Incentives matter: smoking ban file

From the New Zealand Herald:

A squeeze on cigarettes is already causing fights in prison, says an ex-inmate just released from Waikato's Rangipo Prison.

and

Overseas, smoking bans in prisons have produced a few riots, black market smuggling, and some bizarre alternatives to tobacco by addicted inmates.

In Quebec, up to 70 inmates rioted and lit fires two days after a smoking ban came into force at the Orsainville detention centre near Quebec City in 2008. A total ban was rescinded the next day to allow smoking outside.

In Vermont, a thriving black market and prisoners smoking powdered juice led to an easing of its bans in 1992 to allow smoking outdoors.

The Edmonton Sun, meanwhile, reported that grass, leaves, tree bark, toast crumbs, pepper and nicotine patches had been smoked at a local prison, rolled in pages from the Bible and lit by sticking staples into electrical outlets.

Does this behaviour come as a surprise to anyone? Ban something and you give people the incentive to form black markets and to look for substitutes. And to use violence to obtain and control whatever supply there is available.

Titles I just like ........

At AidWatch they note that Celebrities urge G8 to make new unkept promises to keep previous unkept promises.

EconTalk this week

Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about two books: Eugene Richter's Pictures of the Socialistic Future and F. A. Hayek's The Road to Serfdom. Both books warn against the dangers of socialism. Pictures of a Socialistic Future, published in 1891 is a dystopian novel imagining what life would be like after a socialist revolution. The Road to Serfdom, published in 1944, explores the links between economic freedom and political freedom and the inherent similarities between communism and fascism. Both books look at the German roots of centralized planning and the nature of the people who rise to power when the State is powerful. The conversation includes discussion of the these topics as well as the rule of law and the amount of state control of the economy in Nazi Germany.

The Standard is right

No seriously!

Read Eddie's post on Why you don’t give the State too much power. Its about the police abusing their powers to take DNA samples. Eddie ends by saying

The Police should never have been given the power to take DNA off people at such a low threshold. It should be handled by an independent group and only on conviction. Letting the Police take DNA off anyone they arrest gives them too much incentive to bend the rules, and that seems to be happening.

Yes incentives matter, even for the police. We need greater controls on on when and why the police can take DNA samples.

Also you do have to ask why only the Greens and Maori opposed the law change that gave the police these powers. Civil liberties don't appear to have many supporters in Parliament these days.

No Right Turn also notes that the police have gone Fishing for DNA. Every so often even the left are right.

How regulation doesn't work in practice

From the New York Times,

An examination by The New York Times highlights the chasm between the oil industry’s assertions about the reliability of its blowout preventers and a more complex reality. It reveals that the federal agency charged with regulating offshore drilling, the Minerals Management Service, repeatedly declined to act on advice from its own experts on how it could minimize the risk of a blind shear ram failure.

It also shows that the Obama administration failed to grapple with either the well-known weaknesses of blowout preventers or the sufficiency of the nation’s drilling regulations even as it made plans this spring to expand offshore oil exploration.

and

Even in one significant instance where the Minerals Management Service did act, it appears to have neglected to enforce a rule that required oil companies to submit proof that their blind shear rams would in fact work.

While government regulation may be wonderful in theory, it's not so good in practice.

EconTalk this week

Scott Sumner of Bentley University and the blog, The Money Illusion, talks with EconTalk host Russ Roberts about the last 30 years of economic policy and macroeconomic success and failure. Sumner argues that there was a neoliberalism revolution beginning in the 1980s around the world, an era of deregulation, privatization and falling marginal tax rates. Sumner argues that the states that liberalized the most had the most successful economic results. Roberts argues that it is difficult to assess the independent effect of various policy changes and points to many areas--in the United States at least--where government involvement increased in important parts of the economy, and Sumner responds. Sumner also talks about the importance of culture in economic performance.

Jeffrey Miron interview

On C-Span Jeffrey Miron talks about his book, Libertarianism, from A to Z and he responds to telephone calls and electronic communications. The book is about Libertarian principles and what Libertarians think about current issues.

Everyone hates privatization, but why?

A new paper by Irina Denisova, Markus Eller, Timothy Frye, and Ekaterina Zhuravskaya on Everyone Hates Privatization, but Why? Survey Evidence from 28 Post-Communist Countries. This paper is to be presented at 14th Annual Conference of The International Society for New Institutional Economics at the University of Stirling, Scotland, UK, June 17 – 19, 2010. The abstract reads:

A 2006 survey of 28,000 individuals in 28 post-communist countries reveals overwhelming support for revising privatization, but also that most respondents prefer to leave firms in private hands. We test whether individuals support revising privatization primarily due to a preference for state property or due to concerns about the legitimacy of privatization. We find that a lack of human capital and privately owned assets affects the support for revising privatization primarily via a preference for state property over private property; whereas transition-related hardships influence support for revising privatization via both a preference for state property and concerns about the illegitimacy of privatization. These results suggest the value of analyses that not only link respondent traits with support for policy, but that also probe the motivations that underpin this support.

Denisova, Eller, Frye, and Zhuravskaya suggest several broad conclusions follow from their analysis. First, dissatisfaction with privatisation should not be equated with a preference for state property. Support among the general public for revising privatisation in postcommunist countries is broad and deep. More than 50 percent of the population in each of the 28 countries and over 80 percent of all respondents support some form of revision of privatisation from levying additional taxes on current owners of privatized assets to the full expropriation and re-nationalization of assets. However Denisova, Eller, Frye, and Zhuravskaya report that only 36 percent out of those 80 who support revision of privatization - ie 29 percent of all respondents - hold these views because of their preference for state ownership. The remaining 64 percent of supporters of privatisation revision - roughly a half of all respondents - prefer private property despite their support for privatisation revision. Such views are due to a massive discontent with the process and outcome of privatisation in transition countries. One wonders how much of the anti-privatisation feeling in New Zealand, and other western countries, is due to this factor.

While it is important to identify factors that influence peoples' preferences over revising privatisation, it is also important to explore their underlying motives for holding their views.

Discriminating between these motivations is important as they suggest very different policies to increase the legitimacy of privatization. Some oppose privatization because they prefer state ownership, which in turn could be rooted in ideology or personal interest. Others favor private property in principle, but oppose privatization because it resulted in an illegitimate distribution of wealth. When public support for the revision of privatization is rooted in relative losses from declining returns to human capital (as is the case for less skilled and long-time state sector workers), then retraining programs designed to match skills with demand from the new market sectors may prove to be an effective tool. In contrast, when public support for the revision of privatization is driven by concerns of legitimacy, and this is the case for the majority of population of transition countries, governments may have to revise privatization results through policies ranging from redistributive taxation to expropriation of current owners of privatized assets which necessarily generate distortions in the investment decisions of current owners.

When people's human capital is poorly suited for a market focussed organisation then the economic hardships suffered by these people, because of privatisation and exposure to work outside of the state sector, could
significantly increase support for opposing privatisation in the first place and for revising privatisation should it happen. Human capital changes only slowly and policy changes such as privatisation can make specific human capital largely obsolete over night. It is not hard to believe that people caught up in such changes would oppose privatisation, at least in the short term. This could be one factor in the opposition to privatisation in New Zealand.

Denisova, Eller, Frye, and Zhuravskaya close their paper by noting

Two optimistic lessons emerge from our analysis for those who are concerned about the consequences of revising privatization. First, while support for revising privatization in the region is very high, about 70 percent of respondents ultimately support private property. Second, most of the support for the revision of privatization due to illegitimacy comes from negative personal experiences during the transition, and these transition experiences are likely to play a smaller role in shaping attitudes over time.

Expectations and the employment effect of minimum wages

From the Economic Logic blog comes this comment on Expectations and the employment effect of minimum wages. In many markets it is known that anticipated changes in policy can have different effects to unanticipated changes in policy.

Sara Polini applies this idea to labor markets and specifically to the anticipation of movements in the minimum wage. She builds a search and matching model and applies it to Spain where minimum wage changes are usually anticipated, but occasionally not, like after the 2004 terrorist attack that lead to a surprise Socialist government. Anticipated changes lead to a reduction in employment, while unanticipated ones do not. This reconciles the ambiguous and inconclusive results in the literature, which ignored whether changes were anticipated or not.

But what happens over time, presumably unanticipated changes will have to be adjusted for at some point in the future.

Jeffrey Miron on the death penalty

He writes,

Death penalty supporters rely on three arguments. First, that the possibility of capital punishment deters crime by increasing the expected punishment that confronts rational, forward-looking murderers. Second, that executing criminals convicted of the most serious crimes is cheaper than incarcerating them for life. Third, that murderers deserve to die.

None of these arguments is persuasive. Decades of social science research finds little evidence that the death penalty deters murder. Some murderers are not forward looking (e.g., perpetrators of crimes of passion), and forward-looking murderers correctly believe their chances of being executed, even if arrested and convicted, are low and will only occur years or decades after conviction. The monetary savings from use of the death penalty are overstated, since fighting appeals from death row prisoners is costly. Moral considerations do not resolve the issue because many people believe it is wrong for the state to take a life, no matter how heinous the crime.

The death penalty, moreover, has unintended consequences. Capital punishment eliminates the possibility of correcting mistakes. This is not an enormous effect if most convicted murderers are guilty, but everyone benefits from correcting the mistakes that do occur. As with gun control, the death penalty is a distraction. Society wastes substantial energy arguing about the death penalty rather than focusing on policies that would actually reduce crime, such as ending drug prohibition, legalizing prostitution, and improving educational outcomes.

The effects of the death penalty is one of the most controversial issues in law and economics. At Freakonomics Justin Wolfers blogs on How the Supreme Court Misread My Research: Empirics and the Death Penalty. Wolfers writes

Cass Sunstein and I have an Op-Ed in today’s Washington Post, discussing the mis-reading of available empirical evidence in recent death penalty jurisprudence. Some background: A recent Supreme Court ruling (Baze v. Rees) reaffirmed the constitutionality of the death penalty, and along the way, the justices revisited the empirical literature on whether the death penalty has been shown to be an effective deterrent. Justice Stevens cited research by John Donohue and myself in concluding that “there remains no reliable statistical evidence that capital punishment in fact deters potential offenders.” Countering this, Justice Scalia cited a paper by Cass Sunstein and Adrian Vermeule, in arguing that the data do in fact point to deterrence. As two of the supposed flag bearers for the competing views cited by the court, Sunstein and I thought it worth poring over the data to see what we agree on. It turns out there’s a lot of agreement between us: “In short, the best reading of the accumulated data is that they do not establish a deterrent effect of the death penalty.”

Ronald Bailey at Reason magazine asks Does It Really Matter If The Death Penalty Deters Murderers? In the article Bailey argues

The reason to retain the death penalty is vengeance, or as more polite people put it, retribution.

But notes at the end of the article

... in the era of post-conviction exoneration through DNA testing, I have become much more uncomfortable about the possibility that an innocent person might be executed.

This I think is the biggest problem with the death penalty, if you get it wrong there is nothing you can do about it ex post.

An economic forecast I'm almost certain will come true ...........

(HT: Aid Watch)

The rise and fall of central banking

In this audio from VoxEU.org Howard Davies, director of the London School of Economics, talks to Romesh Vaitilingam about his new book, co-authored with David Green, ‘Banking on the Future: The Fall and Rise of Central Banking’. Among other things, they discuss the cost-effectiveness of central banks, the characteristics of an ideal central bank governor, and potential reform of the voting structure at the European Central Bank.

Paul Samuelson misread Hayek (updated)

Hands up who is surprised to hear that!

Donald J. Boudreaux writes to the Wall Street Journal

Justin Lahart accurately reports that, as recently as last year, the late Paul Samuelson dismissed F.A. Hayek’s book The Road to Serfdom as alarmist and wrong: “Sweden and its Scandinavian neighbors are among the most socialistic countries in the world, as Mr. Hayek defined them, Mr. Samuelson pointed out. ‘Where are their horror camps?’ he [Samuelson] wrote” (“The Glenn Beck Effect: Hayek Has a Hit,” June 17).

But Mr. Samuelson profoundly misread Hayek’s book. Hayek said that “the planning against which all our criticism is directed is solely the planning against competition – the planning which is to be substituted for competition.” So because Scandinavian countries emphatically do not plan in this way, Samuelson was mistaken to say that their socialism is of the sort that Hayek believed paved the road to serfdom. Those countries have reasonably free trade, only light regulation of capital markets and business, and strong private property rights. In short, all Scandinavia retains what for Hayek was the most significant protection against serfdom: competitive economies.

And while Hayek would disapprove of the size of Scandinavian welfare states, he stated explicitly that “Nor is the preservation of competition incompatible with an extensive system of social services.”

Paul Samuelson’s long history of misrepresenting Hayek’s arguments has done a great disservice not only to one of the 20th century’s wisest minds but also – and more importantly – to the countless people who would have read Hayek but for Mr. Samuelson’s mischaracterization of The Road to Serfdom.

While I'm not surprised to read that Samuelson misrepresented Hayek's work I do sometimes wonder why people focus so much on The Road to Serfdom when talking about Hayek's work. It isn't his best stuff. To me his papers like "Economics and Knowledge", "The Use of Knowledge in Society" and "Competition as a Discovery Procedure" are much more interesting and important.

Update: In the comments Eric Frampton points us to this interesting looking paper on the Hayek-Samuelson debate: Hayek, Samuelson, and the logic of the mixed economy? by Andrew Farranta and Edward McPhail.

A legacy of the holocaust in Russia

A new paper by Daron Acemoglu, Tarek A. Hassan and James A. Robinson looks at Social Structure and Development: A Legacy of the Holocaust in Russia. The abstract reads:

We document a statistical association between the severity of the persecution and mass murder of Jews (the Holocaust) by the Nazis during World War II and long-run economic and political outcomes within Russia. Cities that experienced the Holocaust most intensely have grown less, and both cities and administrative districts (oblasts) where the Holocaust had the largest impact have worse economic and political outcomes since the collapse of the Soviet Union. Although we cannot rule out the possibility that these statistical relationships are caused by other factors, the overall patterns appear generally robust. We provide evidence on one possible mechanism that we hypothesize may link the Holocaust to the present the change it induced in the social structure, in particular the size of the middle class, across different regions of Russia. Before World War II, Russian Jews were predominantly in white collar (middle class) occupations and the Holocaust appears to have had a large negative effect on the size of the middle class after the war.

Sometimes history matters in very bad ways.

Has Frampton met Crampton?

The Press tells us that, with regard to the Christchurch mayoralty race,

Canterbury University senior economics lecturer Eric Frampton, who sits on the iPredict advisory board, said the Christchurch mayoralty contest had attracted plenty of trading.

and

"Parker started to drop after Anderton confirmed he was running and he fell further after this week's poll came out," Frampton said.

Perhaps Eric Frampton should meet his colleague Eric Crampton, of Offsetting Behaviour fame, they seem to have much in common.

Well done The Press!! Not.

How to fight the war on drugs

I have just come across a 2004 NBER working paper on "The Economic Theory of Illegal Goods: the Case of Drugs" by Gary S. Becker, Kevin M. Murphy, and Michael Grossman. The abstract reads:

This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs. (emphasis added)

What this means is that legalisation of drugs is the best anti-drugs policy.

Ed Glaeser has this to say on the Libertarian view of the drug war in his review of Jeff Miron's book "Libertarianism, from A to Z",

In some cases, like drug legalization, his views are clever if not nuanced -– “the right policy toward drugs is legalization.” Professor Miron’s writing on drugs is interesting not because his overall view is a surprise, but because he has spent decades marshaling arguments and facts in favor of drug legalization. Drug prohibition, he asserts, “harms the public purse,” because of both the cost of enforcement and the lost tax revenues; breeds “disrespect for the law”; “enriches drug traffickers”; leads drug dealers to resort to violence and causes some “thrift-minder users” to use more dangerous drugs that have “the biggest bang-for-the-buck.” He also asserts that some people would benefit by using drugs and that the risk of imprisonment and higher prices that drug laws bring do excessive damage to drug users. Professor Miron’s warning that drug prohibition erodes civil liberties concerns anyone who worries about the millions of Americans who have become part of the prison system because of our drug laws.

In other words the war on drugs comes with seriously big costs.

Johan Norberg on the financial crisis

Johan Norberg on the financial crisis. He is discussing how bailouts, stimulus packages and zero interest rates create new bubbles, especially in emerging markets.

EconTalk this week

Johanna Blakely of the University of Southern California talks with EconTalk host Russ Roberts about the fashion industry and the role of intellectual property. In the fashion industry there is limited protection for innovative designs and as a result, copying is rampant. Despite the ease of copying, innovation is quite strong in the industry and there is a great deal of competition. Topics discussed include the role of the street in generating new designs, the role of fashion in our lives, and whether the host of EconTalk has any hope of being fashionable. The conversation concludes with a discussion of the Grand Intervention, an urban park design competition, and the potential of Second Life for studying social trends.

The rational optimist: how prosperity evolves (updated)

Matt Ridley, bestselling author of The Red Queen, Nature via Nurture, and other books, tells the story of human cultural and economic evolution in his latest work, The Rational Optimist: How Prosperity Evolves. Combining the best of economics and biology, he explains both the "how" and "why" of the amazing (and recent) explosion in worldwide human well-being. Against the pessimism of many of today's intellectuals and commentators, Ridley presents a compelling case for why progress will continue, but only if cultural evolution is allowed to develop in the direction of more contact, trade, and openness between people.

Update: Matt Ridley, the Rational Optimist, Answers Your Questions over at the Freakonomics blog.

I'm in the wrong business

Not PC has recently put up his Blog Stats for May. Seeing these I took a look at some of my own stats. And yes nobody reads Anti-dismal. Ok the Standard thinks six people do, but that seems an over estimate. This didn't come as much of a surprise given that a couple of weeks ago another economist spent part of a Friday night complaining to me how boring and pointless the blog is. And this was after I bought him a beer!! But today I took at look at the draft programme for the upcoming New Zealand Association of Economists conference and there was nothing there that would make me spend even other peoples money to go and see.

I take from all of this that what interests me doesn't interest anyone else, be they economist or non-economist. May be I am in the wrong business.