Alex Tabarrok

Financial Post: Canada is now the first country in the world to require that for every new regulation introduced one of equivalent burden must be removed.

C-21, has been operating as policy for several years already, which means that the costs of new rules must be quantified and equal or greater costs removed. It essentially caps the cost of rules coming directly from regulations.

This is not quite as radical as it sounds. As I understand it, the law applies only to new bureaucratic rules and regulations not to legislation. Nevertheless, it’s reasonable to force regulatory bureaucracies to operate within a budget so that new rules are promulgated only when the new rule is expected to be an improvement over existing rules taking into account all costs.

Joseph Heath has written an interesting and thoughtful comment on my review of his excellent book Enlightenment 2.0 (fyi, we have never communicated but it turns out that Heath is a long time reader of MR.). Samuel Hammond concisely summarized on twitter part of Heath’s response:

In reply to @, Joseph Heath shares the dire Straussian reading of his own book: The US is Rome burning

Quite accurate but I want to focus on a different point.

Finally, Tabarrok suggests that I am “too sanguine about the role of politics.” I thought I was being fairly pessimistic about politics. I think the nub of the disagreement between Tabarrok and myself on this point – and certainly the basis of our major differences of political ideology – is that I am much more sanguine about the role of the state than he is. This is not the same as being sanguine about democratic politics. For example, he points out that:

In a large electorate, no individual’s vote is likely to change the outcome of an election. As a result, it doesn’t pay to be informed about politics nor to think about politics in objective and rational terms. Consider an individual who spends time and effort to be informed about politics. What does this individual receive in return for their investment? The same thing as the uninformed individual. Since better information doesn’t lead to better consequences, it doesn’t pay an individual to be informed.

I couldn’t agree more….Indeed, the sort of considerations that motivate Tabarrok’s enthusiasm for making decisions through betting markets are, I would guess, quite similar to the ones that motivate my own enthusiasm for cost-benefit analysis. The key difference is that Tabarrok (and Bryan Caplan) tend to assume that democracy gives “the people” much greater control over the behaviour of the state than it actually does. In the background there is, I suspect, a somewhat public-choicy picture of legislation as a complex process of preference-aggregation. By contrast, I follow Ian Shapiro in thinking that we need to get past these sorts of “general will” theories of democracy.

There is one point in the last chapter where I say what I really think, but again, it might easily be overlooked. So let me just say, for the record, that I was also dead serious when I wrote the following paragraph (and that it comes closest to summarizing my considered view):

It is important to recognize that modern democratic political systems involve a delicate compromise between, on the one hand, the desire for public control of decision-making and, on the other hand, the need for rational, coherent policy. Democracies need to be democratic, but they also need to work, in the sense that they need to produce a state that effectively discharges its responsibilities. Thus they have a variety of institutional features that allow them to function even when the democratic public sphere is completely degraded. They do so largely by shifting power and control away from elected representatives toward experts. Even in the United States, where this is difficult to do, one can find examples all over. The most obvious example is the enormous role that the Supreme Court has played in making decisions that, in most other democracies, would be left to the legislature. But one can see it in other areas as well, such as the amount of autonomy that government agencies have or the increased use of cost-benefit analysis in public decision-making (338).

So if you want to know what I really think, it’s that we are not going to be able to fix the problem of increased irrationalism in politics — at best we will be able to limit its most toxic effects. As a consequence, the legislature will increasingly become a sideshow, with the two other branches of the state assuming more and more of the responsibility for actually governing.

Heath has hit on an important similarity and difference in our views. We are both skeptical about democracy as a way of making rational, coherent policy. But in response to the defects of democracy I want to devolve more decisions to the individual and the market while Heath wants to centralize more decisions to the state and expert bureaucracies.

One of the reasons that I oppose the extension of democratic politics into every aspect of modern life is precisely that in trying to do too much, democracy delivers incoherence, gridlock and frustration, forces that eventually undermine its own legitimacy. I worry about democratic legitimacy because I see democracy as a check and balance on Leviathan (while Heath sees it as a check on government by experts).

The legislature has become a sideshow. But I worry, because the more Congress is held in contempt the greater the support for a bold executive that takes charge, makes decisions and gets things done. Under these pressures, executive power has grown not just in the United States but also in Canada and Great Britain (on this theme see F.H. Buckley’s The Once and Future King.) But for all its faults, the legislature and the rule of law are more conducive to liberty than the executive and the administrative state. Legislators are satisfied with reelection and a bit of pork but executives hunger for greatness and in so doing they promote the real dangers, idolatry, the centralization of power and war.

In short, I worry that the pathologies of democracy drive the demand not for rational, technocratic government but for Caesarism.

Asymmetric Information: Response

by on April 21, 2015 at 7:30 am in Economics | Permalink

At Cato Unbound Tyler and I respond to comments on our End of Asymmetric Information piece. Here is one bit:

It is important to remember that the opposite of asymmetric information is symmetric information, not perfect information. That is a simple distinction, yet it’s one that many commentators, such as David Auerbach writing at Slate, fail to recognize. Information will always be imperfect. Uncertainty and risk will never be banished. Uncertainty and risk, however, do not in general create market failure (indeed in the case of insurance and gambling, uncertainty and risk create markets).

We don’t even have perfect information about our own tastes. In this setting, when one of us orders a product that does not meet our expectations, what do we do? Most of the time, we return it. Rather than living in a world dominated by moral hazard, we live in a world dominated by firms so eager to sell quality products that they will often guarantee our satisfaction or take the product back for any reason with full refund (sometimes less postage).

….As Hayek emphasized, the market does not require perfect knowledge to function, rather it is the means by which imperfect knowledge is made to function in the social interest.

We discuss some more implications of the leveling of information such as why renting durables will become more common, and we explain why price discrimination is consistent with and in some cases implied by the reduction of asymmetric information. We also discuss what types of regulation we need more of and what types less, and how the level of asymmetric information is consistent with Hayek’s emphasis on markets and dispersed knowledge.

Public Choice Weekend!

by on April 21, 2015 at 7:05 am in Current Affairs, Economics | Permalink

Don’t forget the Public Choice Outreach Seminar is June 12-14. Applications are invited!

What is the Public Choice Outreach Conference?
The Public Choice Outreach Conference is a compact lecture series designed as a “crash course” in Public Choice for students planning careers in academia, journalism, law, or public policy. Graduate students and advanced undergraduates are eligible to apply. Many past participants of the Outreach seminar have gone on to notable careers in academia, law and business.

When and where is the Conference?
The 2015 Conference will be held at the Hyatt Arlington in Rosslyn, Virginia during June 12-14, 2015.​

What are the fees involved?
Outreach has no conference fee – it is free to attend. Room and meals are included for all participants. However, travel costs are the responsibility of the participants.

More information and application here:

I was asked this this question on Quora. Here’s my answer:

Writing an original dissertation.

Anyone who makes it into graduate school has had at least 16 years of learning and, as a result, most graduate students are good learners. A dissertation, however, requires the creation or discovery of new knowledge. On the day you finish your dissertation you have to know something that no one else in the world knows. That is a tall order.

After their course work ends, many students find themselves at a loss. They have done a lot of learning and not much creating or discovering–skills that not only are different than learning but that may even be at cross purposes. A learner has to trust that what he or she is being taught is true and valuable. A learner with too much skepticism won’t pass the final. But a dissertation writer without enough skepticism will never advance beyond previous knowledge and never discover that something previously learned was false.

It’s an odd necessity that the more you know the more skeptical you must become to know more. Not every student navigates this evolution in attitude.

FYI, Quora seems to be growing very rapidly. I first noticed this when my followers on Quora started growing faster than and soon exceeded my followers on Twitter, a fact I found surprising. According to Alexa, Quora has leaped in the popularity rankings 42 places in just the last 3 months. It will be interesting to see how they handle the growth especially keeping the quality of the questions high.

Joseph Heath’s Enlightenment 2.0 is one of the best books I have read in years. I offer an extensive review at the New Rambler. Here’s the opening:

Heath-Enlightenment-2Joseph Heath is a Canadian philosopher who is unusually conversant with economics and also unusually capable of writing sparkling prose for a popular audience. His earlier book Economics Without Illusions was split into 6 right-wing fallacies and 6 left-wing fallacies, and he did a commendable job on both sides. Heath has his own left-liberal point of view: the subtitle of Economics Without Illusions was Debunking the Myths of Modern Capitalism and in the original Canadian version, the book was subtitled Economics For People Who Hate Capitalism. However, I like capitalism and I still enjoyed it! Enlightenment 2.0 is Heath’s foray into political philosophy. Drawing on psychology, economics and political science, Enlightenment 2.0 is a brilliant defense of reason, an important call for a more rational politics, and a great read.

Heath is worried that the foundations of liberal society are being eroded by the cultural denigration of reason combined with ruthlessly competitive economic and political forces that exploit the biases and hooks of our unreasoning mind.

Although I admire Enlightenment 2.0, I answer the question of the post differently than does Heath and my review contains plenty of critical commentary. Ayn Rand, Idiocracy, mind viruses and other interesting characters make an appearance. Read the whole thing.

Just in case you are tempted to go all Wesley Snipes and refuse to pay your taxes on “constitutional” grounds, the income tax is legal and mandatory. Sorry.

Jonathan Siegel, professor of law at GWU has carefully examined all the primary tax protester arguments. All are wrong. Some are quite interesting

Some tax protestors claim that [the 16th] amendment is not really part of the Constitution — it was never ratified! Therefore, they say, the income tax is unconstitutional. This argument was popularized by Bill Benson in a book called “The Law That Never Was.”

Surprisingly enough, this argument has a little something to it. When the Sixteenth Amendment was ratified by state legislatures in the early twentieth century, the versions that some states voted on contained minor textual errors. Some of them neglected to capitalize the word “States,” one had “income” in place of “incomes,” one said “remuneration” instead of “enumeration,” one said “levy” instead of “lay,” and so on.

If the states didn’t all vote on the same, identical text for the Sixteenth Amendment, can the amendment really be considered ratified? When Congress makes a law, the House and the Senate must vote on the same text. Similarly, if the states didn’t vote on the right text, one could argue that they didn’t ratify the amendment. No Sixteenth Amendment, no income tax, the argument goes.

However, it seems that the amendment really was ratified. The alleged defects in the ratification process were considered at the time of ratification in 1913. The Solicitor of the Department of State convincingly explained why the minor textual variations in the versions the states voted on should be disregarded.

First, it seems that the state legislatures intended to ratify the amendment as proposed by Congress. They understood themselves to be voting to approve the proposed Sixteenth Amendment. The text set forth in their instruments of ratification was for recitation purposes only. The errors in the text were not proposals to change the text being ratified; they were just inadvertent errors that do not detract from the intention of the state legislatures to ratify the amendment as proposed.

Benson denies this. He claims that states deliberately altered the text of the proposed amendment. But the evidence just isn’t there. In one of his court filings, Benson singles out Oklahoma as a particularly clear case. He says the facts “unequivocally show that Oklahoma intentionally amended what the United States Congress had proposed” (see page 2 of Benson’s filing). But looking at Benson’s own book (pp. 61-67), one can see that the Oklahoma legislature adopted what it called “A resolution ratifying an amendment proposed by the sixty-first Congress of the United States” (emphasis added). This resolution then begins its ratification by reciting that “Whereas . . . Congress . . . on Monday the fifteenth day of March, one thousand nine hundred and nine, by joint resolution proposed an amendment to the constitution of the United States, in words and figures as follows:” Then, it’s true, the resolution misstates the text of the amendment (and pretty badly too). But it sure looks as though the Oklahoma legislatorsthought they were ratifying the amendment that Congress had proposed on the specified date and just misstated it. So even in a case that Benson himself singles out, it seems quite clear that the state legislature thought it was ratifying the Sixteenth Amendment, not proposing to change it.

…For all these reasons, it seems clear that the Sixteenth Amendment really is part of the Constitution.

Certainly that has been the uniform holding of the courts in cases in which this argument has been raised. For some representative cases, see United States v. Benson, 941 F.2d 598 (7th Cir. 1991) (rejecting these arguments in a criminal case brought against the author of the “Law that Never Was” book); United States v. Foster, 789 F.2d 457 (7th Cir. 1986); Cook v. Spillman, 806 F.2d 948 (9th Cir. 1986) (calling the argument that the Sixteenth Amendment was never ratified “frivolous” and imposing sanctions of $1,500 on the party making it); United States v. House, 617 F.Supp. 237, 238-39 (W.D. Mich.1985).

So while this argument is not as utterly absurd as most tax protestor arguments, one can be confident that it would not succeed in any actual court proceeding.

I will be speaking at the Voice and Exit Festival in Austin, Texas, June 20-21. Voice and Exit is like a TED conference on steroids, an edgier, more radical TED. It looks like a lot of fun. Hope to see you there.

Here is a bit from V&A:

imageWe assemble those who ask: What are the systems and ways of life that are holding us back? What can we create to make those old ways obsolete? What innovations enable us to find wellbeing, life meaning and stronger connection to others? How can we live intentionally today so as to create that better future? Voice & Exit is an environment of exploration where we “criticize by creating” a better world.

It’s a great conversation. Sachs really opened up when discussing how his pediatrician wife influenced his approach to economics. The anger he still feels from the US treatment of Russia during its reform period is evident. He is startling forthright, calling out Acemoglu and Robinson and Krugman for mistakes and errors.

The youtube link is here. The audio edition is here and this is the ITunes link. Finally, here is the elegantly presented transcript on Medium, also with lots of links and additional material.

Sachs’ work on many fronts has influenced both Tyler and I, most notably in the geography section of our MRU development course.

Given the water drought in California, Ito, Ido and Tanaka have a timely paper comparing two methods of electricity conservation. The authors assigned 691 households in Japan to one of three groups a) a moral suasion group, b) an economic incentive group or c) a control group. The moral suasion group were told that electricity conservation was important and necessary on peak demand days and then over a year when the peak times hit they were sent day-ahead and same-day messages to please reduce electricity consumption at the peak times. The economic incentive group were told that their electricity prices would be higher during certain peak periods and over the year when the peak times hit they were sent day-ahead and same-day messages telling then when the prices would be higher. Prices were approximately 2-4 times higher during the peak times. Control groups had smart meters installed but were not sent messages.

Moral suasion worked but not nearly as well as economic incentives (in the figure, lower use is better).

Electricity1

In fact, as the author’s discuss, the figure significantly underestimates the gains from the economic incentive because moral suasion worked only for the first few treatment periods and then faded away. The economic incentive continued to work throughout the treatment period. Moreover, precisely because people continued to respond to the incentive they developed a conservation habit so the group facing economic incentives actually conserved more during non-treatment periods and even after the experiment ended.

Hat tip: John Whitehead at Environmental Economics.

Addendum: Here are previous MR posts on water.

Compensating Differentials

by on April 8, 2015 at 7:28 am in Books, Economics, Education, Film | Permalink

The latest section of our Principles of Economics course at MRU is up today and it covers price discrimination and labor markets.

In this video, The Tradeoff Between Fun and Wages, we introduce the idea of compensating differentials in wages, an idea that goes back to Adam Smith.

Sharp readers will notice a homage near the beginning in what might otherwise appear to be an odd scene setting.

The End of Asymmetric Information?

by on April 7, 2015 at 7:30 am in Economics, Law | Permalink

end of asymmetric information CatoAt Cato Unbound, Tyler and I ask whether the age of asymmetric information is ending and what implications this may have for regulation and markets. The Browser offers an excellent precis:

Sensors and reputation systems allow buyers to know what sellers know, principals to know what agents know, and vice-versa. Akerlof’s arguments have been overtaken. Any interested party can have access to information about product quality, worker performance, the nature of financial transactions. “A large amount of economic regulation seems directed at a set of problems which, in large part, no longer exist”

The end of asymmetric information will make markets work better but also governments. Here is one bit:

Many “public choice” problems are really problems of asymmetric information. In William Niskanen’s (1974) model of bureaucracy, government workers usually benefit from larger bureaus, and they are able to expand their bureaus to inefficient size because they are the primary providers of information to politicians. Some bureaus, such as the NSA and the CIA, may still be able to use secrecy to benefit from information asymmetry. For instance they can claim to politicians that they need more resources to deter or prevent threats, and it is hard for the politicians to have well-informed responses on the other side of the argument. Timely, rich information about most other bureaucracies, however, is easily available to politicians and increasingly to the public as well. As information becomes more symmetric, Niskanen’s (1974) model becomes less applicable, and this may help check the growth of unneeded bureaucracy.

We discuss used cars and Akerloff’s model for lemons, moral hazard problems, principal-agent problems, reputation mechanisms, computable contracts and much more.

We will be joined in future discussion by Joshua GansShirley V. Svorny, and Jeff Ely.

In my TED talk I said that if India and China were as rich as the United States is today then the market for cancer drugs would be eight times larger than it is now. Larger markets, both in size and wealth, increase the incentive to invest in R&D. Larger markets save lives. As India and China become richer, they are investing more in R&D and investing more in educating the scientists and engineers who produce new ideas, new ideas that benefit everyone.

The WSJ reports on this trend:

Chipscreen’s drug, called chidamide, or Epidaza, was developed from start to finish in China. The medicine is the first of its kind approved for sale in China, and just the fourth in a new class globally. Dr. Lu estimates the research cost of chidamide was about $70 million, or about one-tenth what it would have cost to develop in the U.S.

…China’s spending on pharmaceuticals is expected to top $107 billion in 2015, up from $26 billion in 2007, according to Deloitte China. It will become the world’s second-largest drug market, after the U.S., by 2020, according to an analysis published last year in the Journal of Pharmaceutical Policy and Practice.

China has on-the-ground infrastructure labs, a critical mass of leading scientists and interested investors, according to Franck Le Deu, head of consultancy McKinsey & Co.’s pharmaceuticals and medical-products practice in China. “There’re all the elements for the recipe for potential in China,” he said.

We have much to gain from increased wealth in the developing world.

Donald Shoup, whose work on parking has been featured on MR on several occasions, is retiring. Patrick Siegman, “the first Shoupista”, has written an appreciation which includes this excellent quote from Shoup’s classic study, Cashing Out Employer-Paid Parking:

Minimum parking requirements in the planning profession are closely analogous to bloodletting in the medical profession. For over two thousand years doctors prescribed bloodletting to cure most diseases, and medical textbooks contained elaborate parking-requirement-like tables telling exactly how much blood should be let from exactly which part of the body, and when, for every disease…

One strong similarity between bloodletting and minimum parking requirements is the general public acquiescence to both practices without any scientific research on their effects…

Another similarity between bloodletting and minimum parking requirements is the harm caused by both practices. In the case of bloodletting, the problem was magnified because physicians didn’t clean their instruments before proceeding to the next patient. In the case of parking requirements, the problem is magnified when planners require far more parking than is demanded even when all parking is free. Recall here that Willson (1992) found that the number of parking spaces required by zoning ordinances was double the peak accumulation of cars parked at suburban office sites in Southern California.

A final similarity between bloodletting and minimum parking requirements is that the practice of bloodletting gradually fell out of use, and minimum parking requirements in zoning ordinances are gradually being replaced by parking caps.

For much of his career, Shoup was a lonely voice shouting in the wilderness but he shouted reason and fact and his work has had increasing influence in recent years.

Addendum: Here is Tyler’s NYT column on Shoup’s work, Free Parking Comes at a Price.

Vox reports on a study comparing taking notes by hand versus using a laptop

For the first study, the students watched a 15-minute TED talk and took notes on it, then took a test on it half an hour afterward. Some of the test questions were straightforward, asking for a particular figure or fact, while others were conceptual, and asked students to compare or analyze ideas.

The two groups of students — laptop users and hand-writers — did pretty similarly on the factual questions. But the laptop users did significantly worse on the conceptual ones:

Screen_shot_2014-06-03_at_4.55.00_pm

The problem appears to be that the laptop turns students into stenographers, people who write down everything they hear as quickly as they can. Students who take handwritten notes, however, try to process the material as they are writing it down so that they only have to write down the key ideas. Forcing the brain to extract the most vital information is actually when the learning happens.

The laptops resulted in worse learning even under the study conditions when they were actually used to take notes. In the real world, the laptops are a tempting distraction. I am reminded of the day my son came to my class. He sat in the back and afterwards he said “Dad, I can see why you are so interested in online education. Half of your students are online during your class already.”