Alex Tabarrok

Robert D. Tollison, RIP

by on October 24, 2016 at 3:13 pm in Current Affairs, Economics | Permalink

tollisionThe great Robert Tollison has passed. No one was better than him at seeing the implications of a theory and finding a way to test it. He always had ideas, many adopted by GMU graduate students. A pioneer of sportometrics, public choice, public choice and antitrust, economics and religion, the economic analysis of economists and many other areas.

Bob was an immensely productive scholar with at least 12 books as author or co-author, 22 edited collections, 7 editions of a textbook, 110 articles in books, 220 journal articles, 44 journal notes/comments…and more. He was also senior editor at Public Choice for 17 years and he held positions in government as a Senior Staff Economist on the President’s Council of Economic Advisers (1971-72) and Director of the Bureau of Economics at the Federal Trade Commission (1981-83).

Bob had many, many students.

I will post links to remembrances here.

Don Boudreaux at Cafe Hayek.

Mark Thornton.

Bryan Caplan.

Ed Lopez.

Even though William Baumol didn’t win the Nobel prize this year it got me to thinking about the cost disease, as did the death last week of William Bowen, the co-author of Performing Arts – The Economic Dilemma which brought the cost disease to public attention. The cost disease says that if two sectors have unequal levels of productivity growth then the sector with lower growth will increase in relative price. If in 1900, for example, it took 1 day of labor to produce one A good and 1 day of labor to produce one B good then the goods will trade 1:1. Now suppose that by 2000 1 unit of labor can produce 10 units of A but still only one unit of B. Now the goods trade 10:1. In other words, in 1900 the price or opportunity cost of one B was one A but in 2000 to get one B you must give up 10 A. B goods have become much more expensive.

The cost disease says only that the relative price of the low productivity good increases, it doesn’t say that the low productivity good becomes absolutely more expensive. The economy in 2000 is much wealthier than in 1900 so relative to income B has become cheaper. Anyone who could consume x units of B in 1900 can still consume x units of B in 2000, the only difference is that in 2000 they will be giving up more A than in 1900 so the tradeoff has become steeper even though still affordable.

Stated generically the cost disease is indisputable. But it becomes more contentious when we try to identify the A and B good. Baumol and Baumol and Bowen initially pointed to labor intensive goods, the service sector, as the low-productivity B sector. The performing arts were the key example–it took four quartet players 40 minutes to perform a Mozart composition in 1900 (or 1800) and it took four quartet players 40 minutes to perform a Mozart composition in 2000, hence no productivity improvements in Mozart performances, hence a rising cost over time since those four players could produce many more goods in say the manufacturing sector in 2000 than 1900. Health care and education are other stock examples.

Tyler offers one response to the cost disease namely that it’s true if you define the good narrowly (listening to a live performance of a 40 minute Mozart composition) but why should we define the good narrowly? If instead we define the good as “listen to music for 40 minutes” then it’s clear that costs have fallen dramatically. Not only has the cost of listening fallen, variety has increased. Costs have fallen even further since Tyler wrote. In a similar way, Tyler and I have argued that online education greater lowers costs and increases quality.

robot-playerHere, however, I offer a different and more fundamental response. Baumol pointed to labor and the service sector as the low productivity, low growth, sector. But robots and artificial intelligence mean that there is no longer a pure “labor” sector. Robots are labor made of capital. Whether we are talking about robot vacuum cleaners, AI answering machines or Dr. Watson there is much more capital in the service sector than ever before. K has become L. And when K becomes L, the productivity of L increases with the productivity of K. If manufacturing productivity improves and we are manufacturing robots then any sector that uses robots increases in productivity. If software productivity improves–if AI becomes more intelligent, for example–then any sector that uses AI increases in productivity. Any service that uses information technology inherits all the productivity growth of information technology.

At any moment there will always be some sectors that are increasing in productivity at a faster rate than other sectors–that is the nature of progress, uneven and episodic–but the time when one could distinguish a manufacturing sector and a service sector and argue that as a general rule the latter increases in productivity at a slower rate than the former is rapidly coming to a close. K has become L.

Addendum: Timothy Lee also has a piece today on the cost-disease.

The accuracy of these tests is astounding.
Hat tip: Nathaniel B.

Kevin Grier lets loose at Cherokee Gothic:

People! Check out this quote,

“Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said.”

After the events of the great recession, it’s just amazing to me that people think the economy is a steak, the Fed is a precision sous-vide machine, and all we have to decide is medium-rare or well-done.

For the millionth or so time, the models implying the Fed can do this, completely and utterly failed during the great recession. There is also evidence that a large part of the good outcomes credited to the Fed during the great moderation were actually due to exogenous forces (i.e. good luck).

Neither the Fed nor the President “runs” the economy. There is no stable, exploitable Phillips Curve / sous vide machine that lets us cook at a certain temperature.

This Fed worship is more religious than scientific. The past 10 years should be enough to convince anyone with an open mind that the Fed’s power over the economy is quite limited and tenuous.

But I guess it’s comforting to think that the little old lady behind the curtain can fix things for us.

She can’t, Stan Fischer can’t, Bernanke couldn’t. Maybe the sous vide machine is unplugged?

Yup, whatever your prior was, after the events of the Great Recession, you should surely downgrade your belief that Fed has a lot of control over the economy and yet I see a resurgence of this view despite it being at all odds with the evidence.

Robin Hanson: Futurist

by on October 17, 2016 at 7:22 am in Uncategorized | Permalink

A great cover and story in The Chronicle of Higher Education on our colleague, Robin Hanson. The answer, of course, is yes.hansoncover

The founding father of Singapore, Lee Kuan Yew, credits ‘social discipline’ for the phenomenal economic rise of his country (Sen, 1999). Countries such as Singapore apparently demonstrate that autocratic measures are probably necessary, particularly in culturally fractionalized societies for creating the social stability necessary for economic growth (Colletta et al., 2001). Such thinking informs the so-called “Asian model” (Diamond, 2008).1 Recent studies, particularly in economics, support the logic (Alesina et al., 2006 and Easterly et al., 2006). According to these scholars, the more congruent territorial borders are with nationality, the better the chances for good economic policy to appear endogenously from within these societies because social cohesion determines good institutions and policies for development (Banerjee et al., 2005 and Easterly, 2006b). This paper addresses the question of whether or not social diversity hampers the adoption of sound economic policies, including institutions that promote property rights and the rule of law. We also examine whether democracy conditions diversity’s effect on sound economic management, defined as economic freedom, because the index of economic freedom is strongly associated with higher growth and is endorsed by proponents of the ‘diversity deficit’ argument (Easterly, 2006a).2

…Using several measures of diversity, we find that higher levels of ethno-linguistic and cultural fractionalization are conditioned positively on higher economic growth by an index of economic freedom, which is often heralded as a good measure of sound economic management. High diversity in turn is associated with higher levels of economic freedom. We do not find any evidence to suggest that high diversity hampers change towards greater economic freedom and institutions supporting liberal policies.

Paper here. The data is a panel from 116 countries covering 1980–2012 so this doesn’t rule out a negative long-run effect but it is prima facie evidence that diversity need not reduce freedom or growth.

Amanda Knox on Netflix is a shorter version of Making a Murderer. Shorter because there isn’t much evidence that Knox had anything to do with the murder of her amanda-knox-doc-netflix-780x439housemate. The documentary has extensive interviews with the lead investigator, a blowhard who likens himself to Sherlock Holmes but whose idea of deduction is that the murderer must have been a woman because the body was covered up. Surprisingly, the one clear sociopath isn’t the actual killer but the journalist whose lurid dispatches turned a tragic but ordinary murder into a witch hunt–a real Nightcrawler. Throw in some nationalism on both the Italian and U.S. sides and it’s not surprising that justice went awry. Trump has a cameo.

Luke Cage, also on Netflix, is the latest Marvel superhero story set in the same New York universe as Daredevil and Jessica Jones. Harlem is lovingly portrayed and the barbershop name dropping–Walter Mosley, Zora Neal Hurston, Crispus Attucks–and luke-cagevarious basketball, jazz, and rap references adds color. The central conflict, however, is flat. Super-strong, well-nigh invulnerable Cage is not evenly-matched by drug dealer-businessman Cottonmouth. Despite a watchable performance by Mahershala Ali, Cottonmouth is no Kingpin. Vincent D’Onofrio’s Kingpin had Shakespearean intensity, depth, and the physical power to battle a super-hero. Indeed, one of the things that made Daredevil special was that you could see his exhaustion and pain in every battle. Similarly, Jessica Jones’s nemesis, Kilgrave, was one of the most horrific characters ever seen on television (in a great understated performance by David Tennant) and Kilgrave had Jones under his thumb for much of the season. Super heroes need super villains. To be sure, there is pickup in the second half of Luke Cage, but it takes a long time to develop.

Westworld (HBO)–this is the one that you must watch. The first two episodes have been remarkable. Every scene has something to see or to think about. Audience expectations are continually subverted. The cinematography is stunning.

One characters says “That’s what I love about this place all the secrets, all the little things I never noticed even after all these years. You know why this place beats the real world…in here every detlevelsail adds up to something.” Very meta. The shots also speak to the structure of the plot. Look at this amazing shot of the control building–levels of meaning.

It does not pass notice that it’s bright and shiny on top but the lower levels are dark, moist, subterranean–like our subconscious. We are told that WestWorld is a maze, a maze literally and figuratively, in our heads.

Westworld also challenges us with questions. Who are we? If we visited Westworld would we be the good guys or the bad guys? How many of us secretly harbor the desire to do evil and are restrained only by fear of punishment? What kind of Zimbardo experiment is Westworld?

Or are we the operators of Westworld who treat other people (?) as mere means and not as ends in themselves? Parts of Westworld look like an abattoir and from one perspective there are mass rapes.

Or are we the robots, living in a simulation, a reality of someone else’s construction? And what is going on with the corporation? The ultimate god?

The executive producer of Westworld is Jonathan Nolan, brother of Christopher, and writer or co-writer of Memento, The Prestige, The Dark Night and Interstellar.

We are only two episodes in but so far this is thrilling art in action.

Piketty, Housing, and Capital Share

by on October 13, 2016 at 12:30 pm in Economics | Permalink

Gianni La Cava has a very interesting article (based on a longer paper) on what accounts for the rising share of capital in the income accounts:

A key observation in Thomas Piketty’s Capital in the Twenty-First Century (Piketty 2014) is that the share of aggregate income accruing to capital in the US has been rising steadily in recent decades. The growing disparity between the income going to wage earners and capital owners has led to calls for government intervention. But for such interventions to be effective, it is important to ask who the capital owners are.

Recent research has shown that the long-run rise in the net capital income share is mainly due to the housing sector (e.g. Rognlie 2015, Torrini 2016 – see Figure 1). This phenomenon is not specific to the US but has been evident in almost every advanced economy. This suggests that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners.

…The decomposition of the national accounts by type of housing indicates that the secular rise is mainly due to a rising share of imputed rent going to owner-occupiers. The owner-occupier share of aggregate income has risen from just under 2% in 1950 to close to 5% in 2014 (top panel of Figure 2). The share of income going to landlords (i.e. market rent) has also doubled in the post-war era. But, in aggregate, the effect of imputed rent is larger simply because there are nearly twice as many home owners as renters in the US economy. A similar phenomenon is observed in the personal consumption expenditure data (bottom panel of Figure 2). In other words, today’s landed gentry are predominantly home owners, not private landlords.

…The geographic decomposition reveals that the long-run rise in the housing capital income share is fully concentrated in states that face housing supply constraints. To see this, I divide the states into ‘elastic’ and ‘inelastic’ groups based on whether the state is above or below the median housing supply elasticity index (as measured by Saiz 2010). This index captures both geographical and regulatory constraints on home building across different US regions. For 50 years, the share of total housing capital income going to the supply-elastic states has been unchanged at about 3% of GDP (Figure 3). In contrast, the share going to the supply-inelastic states has risen from around 5% in the 1960s to 7% of GDP more recently. Notably, these divergent trends in housing capital income are not due to a few ‘outlier’ states where housing supply is particularly constrained, such as New York or California – instead, there is a clear negative correlation between the long-run growth in housing capital income and the extent to which housing supply is constrained across all states (Figure 4).

One of Nobel prize-winner Oliver Hart’s most influential papers (co-authored with Andrei Shleifer and Robert Vishny) is on incentive design and private prisons (see Tyler’s post covering Hart’s work). Yesterday was not the day for a critique but Tyler and I do critique this paper in our principles textbook, Modern Principles. I believe that our textbook is the only principles textbook to have a chapter on contract design and we make this modern material accessible to undergraduates! Here is our explanation and critique:

Should the management of prisons be contracted out to the private sector? The
owners of a private firm have a strong incentive to cut costs and improve productivity because they get to keep the resulting profits. If a public prison cuts
costs, there is more money in the public treasury but no one gets to buy a yacht so the incentive to cut costs is much weaker.

private_prisonIn 1985, Kentucky became the first state to contract out a prison to a for profit firm. Private prisons today hold about 120,000 prisoners in the United
States, about 5 percent of all prisoners. Should efficient private prisons replace
inefficient public prisons? Three economists—Oliver Hart, Andrei Shleifer, and
Robert Vishny (HSV)—say no. HSV don’t question that the profit motive gives
private prisons stronger incentives than public prisons to cut costs—HSV say
that’s the problem! Suppose that we care about costs but we also care about
prisoner rehabilitation, civil rights, and low levels of inmate and guard violence.
What we pay for is cheap prisons, but what we want is cheap but high quality
prisons. If we can’t measure and pay for quality, then strong incentives could
encourage cost cutting at the expense of quality.

The principle is a general one, a strong incentive scheme that incentivizes
the wrong thing can be worse than a weak incentive scheme. One car dealer in
California advertises that its sales staff is not paid on commission.
 Why would
a store advertise that its sales staff do not have strong incentives to help you?
The answer is clear to anyone who has tried to buy a car. High-pressure dealers
who pounce on you the moment you enter the showroom and bombard you
with high-pressure sales tactics (“I can get you 15 percent off the sticker, but
you have to act NOW!”) may sell cars to first-time buyers, but the strategy is
too unpleasant to win many repeat customers. Car dealers who rely on repeat
business usually prefer a low-pressure, informative sales staff….
In theory, a car dealer could have strong incentives and repeat business by
paying its sales staff based on their “nice” sales tactics, but in practice it’s too
expensive to monitor how salespeople interact with clients. Cheating by the
sales staff would be difficult to detect and thus would be common. 

What about prisons? Are HSV correct that weak-incentive public prisons
are better than strong incentive private prisons? Not necessarily. HSV assume
that cutting quality is the way to cut cost. But sometimes higher quality is also
a path to lower costs. Low levels of inmate and guard violence, for example, are
likely to reduce costs. And respect for prisoner’s civil rights? That can save on
legal bills. When quality and cost cutting go together, a private firm has a strong
incentive to increase quality.

HSV may also underestimate how well quality can be measured. Measuring
output pays off more when incentives are high. Unsurprisingly, therefore,
private prison companies and government purchasers have made extensive
efforts to measure the quality of private prisons.

Finally, don’t forget that weak incentives reduce the incentive to cut costs
but they don’t increase the incentive to produce high quality! Public prisons
might use their slack budget constraints to offer high-quality rehabilitation
programs, or they might instead offer prison guards above-market wages.
Which do you think is more likely?

Nevertheless, whether HSV are right or wrong about private prisons, their
argument is clever. The usual argument against government bureaucracy is that
without the profit incentive, public bureaucracies won’t have an incentive to
cut costs. HSV suggest this is exactly why public bureaucracies may sometimes
be better than private firms.

Addendum: We don’t go through the empirical literature in the text but overall it’s not supportive of HSV. As HSV predict, private prisons appear to be cheaper than public prisons but they are not significantly cheaper and the quality of private prisons is comparable to that of public prisons and maybe a little bit higher (faint praise). Basically the government gets what it pays for.

The Performance Pay Nobel

by on October 10, 2016 at 7:15 am in Economics, Uncategorized | Permalink

The Nobel Prize in economics goes to Oliver Hart and Bengt Holmstrom for contract theory, the design of incentives. See Tyler’s posts below for overviews. In our textbook, Modern Principles, Tyler and I have a chapter called Managing Incentives which covers some of this work, especially related to Holmstrom’s work on performance pay. Let’s give a simplified precis (fyi, the textbook doesn’t have the math).

Suppose that you are a principal monitoring an agent who produces output. The output depends on the agent’s effort but also on noise. It wouldn’t be a very efficient contract to just reward the agent based on output since then you would mostly be responding to noise—punishing hard-working agents when the noise factors were bad and rewarding lazy agents when the noise factors were good. Not only is that unfair–if you setup a contract like this the agents will a) demand that you pay them a lot of money in the good state because they will be taking on a lot of risk and b) the agents won’t put in much effort anyway since their effort will tend to be overwhelmed by the noise, either good or bad. Thus, rewarding output alone gets you the worst of all worlds, you have to pay a lot and you don’t get much effort.

But perhaps in addition to output, y, you have a signal of effort, call it s. Both y and s signal effort with noise but together they provide more information. First, lesson – use s! In fact, the informativeness principle says you should use any and all information that might signal the agent’s effort in developing your contract. But how should you combine the information from y and s? Suppose you write a contract where the agent is paid a wage, w=B0+By*y+Bs*s where Bo is the base wage, By is the beta on y, how much weight to put on output and Bs is the weight on the s signal–think of By as the performance bonus and Bs as a subjective evaluation bonus. Then it turns out (under some assumptions etc. Canice Prendergast has a good review paper) you should weight By and Bs according to the following formula:


that looks imposing but it’s really not.  σ^2s (sorry for the notation) is the variance of the s signal, σ^2y is the variance of the y signal. Now for the moment assume r is zero so the formula boils down to:


Ah, now that looks sensible because it’s an optimal information theorem. It says that you should put a high weight on y when the s signal is relatively noisy (notice that By goes to 1 as σ^2s increases) and a high weight on s when the y signal is relatively noisy. Notice also that the two betas sum to 1 which means that in this world you put all the risk on the agent. Ok, now let’s return to the first version and fill in the details. What’s r? r is a measure of risk aversion for the agent. If r is zero then the agent is risk neutral and we are in the second world where you put all the risk on the agent. If the agent is risk averse, however, then r>0 and so what happens? If r>0 then you don’t want to put all the risk on the agent because then the agent will demand too much so you take on some risk yourself and tamp down By and Bs (notice that the bigger is r the smaller are both By and Bs) and instead increase the base wage which acts as a kind of insurance against risk. So the first version combines an optimal information aggregation theorem with the economics of managing the risk-performance-pay tradeoff.

(c, by the way, is a measure of how costly effort is to the agent and so it also makes sense that the higher is c the less weight you put on performance incentives and the more on the base wage.)

Let’s also discuss some further work which is closely related to Holmstrom’s approach, tournament theory (Lazear and Rosen). When should you use absolute pay and when should you use relative pay? For example, sometimes we reward salespeople based on their sales and sometimes we reward based on which agent had the most sales, i.e. a tournament. Which is better? The great thing about relative pay is that it removes one type of noise. Suppose, for example, that sales depend on effort but also on the state of the economy. If you reward based on absolute sales then you are rewarding a lot of noise. Once again, that has two bad effects it means that you have to pay your agents a lot since you are imposing risk on them and it means that they won’t work that hard since they know they will be paid a lot when the economy is good and hardly at all when the economy is bad so in neither case do the agents have strong incentives to work hard. Suppose, however, that you have a relative pay scheme, a tournament. Now you have removed the noise coming from the state of the economy–since all the salespeople face the same economy and since there is always a first, second and third place the agent’s now have an incentive to work hard in good or bad times. Not only do they have an incentive to work hard you don’t have to pay them much of a risk premium since more of their pay is now based on their own effort rather than on noise.

But relative pay isn’t always better. If the sales agents come in different ability levels, for example, then relative pay means that neither the high ability nor the low ability agents will work hard. The high ability agents know that they don’t need to exert high effort to win and the low ability agents know that they won’t win even if they do exert high effort. Thus, if there is a lot of risk coming from agent ability then you don’t want to use tournaments. Or to put it differently, tournaments work best when agent ability is similar which is why in sports tournaments we often have divisions (over 50, under 30) or rounds.

FYI, in our textbook Tyler and I use this model to discuss when students should prefer an absolute grading scale and when they should prefer grading on a curve. Work it out!

Holmstrom’s work has lot of implications for structuring executive pay. In particular, executive pay often violates the informativeness principle. In rewarding the CEO of Ford for example, an obvious piece of information that should used in addition to the price of Ford stock is the price of GM, Toyota and Chrysler stock. If the stock of most of the automaker’s is up then you should reward the CEO of Ford less because most of the gain in Ford is probably due to the economy wide factor rather than to the efforts Ford’s CEO. For the same reasons, if GM, Toyota, and Chrysler are down but Ford is down less then you might give the Ford CEO a large bonus even though Ford’s stock price is down. Oddly, however, performance pay for executives rarely works like a tournament. As a result, CEOs are often paid based on noise.

The basic framework has since been applied in many different circumstances because principal-agent can be interpreted in many different ways employer-worker, teacher-student, regulator-banker and so forth. Thus the basic insights have been reflected in a wealth of applications each of which adds to the body of theory.

Our industrialized food system nourishes more people, at lower cost, than any comparable system in history. It also exerts a terrifyingly massive influence on our health and our environment. Photographer George Steinmetz spent nearly a year traveling the country to capture that system, in all its scope, grandeur and dizzying scale.

That is the introduction to an excellent NYTimes photo essay on farming. I liked this photo showing a machine for dumping cranberries from a truck: simple but awesome.



Americans more likely to say growing diversity makes their country a better place to liveSurveys from the Pew Research Center show that Americans are much more positive about diversity than Europeans. Remarkably only 7% of Americans think that diversity makes America a worse place to live–the next closest on that score is Spain where more than three times as many people think diversity makes Spain a worse place to live.

Liberals are more positive about diversity than conservatives but close to a majority of American conservatives (47%) think that diversity makes America better–which would make American conservatives more positive about diversity than most European liberals.

Optimism about diversity is one of America’s most admirable qualities.

Diversity can reduce trust and a society that combines distrust and a powerful central government threatens to oscillate between civil war and authoritarianism. Under limited government, however, a little distrust can not only be managed it’s a positive. If America were more homogenous, for example, we would have abandoned freedom of speech and religion a long time ago. It’s precisely because we can’t agree on what to say that we let everyone say what they want.

Hat tip: Cardiff Garcia.

Uber Versus Taxi Cab Racism

by on October 6, 2016 at 7:28 am in Economics, Film, Travel | Permalink

Film maker Charles Mudede, a black Zimbabwean living in the United States, is thrown back into the racist past by a visit to Vancouver.

Vancouver B.C. does not have Uber or Lyft, the ridesharing service I mainly use in Seattle and New York City…the absence of ridesharing companies in Vancouver has meant the persistence of a problem that, in my experience, pretty much vanishes from the surface of things when you have an account with Uber or Lyft: taxi cab racism….I had all but forgotten this form of racism until this weekend, when I found myself in downtown Vancouver unable to hail a cab. They just simply passed by me, though many were not engaged. At first I thought I was not visible enough to drivers, but after a few cabs passed by my increasingly theatrical waving, I remembered the color of my skin.

It’s important to note that many of the taxi drivers were not white but South Asians—some who were even blacker than me. But when it comes to taxi racism, the color of the driver often does not matter. White racism, in this sector, has been adopted, sometimes even intensified, by all other races, many of which have been and still are the victims of white racism. Even in Seattle, when Yellow Cab was the top dog, East African drivers would pass by me because I looked like them. All of that nonsense came to an end with ridesharing, whose apps made hailing unnecessary.

The author, it’s worth noting, is not a fan of neoliberalism:

The sad thing is that much of my thinking is strongly opposed to the sharing economy because the society in which its modes are expressed, a neoliberal society, results, for one, in the encroachment of the “entrepreneurial spirit” into all aspects of our lives.

So give him credit for grudgingly acknowledging one important benefit.

Fresh off his defeat (according to me!) in the signaling battle, Tyler is on fire in the rematch. Some heavy blows are thrown in our battle over artificial intelligence and the future of jobs. Is there a knockout? You be the judge! Either way, I guarantee a better debate than any you have seen recently.

Why do left wing governments sometimes support policies which harm their constituents? In A Theory of Political Entrenchment Gilles Saint-Paul, Davide Ticchi and Andrea Vindigni offer an answer:

A partially self-interested left-wing party may implement (entrenchment) policies reducing the income of its own constituency, the lower class, in order to consolidate its future political power. Such policies increase the net gain that low-skill agents obtain from income redistribution, which only the Left (but not the Right) can credibly commit to provide, and therefore may help offsetting a potential future aggregate ideological shock averse to the left-wing party.

The basic idea may also be put this way.  A left wing government might not want to pass policies to educate the masses or open markets to small business firms because such policies are likely to be successful and in the process create a class of skilled workers and petty bourgeoisie who will vote against the left-wing party and its policies of income redistribution. By keeping its constituents poor, the left-wing party keeps its constituents beholden because only the left-wing party will support income redistribution.

The left-wing party might even pass policies that the right-wing party wants in order to build its own future power base. The authors give the example of the Democrats under Bill Clinton supporting NAFTA which may have harmed the left-wing constituency of labor. The authors show, moreover, that the effect is likely to be bigger the bigger are political rents and the more stable are political careers. In other words, Bill Clinton passed NAFTA so that Hillary Clinton could run against it. An interesting idea if not wholly convincing.