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Monthly Archives: June 2008
The Error of Productributionism
Good stuff from Phillip Whyte:
Many Europeans believe liberal economic reforms are incompatible with social justice. The US and the UK, they point out, have more liberal markets for products and labour than in continental Europe – but also higher levels of poverty and income inequality. European countries therefore face a choice. They can either free their product and labour markets and accept the downsides or they can protect social solidarity by resisting Anglo-American neo-liberalism.
But the belief that market liberalisation increases social inequalities is not borne out by the evidence. The UK certainly has higher levels of poverty and inequality than France or Germany. But pointing this out is just selective use of evidence to support a predetermined conclusion. If there were a strong correlation between levels of market liberalisation and social outcomes, one would expect to see the pattern replicated across the European Union – not just in a carefully selected group of countries.
Is such a pattern discernible? No. The nation with the lowest levels of poverty and income inequality in the EU, as well as the lowest rate of long-term unemployment, is Denmark – a country with competitive product markets and some of the least restrictive labour laws. Countries with the worst social outcomes (Greece, Italy and Portugal) all have restrictive product and labour market laws. Liberalisation, it seems, no more threatens social justice than regulation guarantees it.
The following isn’t what this column is about, but it’s what it made me think about.
The structure and regulation of an economy is conceptually separable from tax and transfer policy. Of course, it is really all one system, and taxes and transfers affect economic performance by affecting labor supply, etc., but this is relatively distinct from the body of law that defines the parameters and rules of the economic game. You could in principle have buck-wild laissez faire together with fairly high taxes and lavish social insurance. Nobody does do this, exactly, but it’s possible. Optimize the basic economic structure for maximizing wealth creation, not for creating a pattern of distribution, and then use the political institutions to take care of redistribution after the wealth is created. Because then there will be more wealth.
Nevertheless, there persists a very strong impulse on all sides to think that if you care about distribution, then you’re going to want to try to rig the basic economic-regulatory structure to produce the favored pattern of distribution. That’s a big mistake. But, anyway, people who want to do something about broadening access to health care, say, end up mucking around with markets in insurance and health services until they don’t really function as markets at all. And then they use that as some kind of evidence of “market failure” and plump for eliminating the market altogether. That’s a bad way of realizing the original distributive goal.
So why won’t distributive tweaking of productive institutions go away? I think we get so much of this in part because rigging the system to approximate a pre-determined distributive pattern is less transparent, meaning that those who are being implicitly subsidized don’t so much feel like it. They don’t suffer the stigma of an explicit transfer. But is that really worth a reduction in the amount of the transfer relative to the grow-then-distribute world? Well, some people say, this may not be a reduction all, because people are greedy bastards. It’s not only the implicitly subsidized who are tricked by implicitness, but also those implicitly taxed. They’d more vividly feel a transparent tax, they’d hate it, and so they’d withdraw political support for it, driving down the value of the explicit transfer. Maybe, maybe not. Anyway, the argument that democratic transparency kills distributive justice makes liberals sad.
High rates of economic growth do a lot more for poor people than redistribution does. But probably the path to higher rates of growth has something to do with persuading welfare statists that they can do a lot more redistribution if there is more money to redistribute. Now, if you come to see growth as a means to the end of more generous redistribution, you might find that the knock-on effects of growth end up making a lot of that planned redistribution superfluous. The historical path to freedom had something to do with autocrats realizing they could skim more off the top if there was more to skim, but then found themselves undermined by the economic empowerment of their subjects. Maybe it’s something like that. Or maybe the flush welfare state will come up with new risks to insure, new stuff to give away, since it can afford it.
Political Philosophy and Evidence
There is an interesting discussion at Public Reason about coming from both the discussion of David Estlund’s new book and a post by Nicole Hassoun about the role of the social scientific (using that term very broadly) evidence in political philosophy. I’ve got a lot of thoughts about that. Here’s one largely ad hominem thought.
There is (what should be) an unsurprisingly large amount of motivated cognition among philosophers when they think about this issue. This is of course the natural human reluctance (philosophers are people, too!) to diminish the importance, authority, or relevance of one’s own expertise. When it is suggested you might need to know, say, a good deal of economics or the literatures that actually compare the performance or real institutions, in order to be able to know confidently whether your argument for the welfare state or whatever goes through or not, one sees a tendency to either deny that you do need to avail yourself of the relevant bodies of knowledge (these people tend to defend strongly utopian political theorizing), to really let motivated cognition run wild and pretty crudely cherry-pick your way through a bit of the relevant literature, or some combination of quasi-a priorist soft utopianism and limited cherry-picking.
But shouldn’t it be impossible to take seriously an argument to the effect that, say this or that policy is required in order to secure the conditions for the development of some capacity, in the absence of (a) a well-empirically-grounded theory of the nature of that capacity and its development, and (b) some kind of actual evidence that this or that policy in fact has the kind of effect on it that one hypothesizes? I wouldn’t mind so much if political philosophy arguments were more often in the form of “Hey, here’s a conjecture! I suggest somebody competent to do so try to find out if it’s true.” I would be quite happy if I saw more “Hey, here’s a conjecture, and here’s a my attempt to honestly synthesize the relevant literature in a first pass at getting the answer.” That would be terrific. But usually, the argument aims to establish something substantive with an armchair, a Joe Stiglitz op-ed, and something remembered from the Tuesday Science Times.
Over just the past decade, moral philosophers have made huge strides in intelligently using, and even creating, findings in psychology. Political philosophers, I fear, have yet to catch up.
Baptists, Bootleggers, and Global Warming
Some of you might be interested in this 2001 essay from Bruce Yandle. The analysis applies to an international scheme under Kyoto, but the logic of a national permit system is the same.
This isn’t just crude public choice theory. It accounts for actual corporate and political behavior rather well. Journalist Tim Carney has been doing an outstanding job reporting on corporate welfare — including the “green” kind — for the Washington Examiner. His column on hedge fund billionaire Julian Robertson is an excellent example:
[...]
Big businesses have long been lobbying for federal restrictions on greenhouse gases. Enron, General Electric, DuPont, Goldman Sachs and many top energy companies have lobbied hard for “cap-and-trade” laws that would impose federal restrictions on greenhouse gas emissions by manufacturers and power plants, but allow firms to buy or sell excess emissions credits. In many of these cases, it’s easy to see the financial motive of these “socially responsible” corporations.
[...]
[U]nless you spend time going through federal lobbying records, you probably haven’t heard of Robertson’s big push for cap-and-trade laws. Robertson has hired top lobbying firm Akin Gump to advance such restrictions on Capitol Hill, in the public and in policy arenas. Akin Gump even runs a global warming blog now called “Climate Intel.”
Akin Gump lobbyists doing Robertson’s bidding on Capitol Hill include former Republican National Committee Chairman Ken Mehlman and former Reps. Bill Paxon, R-N.Y., and Vic Fazio, D-Calif. What’s Robertson’s angle? Environmental publication Greenwire described Robertson as a “former hedge fund tycoon and now a philanthropist.” Robertson indeed closed down his most famous fund, Tiger Management, earlier this decade, but is still a big investor. Getting richer — not merely philanthropy — motivates these investments.
Relevant to his cap-and-trade position are his investments in China’s leading biofuels maker Gushan and in a company that deals with nuclear waste disposal. Given the right global warming legislation, both of these investments will benefit.
A bigger Robertson bet, presenting a more insidious angle, is his short position on 10-year Treasury bonds paired with a long position on two-year Treasuries. Basically, if the U.S. economy is fundamentally unsound, Robertson gets rich. “I’ve made a big bet on it,” Robertson told Fortune. “I really think I’m going to make 20 or 30 times on my money.”
The fact that many millions of people are earnestly morally motivated to push carbon regulation creates the political conditions for huge potential profits for the savvily well-positioned. Maybe Robertson is a global warming true believer and just wants to help capitalize the firms that are going to save the world and maybe he just wants to get even richer. I’m not so uncertain about GE and Goldman. Either way, the man is making an enormous bet, and aligning his pecuniary self-interest strongly with a particular political result. Suppose we get cap and trade and then the global warming scare starts to peters out. Is Julian Robertson going to happily give up on the policies upon which he has bet the farm?
[Added: Oh, and why have all these big players lined up behind cap and trade and not a tax? Wouldn't the equivalence thesis predict indifference? I suspect that the answer is that their expected competitive advantage given a tax is lower than their expected advantage given cap and trade. In which case, that's a pretty significant real-world failure of equivalence, no?]
More on Carbon Policy Equivalence
My sympathies in economics lie with the so-called “new institutionalists.” I think institutionalists are going to see more clearly than neoclassicals the rather big difference between a carbon tax and a whole new market institution for trade in government-created and government-rationed permits.
But let’s back up a little, to the pre-applied political economy context. It is a fundamental finding of Vernon Smith-style experimental economics that, say, theoretically equivalent auction institutions in practice lead to different results. So you ought to be pretty unimpressed by the fact that there is a possible institution of tradeable carbon permits that is equivalent to some carbon tax on the blackboard. Even were a cap-and-trade permit market or a carbon tax implemented without a hitch according to the blackboard assumptions, there would be little reason to expect them to actually produce equivalent results, since the way actual people interface with an institutions depends on the way actual humans process the rules of the game. Mathematical equivalence doesn’t imply cognitive or motivational equivalence. Therefore it does not imply policy equivalence.
Moving back to the applied political economy context, the fact that cap and trade creates a new set of institutions in a way tax doesn’t is pretty important, I think. For one thing, there is a question of reversibility. I think Arnold gets it right when he writes:
In practice, cap-and-trade creates an irresistable opportunity for politicians to use carbon permits as political favors to be handed out to special interests. This in turn means that there will be special interests with a large stake in keeping cap-and-trade policies in place, regardless of what transpires in terms of global temperature.
What is the probability that the United Nations derivation of climate model consensus overstates the problem of man-made global warming? Unless that probability is zero, it seems to me that we should prefer a climate change policy that is reversible to one that it irreversible.
Because I think that the probability that the UN is misleading us is significantly greater than zero, I think that the issue of irreversibility is quite important. Therefore, I think that a carbon tax is far preferable to cap-and-trade. Ten years from now the global warming scare might be completely debunked, and yet we will still be unable to unwind cap-and-trade. As with farm subsidies and many other policies, the problem will be long gone but the solution will be with us in perpetuity.
I think the probability that global warming is a significant problem is low. I think the probability that carbon externality pricing policies will meaningfully reduce global warming is even lower. If we are going to have global warming policies at all, I want them to be minimally damaging, which means maximally reversible. Like Arnold, I think it would be a lot easier to simply keep cutting a carbon tax until it hits zero than it would be to dismantle the institutional framework of a carbon permit trading system and all the subsidiary industry that grows up around it. Better yet would be to do nothing. If global warming does turn out to be a problem in a few decades, then unleash the carbon sequestering trees, or what have you. The idea that doing something now is better than doing nothing has, as far as I can tell, a surpassingly thin empirical rationale.
Games Within Games
Stephen Dubner asks an intriguing question:
Pretend for a minute that you have done something to put yourself in jeopardy and are facing a real-life Prisoner’s Dilemma. Now pretend additionally that you get to choose your partner in the dilemma. There are three people to choose from. You cannot see or talk directly to the three people, but you are allowed to ask one question of each of the three people to help make your decision.
What is the one question you’d ask?
Commenters then came up with a bunch of ideas, and experimental economics jock John List winnowed them down to five, among which the commenters are now voting.
So here are your five choices:
1. “How old are you?”
2. “What is the number of ethics courses you’ve taken, minus the number of economics courses you’ve taken?”
3. “Given that you are in a bar, would you prefer to pursue the most attractive person in the bar, or would your efforts focus on someone less attractive?”
4. “What is the name and address of your most cherished family member?”
5. “Have you read Freakonomics?”
Option 4, which List describes as the coercive option, seems to be doing surprisingly well in the voting. But these people seem to me confused. “Ask a question, get an answer” is also a game of cooperation in which players can defect. Importantly, Dubner does not stipulate the other players will answer the question at all, much less tell the truth. (The thought experiment strikes me as badly underspecified, in fact, since it’s not clear what’s the pre-PD payoff matrix for the people faced with these questions. If I’m chosen to be in the PD, my choice set improves or deteriorates? Or what?) Anyway, if someone asked me the name and address of my most cherished family member, in an attempt to change the way I represent my payoffs, I would surely lie and then, if placed in the PD, I’d defect on that asshole.
In this circumstance, the question is not just an opportunity for eliciting useful information about the candidate partners’ cooperativeness, but an opportunity to signal your own.
I think I would ask, “How can I help you?” The best answer would be, I think, “How can I help you?”
Equivalent In Your Dreams
I understand the theoretical argument for the equivalence of cap and trade and the carbon tax in conditions of full information and perfect compliance, but I think it’s sort of crazy to think they’re equivalent in any meaningful empirical way. Tyler Cowen helpfully explains why.
Meanwhile, Reason Foundation economist Shikha Dalmia has a good op-ed in the NY Post that I think more or less correctly captures the fiscal politics of the proposed cap-and-trade bill.
My policy preferences in this area are (1) Wait until we have much better estimates of the externalities of carbon use, which requires better climates models that do not rely on rapidly empirically crumbling assumptions about ocean warming and water vapor. Which is to say, do nothing, for now. (2) Straightforward carbon tax with offsetting reductions in other taxes. (3) Cap and trade plus tax cuts.
I understand the appeal of trying to gin up a market in carbon permits by politically inventing scarcity, but I think it’s sort of insane to think that route isn’t a lot more prone to system-gaming, rent-seeking, and non-compliance from the start compared to a carbon tax. Which is not to say that a carbon tax wouldn’t be gamed and lobbied, too. It would be, just not so badly. We already know how to collect taxes, more or less. Cap and trade, on the other hand, basically requires creating an entire new set of institutions, on dubious scientific grounds, in a context of insufficient information about their optimal design. Which doesn’t seem promising. The real-world political economics of it seems to me less like implementing an excise tax and more like the process of creating a stock exchange in a developing country.
Let Slip the Dogs of Kvetch!
In today’s Marketplace commentary, I maintain we should all feel free to grouse about the economy, whether or not we’re officially in recession.
Sausage, Anyone?
Jim Manzi braves the tedium of typing in a partial list of exemptions and carve outs inside the cap-and-trade bill working through Congress. It is not a small list. He concludes:
Calling some of these carve-outs “transition” assistance is pretty funny, since they extend out to 2030 for the oil, natural gas, power generating and manufacturing companies (six presidential elections and more than three senate terms from now). Do you think that when 2030 rolls around their reaction is going to be “a deal’s a deal”?
Of course, this is the rent-seeking we have now as the regulatory process is about to be kicked off. For this program to work, it has to remain in force for many decades. If this happens, entire lobbying firms will be built up to seek exemptions, allowances and so on. Many nice homes will be built in McLean with the proceeds, and many members of congress will have re-election campaigns financed by the contributions this bill will generate. It will create another income tax code.
As Jim mentions, some people think he is cynical. I don’t know, maybe he is. But he’s right. Understanding basic public choice dynamics is required for a rudimentary grasp of what politics and government are. A civics or “social studies” course without rent-seeking is the equivalent of an economics course that never touches on the logic of a collective action problem. Both leave you laughably incapable of grokking how and why things work (or don’t) they way the do (or don’t).
This bill is obviously going to be worth much less than nothing, and, to be frank, I think people who can’t understand why are sadly ignorant of how politics works. Global warming is the sort of “crisis” that is useful as a pretext for the enrichment of the connected. And that may be all global warming legislation ever manages to accomplish. Is that cynical?
Remittances
Please direct your attention to this excellent post on the economics of remittances by YouNotSneaky! (for my money far and away the best anonymous econblogger):
But what about the argument that remittances are all biscuits and gravy with tiny bits of sausage in it? Welllll, no. Sort of. I mean, yes, but, let’s think about things more carefully here.
Exactly. But more technically…
Bottom line is that most of the so called “gains from remittances” are straight up gains from IMMIGRATION. Or in other words, they are gains from the fact that some person from a poor household in a poor county has managed to make their way to a rich country and now has a richer income. Strictly speaking the gain from remittances is just the gain from INTER-HOUSEHOLD reallocation of income between the migrant and those who stay behind, not the overall increase in household income due to migration.
A bunch of illuminating graphs intervene and then:
All that basically means that the observed benefits from remittances that people rave so much about are mostly just straight up benefits from LABOR MIGRATION. Which are huge, but somehow that just isn’t being said.
It is interesting that people fix on the humanitarian effect of migrants sending money back home. The immigrant, prior to migration, was presumably just about as poor as the people he or she is sending money home to. So if it’s so good for those people to get that money, then it was just as good for the migrant to make it in the first place. But I’m just saying the same thing.
There’s a lot more, all of it interesting.
[Hat tip: Ambrosini.]
Kindlenomics
From the Post’s article about e-books:
“We don’t see people buying both versions,” one publishing executive told Wyatt. “I think there is almost a one-to-one cannibalization.”
Curious. Could it be that there exist people who will buy a $9.99 electronic version but would not have bought the $19.95 paper version? Yes! For I am one of those people. I’ve bought a good number of books on the Kindle, few of which I ever would have purchased otherwise. And most of the actual books I buy on Amazon are used anyway, and that’s got to be worse for the publisher.
I deal with a lot of books for research, reviewing, and Bloggingheads book chats. I don’t so much read these as use them. The Kindle is very bad for riffling, which I do a lot of. And it’s useless for the scholarly task of creating and looking up citations, since, through some gross oversight, the Kindle fails to relate e-book locations to the page number in the corresponding paper text. However, I find it wonderful for actual reading, and I have been on a kick of buying novels and other sorts of edifying literary entertainments for the Kindle. I don’t think I would have otherwise bought The Emperor’s Children, The Brief Wondrous Life of Oscar Wao, or Kafka on the Shore, for example. So the Kindle is making these publishers money they wouldn’t otherwise have made while improving my literary um… literacy.
Question: Is the fact that people often wait for the less-expensive paperback version of a book also comparable to eating the flesh of your own kind?
Also: The Emperor’s Children is overrated. It felt to me like an Ayn Rand novel with slightly less cardboard characters (or maybe the conversations of New York intellectuals really are that shallow), no really interesting ideas (despite the evident ambition to have ideas), and often overly precious prose. But it was really fun to read because I like Ayn Rand novels.
Uncooperative Collectivsm
Gated summaries of gated papers are annoying, but the result is interesting, so I thought I’d pass this along:
Put four Boston students-all strangers-in a game where they must distribute tokens among themselves using rules that reward both selfish and cooperative moves; allow them to punish each other by taking back tokens (albeit at a cost to themselves); and then watch the chips fall. The students not only penalize freeloaders- that is, players who don’t give enough tokens to the group- but also respond to each other’s punishment by giving more to the group in subsequent rounds. So do students in western European countries such as the United Kingdom, Germany, and Denmark.
But half a world away, in the more collectivist cultures of Istanbul, Turkey; Riyadh, Saudi Arabia; and Muscat, Oman, the play is a little rougher. Students give less overall to the public weal. And when punished, the freeloaders strike back, exacting revenge from the do-gooders who penalized them in earlier rounds. Closer to home, students in Greece, Russia, and Belarus likewise act less altruistically and more readily ding their cooperative colleagues.
Having watched college students play the token game in 16 cities, the researchers conclude that “culture strongly influences cooperation and punishment,” says Simon Gächter, an economist at the University of Nottingham in England and one of the study’s authors.
[...]
Ironically, a distaste for civic cooperation and the rule of law tends to travel with collectivism, data from the World Values Survey show. Collectivistic societies stress interdependence between people and the pursuit of group goals. But not just any people or group’s goals count, explains Gächter: “In these societies you cooperate with people inside your network, which is organized along family and friendship lines. In our experiments, everyone is an outsider to everyone else. You might not accept punishment from outside your network.”
Conversely, individualistic societies view each person as independent and value the pursuit of individual goals. These mores are more prevalent in wealthier democracies, notes Herbert Gintis, an economist at the Santa Fe Institute, in an accompanying article. “In modern, market-based societies, group boundaries aren’t very important,” explains Gächter. “You have to be able to cooperate with unrelated strangers.” And so rather than being hotbeds of cut-throat competition, capitalist democracies are actually kinder and gentler than more traditional economies—at least for strangers.
Similar results have been rolling in for a while now. So it should be considered scientifically and thus intellectually bogus to characterize individualist cultures and markets societies as encouraging some kind of atomized dog-eat-dog ethic. There is tribalist solidarity, which certainly has its share of mammalian gratification, but leads to vicious conflict between tribes. And then there is liberal, market solidarity, which is based not in exclusion, or a feeling of warmth for our kinsmen, but in a perhaps less “meaningful” yet much more materially significant relations of extended mutual advantage.
[Thanks to Ashley March for the article.]