at D, with mass unemployment and wages depressed to the lowest incentive-compatible level. Think of a Keynesian explanation for the Great Depression.

What of the Stalinist case?

Due to the low level of capital per head in Russia at the beginning of industrialisation, the productivity of labour is below that in the West; and the compression of real wages is a sign of the effort to catch up with the West by rapid capital accumulation. Real wages are not high in either system, but massive investment in Russia carries promises of a brighter future. Compared with the West in Depression, higher employment in Russia is relatively attractive for those in jobs: but for those not in jobs, the Gulag replaces the unemployment queue.

What of the no demand deficiency situation? Let the Western equilibrium be the competitive equilibrium.

There is no demand failure, so employment rises until the supply price of labour shown as NSC' matches its marginal productivity (and output is maximised subject to the incentive constraint imposed by asymmetric information) at point B.

What of the Stalinist position?

Assume ... that Russia remains in equilibrium at C. What does the command economy offer now? Lower wages; lower output ; and higher coercion.

Thus the economic rationale for the Gulag is as a labour-discipline device and the economic incentives were such that discipline was harsh. Deadly so in many cases.

Another member of the Coalition against Fiscal Stimulus

Greg Mankiw tell us he has found another member of the Coalition against Fiscal Stimulus. This time its the President of the European Central Bank, Jean-Claude Trichet. At a recent press conference he said,

With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be avoided. There is ample evidence that activist fiscal policies were not effective in stabilising European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries with strong fiscal positions and safeguarding the long-term sustainability of public finances are the best contributions that fiscal policy can make to macroeconomic stability. Countries with fiscal imbalances are urged to make further progress with consolidation, in line with the requirements of the Stability and Growth Pact. There is a clear risk that some countries will fail to comply with the provisions of the preventive arm of the Pact, thereby undermining its credibility.

Bill v. Bill

In the Wall Street Journal Bill Easterly writes on Why Bill Gates Hates My Book. The book in question, I assume, is Easterly's The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Easterly opens this commentary by pointing out that

This newspaper [WSJ] reported recently that Bill Gates hates my ideas. I have no hurt feelings, at least nothing that months of intensive psychotherapy can't cure.

He then writes that Bill Gates thinks that entrepreneurs will fall all over themselves to meet the needs of the rich but have no incentive to serve the poor. Bill Easterly responses,

Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor's needs by boosting the "recognition" of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet.

Easterly goes on

First of all, the recognition motive has proven to be awfully weak compared to the profit motive. Otherwise we would have had a lot more than the $5.1 billion of annual American corporate philanthropy to the Third World (as of 2005, which has the most recent reliable figures). That was four one-hundredths of 1% of the $12.4 trillion of U.S. production for the free market. Is it really the poor's only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?

Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.

The Easterly bottom line,

... profit-motivated capitalism is still the best hope for the poor.

Game, set and match Easterly.

(HT: Greg Mankiw)

Can offshoring create domestic jobs?

Outscourcing has been a major concern all around the world in recent years. Here in New Zealand Alliance Party president Victor Billot is reported to have said,

... a manufacturing policy had to be introduced that stopped the bleed of skills and jobs to low wage economies, which had to include tariff and other support for producers, and disincentives for outsourcing and relocating corporates.

In the US Alan Blinder warn that about the social affects of outscouring,

massive transformations in the nature of work tend to bring wrenching social changes in their wake.

Mankiw and Swagel noted that in the runup to the 2004 US election,

outscourcing became synonymous in the public debate with job loss

Is there any basis for such concerns?

This CEPR Policy Insight outlines empirical research that looks at the effects of outscouring on the Japanese domestic labour market. The research on which the policy Insight is based is

Ando, M. and F. Kimura (2007), 'International Production/ Distribution Networks and Domestic Operations in Term of Employment and Corporate Organization: Microdata Analysis of Japanese Firms,' September, Keio University mimeograph.

First note that theoretically the effect of offshore outsourcing on domestic operations may be positive or negative. The outcome depends on whether the cost savings from offshoring make the firm more competitive, inducing it to expand at home, and whether the activities abroad are complementary to domestic operations.

To see what the actual effects of outscouring where for the Japanese labour market data from a comprehensive survey of firms with more than 50 workers or capital exceeding 30 million yen conducted by the Japanese government's Ministry of Economy, Trade, and Industry for fiscal years 1998 - 2003 was studied. The firms in the data set primarily offshore to East Asia.

A cursory examination of the data suggests that domestic employment is not reduced by offshoring. While the majority of firms in the survey cut jobs between 1998 and 2003, those expanding their operations in East Asia did so much less than those that did not. For example manufacturing firms going abroad for the first time averaged domestic employment growth of 9.1% and firms expanding their offshoring only cut domestic employment by 2.2%. In contrast, manufacturing firms with no change in their offshore presence reduced domestic employment by more than 5%, and those reducing their East Asian operations cut jobs by more than 10%.

Overall the data suggests that at the firm level pursuing foreign direct investment (FDI) in East Asia is associated with positive affects on employment, establishments and affiliates in the home market, Japan.

When econometric methods are applied to the data they demonstrate that the correlation noted above holds when the authors control for other variables, such as firm size, capital-intensity, the ratio of foreign to domestic sales, research and development activity, advertising expenditures, and foreign capital holding the firm. For manufacturing firms, expansion of operations in East Asia is associated with no decline in domestic employment. The analysis by Ando and Kimura also shows no statistically significant relationship between the expansion of manufacturing operations in East Asia and a decline in the number of domestic establishments or affiliates. They note, importantly, that domestic and foreign operations appear to be complements, not substitutes.

As to why this is the case Ando and Kimura point out that growth in manufacturing operations in East Asia and grow in domestic employment may reflect a need to expand domestic production of key parts and components exported to East Asia or an intensified specialisation in headquarters services at home as a result of fragmentation of production. It is also be possible that globalising manufacturing firms succeed in differentiating products produced in the domestic market from those produced elsewhere in East Asia.

It is also noted by Ando and Kimura that the positive impacts on domestic employment due to globalising manufacturing activities grow over time.

While expanding operations abroad are correlated with a 3% increase in domestic employment over a one year horizon, they are associated with an 8% increase over a five year period, compared with others.

In summary,

The statistics and our formal analysis both suggest that globalising manufacturing firms are less likely to reduce their domestic employment than other firms. In fact, controlling for other firm characteristics, they experience greater job creation at a rate as high as 8%.

Perhaps Mr Billot should think about these results.

Marginal Revolution book forum 4

In the fourth of the Marginal Revolution book forums Megan McArdle looks at chapter 4 of the Logic of Life: Why your boss is overpaid.

Kenneth Rogoff on China

Kenneth Rogoff has an article in the Financial Times on why China may yet be economy to lose sleep over. Rogoff writes

In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging.

If recession was to happen, Rogoff asks, what would happen to global growth? He goes on to point out that

With all due respect to the extraordinary recent performance of China’s managers, the country faces economic, financial, social and political landmines just like any other emerging market, with epic environmental problems to boot. And, throughout history, no emerging market has escaped bouts of crisis indefinitely.

An interesting point he makes in this regard is

Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem.

Telecommunications mandatory unbundling

Mandatory unbundling in telecommunications markets has been a hot topic in a number of countries around the world, including New Zealand, for sometime now. One obvious issue is What are the effects of such a policy? Did it achieve what it was designed to achieve? There is a new working paper out, entitled Did Mandatory Unbundling Achieve Its Purpose? Empirical Evidence from Five Countries by Jerry Hausman and Greg Sidak, that addresses these issues. In this article, Hausman and Sidak evaluate the rationales offered by telecommunications regulators around the world for pursuing mandatory unbundling.

First, mandatory unbundling is defined, with brief descriptions of different wholesale forms and different retail products. Hausman and Sidak note that

The term ‘mandatory unbundling’ describes an involuntary exchange between an incumbent network operator and a rival at a regulated rate where the scope of unbundling is determined by regulators. Determination of the access rate thus becomes the major bone of contention between incumbent and entrant, as a regulatory access rate that is equal to the voluntarily agreed-upon access rate cannot really be said to constitute ‘mandatory’ unbundling. When formulating that access rate, regulators have generally opted in favor of a measure of total element long-run incremental cost (TELRIC) or total service long-run incremental cost (TSLRIC) and against a measure of opportunity cost or option value.

Then the four major rationales for regulation of this kind are looked at: (1) competition in the form of lower prices and greater innovation in retail markets is desirable, (2) competition in retail markets cannot be achieved with mandatory unbundling, (3) mandatory unbundling enables future facilities-based investment (stepping-stone or ladder of investment hypothesis), and (4) competition in wholesale access markets is desirable.

Next Hausman and Sidak proceed by testing empirically the major rationales in the United States, the United Kingdom, New Zealand, Canada, and Germany. For each case study, they review the mandatory unbundling experience with respect to retail pricing, investment, entry barriers, and wholesale competition.

The lessons learned from unbundling are then reviewed by Hausman and Sidak. There are two possible explanations for why a rationale for mandatory unbundling at total element long-run incremental cost (TELRIC) was not substantiated in practice. First, the rationale was never supported in theory. Second, the rationale was supported in theory but those theories could not be transported from textbook into practice. For example, an exogenous shock, unforeseen by the regulators, may have occurred and the regulatory framework was not sufficiently flexible or robust to cope adequately with it.

Rationales (2) and (4) are not supported in theory, which implies it was unlikely for regulatory intervention to serve its purpose. Rationale (2) fails in theory since rationale cannot account for the significant facilities-based competition that has emerged independent of mandatory unbundling. Rationale (4) fails in theory as well. This is the idea that mandatory unbundling would stimulate competition in the wholesale market for network elements. If wholesale supply of network elements were a viable business strategy, then one would expect several firms to pursue and succeed at such a strategy. But the experience suggests that the most valuable ‘component’ of the network is the carrier's relationship with the customer. It therefore makes little sense to cede this valuable asset to an intermediary for the sake of avoiding the retail costs of providing the service to the end user. Moreover, the idea of divorcing the wholesale activities from the retail activities ignores the significant economies of scope that can be realized in their joint production. For these reasons, it was not reasonable to expect that mandatory unbundling would induce new carriers to enter and limit their business plans to wholesale activities only.

By contrast, the stepping stone hypothesis and lower retail prices were theoretically plausible under certain assumptions yet were not satisfied in practice. The stepping stone hypothesis may have failed due to selection bias created by the unbundling program—that is, the very firms that were attracted to compete with the aid of government support were not interested in developing long-term rival networks. Retail prices may not have declined as quickly as regulators had hoped due to the divergence of interests between managers and shareholders of telecommunications firms or because regulated telecommunications prices are not subject to market power by their incumbent providers in the first place.

Britney saves Paul David?

Peter Klein at the Organizations and Markets blog points us to a nice piece by Thom Lambert on Britney Spears over at Truth on the Market. Lambert thinks that may be, just may be, Britney's popularity isn't due to intrinsic merit (shock, horror) but it may be due to network affects. People are interested in Britney because other people are interested in her. Lambert suggests that Britney is like the QWERTY keyboard, grossly inefficient but still hard to replace. As Klein notes, the inefficient keyboard fable has been pretty well demolished by Liebowitz and Margolis; So is Britney the first true example of market failure due to network effects?!

I can only hope that Paul David is looking into this as I type.

Why Capitalism is Good for the Soul

We know that capitalism delivers the goods and socialism has failed to do so. When allowed to, we know that capitalism has increased people's wealth and well being while when tried socialism hasn't. So why is it that socialism managers to inspire so many while capitalism doesn't? Why do people distrust market processes and turn to the state to provide security and stability? Peter Saunders has a nice discussion of these issues.

Top econ producers

Here is the most up-to-date ranking of the top producers of new economic knowledge.

Its got to be a bum list, as I didn't make the top 5% of economics authors, yet again.

(HT: Greg Mankiw)

Go Microsoft and Yahoo? (updated x3)

Perhaps the best reason for supporting the Microsoft bid for Yahoo is the efforts Google seem to be putting in to stop it. May be Google just doesn't want the competition.

When consumers did not ask for antitrust actions but rival firms do, you have to worry. Are such anti-trust actions just firms trying to handicap their rivals’ by turning to the government for protection.

High technology markets are among the most dynamic and competitive in the world but such competition places heavy pressures on rival businesses, which must keep pace or lose out. Rivals can legitimately respond by improving their own products or by lowering prices. These are actions from which consumers gain. Increasingly we see, however, antitrust authorities are being asked to respond to increased competition. We see more protectionist demands by uncompetitive firms. This results in the workings of markets being short-circuited. Antitrust protectionism means that market decisions about how to compete for consumers’ favour are displaced by bureaucratic and political decisions. More of the energies of firms are directed to politics, less to production and innovation. Consumers and innovators are the losers, innovation is penalized, competition is thwarted and price aren't stopped from rising they are prevented from falling.

This isn't the first time we have seen such moves in the high tech sector. Ten years ago attacking Microsoft was all the rage. Similar issues arose in that case. Have consumers really benefited from all the antitrust action against Microsoft? At that time a number of economists thought they would not. Here is an Open Letter on Antitrust Protectionism (pdf) from that time which still seems relevant today.

(HT: Alex Tabarrok, Marginal Revolution)

Update: Chris Makler comments at the Aplia Econ Blog, noting that "... since Google's position is so dominant, it might actually help consumers if Google had a larger adversary within the industry."

Update 2: The Economist has an article looking at the offer, The Microhoo! hoo-hah.

Update 3: James D. Miller comments, Google's reaction to Microsoft's Yahoo! bid. He argues, "Businesses hate competition. So if a Microsoft - Yahoo! merger would greatly reduce competition in online markets then Google would benefit. But Google opposes the merger so the merger probably wouldn't significantly reduce competition"

Rational ignorance ... or the school system?

According to this report a recent poll in the UK showed that 23 percent of people thought World War II prime minister Churchill was made up, 58 percent thought Sir Arthur Conan Doyle's fictional detective Holmes actually existed and 33 percent thought the same of W. E. Johns' fictional pilot and adventurer Biggles.

I'm sure this is reassuring news for the UK educational establishment. But would New Zealanders do any better?

Dan Klein on Coordination and Cooperation

Russ Roberts interviews Dan Klein this week on EconTalk. Klein of George Mason University talks about the marvel of economic coordination that takes place without a coordinator--the sequence of complex tasks done by individuals often separated by immense distances who unknowingly contribute to everyday products and services we enjoy. Klein also discusses what he calls "the people's romance"--the idea that the highest form of human cooperation is through government action.

Frederic Sautet on New Zealand (updated x2)

Frederic Sautet has an interesting and insightful post on the economic and political situation in New Zealand on the Austrian Economists blog.

He is right when he says

[...] that NZ didn’t become a Pacific tiger because the reforms, while extensive, zigzagged for too long and stopped short of the radical turn necessary to transform a heavy social democracy into a speed boat.

The famous Lange "breather and a cup of tea" of 1987 is still going on. Lange's cancelling of the reform package: flat tax, targeting of welfare benefits, the introduction of an element of user-pays into health, asset sales and so on, was the beginning of the end. If this package has gone through New Zealand's situation today would have very different. That speed boat could have been cruising the world's economic fast lanes.

Sautet goes on the say

The good news is that the political center, as the result of the reforms, has moved tremendously in the last 20 years, and in the right direction.

On this I'm not so sure. The recent student loan policy from National shows just how unstable the political center can be. Clearly it is just a vote buying exercise of the type we don't need.

But Sautet is right when he states

NZ never seriously reduced the size of its government expenditures.

As I have noted before the ratio of tax to GDP have been increasing over the last 30 years. In 1975 New Zealand's ratio was 28.5%, in 2005 it was 37.8%. The reforms haven't stopped this and this is one of the biggest failures of the reformers. And what is more worrying is that the gap between New Zealand and Australia in terms of this ratio is increasing. In 1975 New Zealanders paid a bit less than 3% more of GDP in tax than Australians, while by 2005 the gap had risen to about 7%. Not a good look.

The most important point Sautet makes, however, may be

The battle of ideas was won in the 1980s and 1990s. However, the battle of implementation was never fully won (see Peter Boettke’s interesting speech on this subject in NZ two years ago). This is now coming back to haunt us and, as a result, the battle of ideas is on the verge of being lost again.

If the battle of implementation has been lost then this raises the question, Under what conditions could it be won? Must there be an even bigger economic crisis than we had in 1984? Must we move even faster in the implementation of policy than we did post-84? Is gradual reform an oxymoron? Is politics the enemy of reform? The reality seems to be that it is a lack of political will that results in the losing of the battle of implementation. And in New Zealand right now there is little evidence that there is any political will to rejuvenate the reform process.

Update: For comments by Frederic Sautet see here.

Update 2: At Marginal Revolution, Tyler Cowen has this to say about the Sautet posting:

Speaking of small countries, Fred Sautet has an interesting blog post on what happened to the New Zealand reforms. Since the reforms starting in the 1980s, New Zealand has had excellent economic policies, probably better than Mauritius can expect to implement. But New Zealand has not had stunning rates of economic growth. A big part of the answer is simply that New Zealand still depends on the demands for dairy and agriculture. Yes, many parts of the country are booming but the worldwide demand for commodities is a big part of the reason why. The deregulation of agriculture helped but without rising food prices growth would be lower yet. Earlier, it was Britain's removal of imperial preference in 1972 that sent the country tumbling over the edge in the first place. Yes freedom is still better but in general small countries are less of an "economic laboratory" than we might think. Conversely, while there are some good explanations for "the Irish miracle," a small country with a few million people can with good luck grow quite rapidly.