Political Science

That is the new paper by Lalley and Weyl.  Here is the abstract:

While the one-person-one-vote rule often leads to the tyranny of the majority, alternatives proposed by economists have been complex and fragile. By contrast, we argue that a simple mechanism, Quadratic Voting (QV), is robustly very efficient. Voters making a binary decision purchase votes from a clearinghouse paying the square of the number of votes purchased. If individuals take the chance of a marginal vote being pivotal as given, like a market price, QV is the unique pricing rule that is always efficient. In an independent private values environment, any type-symmetric Bayes-Nash equilibrium converges towards this efficient limiting outcome as the population grows large, with inefficiency decaying as 1/N. We use approximate calculations, which match our theorems in this case, to illustrate the robustness of QV, in contrast to existing mechanisms. We discuss applications in both (near-term) commercial and (long-term) social contexts.

Eric Posner has a good summary.  I would put it this way.  Simple vote trading won’t work, because buying a single vote is too cheap and thus a liquid buyer could accumulate too much political power.  No single vote seller internalizes the threshold effect which arises when a vote buyer approaches the purchase of an operative majority.  Paying the square of the number of votes purchased internalizes this externality by an externally imposed pricing rule, as is demonstrated by the authors.  This is a new idea, which is rare in economic theory, so it should be saluted as such, especially since it is accompanied by outstanding execution.

The authors give gay marriage as an example where a minority group with more intense preferences — to allow it — could buy up the votes to make it happen, paying quadratic prices along the way.

My reservation about this and other voting schemes (such as demand revelation mechanisms) is that our notions of formal efficiency are too narrow to make good judgments about political processes through social choice theory.  The actual goal is not to take current preferences and translate them into the the right outcomes in some Coasean or Arrovian sense.  Rather the goal is to encourage better and more reasonable preferences and also to shape a durable consensus for future belief in the polity.

(It is interesting to read the authors’ criticisms of Vickrey-Clarke-Grove mechanisms on p.30, which are real but I do not think represent the most significant problems of those mechanisms, namely that they perform poorly on generating enough social consensus for broadly democratic outcomes to proceed and to become accepted by most citizens.  One neat but also repugnant feature of democratic elections is how they can serve as forums for deciding, through the readily grasped medium of one vs. another personae, which social values will be elevated and which lowered.  “Who won?” and “why did he win?” have to be fairly simple for this to be accomplished.)

I would gladly have gay marriage legal throughout the United States.  But overall, like David Hume, I am more fearful of the intense preferences of minorities than not.  I do not wish to encourage such preferences, all things considered.  If minority groups know they have the possibility of buying up votes as a path to power, paying the quadratic price along the way, we are sending intense preference groups a message that they have a new way forward.  In the longer run I fear that will fray democracy by strengthening the hand of such groups, and boosting their recruiting and fundraising.  Was there any chance the authors would use the anti-abortion movement as their opening example?

If we look at the highly successful democracies of the Nordic countries, I see subtle social mechanisms which discourage extremism and encourage conformity.  The United States has more extremism, and more intense minority preferences, and arguably that makes us more innovative more generally and may even make us more innovative politically in a good way.  (Consider say environmentalism or the earlier and more correct versions of supply-side economics, both innovations with small starts.)  But extremism makes us more innovative in bad ways too, and I would not wish to inject more American nutty extremism into Nordic politics.  Perhaps the resulting innovativeness is worthwhile only in a small number of fairly large countries which can introduce new ideas using increasing returns to scale?

By elevating persuasion over trading in politics (at some margins, at least), we encourage centrist and majoritarian groups.  We encourage groups which think they can persuade others to accept their points of view.  This may not work well in every society but it does seem to work well in many.  It may require some sense of persuadibility, rather than all voting being based on ethnic politics, as it would have been in say a democratic Singapore in the early years of that country.

In any case the relevant question is what kinds of preference formation, and which kinds of groups, we should allow voting mechanisms to encourage.  Think of it as “politics as education.”  When it comes to that question, I don’t yet know if quadratic voting is a good idea, but I don’t see any particular reason why it should be.

Addendum: On Twitter Glenn Weyl cites this paper, with Posner, which discusses some of these issues more.

Matt Yglesias has a good argument to the contrary:

On its face, the political crisis in Greece seems relatively likely to lead to Greece exiting the Eurozone. And why not? Europe’s leading politicians pretty clearly regret having let Greece in back in 1999 (particularly in off-the-record conversations), and Greek voters are clearly fed up with being told what to do by Brussels and Frankfurt. Journalistically, a “Grexit” is certainly the most interesting outcome, so people talk a lot about it, and at this point there are a lot of plausible theories about how it could go. But I think it’s not going to happen. The forces of the status quo will rally, and another grand coalition will lead Greece through several more dreary years of austerity and slow growth.

Nonetheless I think Germany wants them out.  First, I think Germany regards Greece as a kind of cultural and economic cancer for the eurozone, and they don’t want to enshrine the principle that eighty percent default is OK.  Second, Germany sees a fair amount of eurozone stability right now (NB: I’m not saying stability is always good in every way) and has noticed that the contagion effects from the recent Greek troubles have been small.  This is not a bad time to get them out.  Third, Germany is smart and knows that the real problems are Podemos in Spain and just about everyone in Italy and maybe even a few people (or more) in France.  Now is a good time to send splinter parties a message that they had better not mess around with the Troika, and what could do that better than an economic disaster in a recalcitrant Greece?

So I think Germany will play brinksmanship with Syriza and, when the time comes, simply pull the plug and leave them high and dry.

Addendum: Here are some useful graphs.

Justin Wolfers considers that topic here.  I don’t disagree with his points, but I’ll offer a separate (but somewhat overlapping) set of picks:

1. The major economic and indeed geopolitical question of 2015 will be whether the Russian economy can manage a graceful decline.  I’ll say no, they can’t, but it is hard to see what lies around the corner or even to outline scenarios.

2. U.S. gdp is now growing at a five percent clip.  Will that finally translate into significant real wage growth?  Again, I’ll say no, see this recent piece by Barry Bosworth.  Either way, this question will shape our entire future looking forward.

3. Can India continue and indeed extend its recent momentum?  They are one of the bright spots in the global economy right now, in terms of rates of growth that is.  I say yes they can, they “enjoy” the odd liberty of not having been very successful exporting in the past and thus they have a relatively insulated position where they can rely on internally generated catch-up growth.

4. Will Canada and Australia turn out to have been bubbles of a kind, due to falling resource prices?  Will the global economy enter a new forty year period where Julian Simon is right once again about resource prices?  I say the word “bubble” is misleading here, but they will see a further growth slowdown in 2015 in those two nations.

5. Will anyone still be pretending that Abenomics has a chance of succeeding?  I say no, not really.

6. Will Greece vote itself out of the eurozone?  (Technically speaking, that could start in very late 2014).  I say yes.

7. How slowly/rapidly will the Chinese government allow the growth rate to fall?  How much excess capacity will be wracked up in the meantime? Does there exist a scenario in which the growth rate decline is so slow that the excess capacity can be worked off in a relatively orderly manner?  I say no.

8. Will Brazil and Mexico turn around the fading economic fortunes of Latin America?  I say no, not this coming year at least.  Not next year either.

9. Will the economies of Italy and France continue to fester?  I say sadly so.  The risk is that Germany joins them.

What are the “unknown unknowns”?  (Can that concept still make sense these days, with so much on-line commentary?)  North Korea was always one, but it can’t fit into the total surprise slot any more.  In any case, the Sony hack and its aftermath will continue to be a big story.  What else might count as speculative guesses?  (NB: not all of these are maximum likelihood estimates, rather they are undervalued possibilities.)  U.S. equities could turn out to be a bubble, even with continuing superior American economic performance.  So we may have a 1987-style crash.  The traditional relationships between macro variables such as currencies, interest rates, growth rates, stock prices and the like will not hold up.  No one’s macro theory will look very good (now that’s a daring prediction).  Each year the chance of a nuclear weapon going off is larger than we think.  Maybe not in 2015, but the chance of France having another “constitutional revision”/peaceful revolution is larger than most people realize.  Private space travel will prove ever more dangerousAvian flu will reemerge.  The Supreme Court will rule against the current version of Obamacare subsidies.  Haiti will reenter political chaos.  An American terrorist will operate in the Middle East and pull off one surprise attack, not huge in terms of casualties but it will create a lot of attention.  The new Star Wars movie will be good.

This is from Karen Dawisha’s more-important-than-ever Putin’s Kleptocracy: Who Owns Russia?:

When the economy almost collapsed in 2008, the Russian government bailed out state-supported banks first, to the tune of 5 trillion rubles (approximately $230 billion), in a move which government ministers who sat on boards (such as Finance Minister Kudrin, who sat on the board of VTB Bank) simply helped themselves to their own private stimulus package.  But instead of using the money to stabilize the Russian ruble (which plummeted from 23RR/US$ to 36RR/US$) or the stock market (which lost 80 percent of its value), it only stimulated capital flight.  Kudrin estimated that between October 2008 and January 2009, $200 billion was taken out of the country — i.e., virtually the entire stimulus.

This book contains a remarkable amount of research.  The point I wish to make today is that the Russian economic collapse is just beginning to unfold.

Scott Sumner asks a version of that question:

But here’s what I don’t get.  If America really is this weak and cowardly, then why can’t ISIS easily defeat us?  They could phone in threats against movie theaters just as easily as the North Koreans can.  And there must be 100 times as many Hollywood films that offend ISIS sensibilities as there are that offend Kim.  Recall that women get stoned to death in ISIS-controlled areas for things like wearing a miniskirt.  Then consider Hollywood films, which often show Arab terrorists as villains. So why doesn’t ISIS copy North Korea?  Why does ISIS let us insult them? I don’t get it.

There is more from the Scott on the question here.  This is hardly my area, but here are a few observations:

1. The United States will permit all kinds of mini-outrages against us, provided they are not seen as precedents.  If we were viewed as exploitable at this margin, our reaction, from both the government and private citizens, would be quite different.  In the meantime, pretending that North Korea is a fly to the American elephant may be an optimal response/non-response.  When Obama told Sony it made a mistake by pulling the film, that is exactly what he was doing, namely minimizing the significance of the event on purpose.  He wasn’t trying to scold Sony or even to defend free speech.

2. Often groups such as ISIS are much more offended by what “their own” women do than by what “outsiders” do.  They may even welcome the existence of a certain amount of Western and also Hollywood depravity, to aid product differentiation.  Additionally, don’t forget that some of the 9-11 terrorists seemed to enjoy strip clubs and the like.  Their motivations are not always strictly pious.

3. We don’t have a good understanding of why terrorists don’t attack more than they do.  Perhaps terror attacks can be viewed as belonging to two groups: a) the more or less replicable (Sri Lankan and Palestinian suicide bombings), which are allocated by some set of calculating authorities, and b) the “one-off,” which are governed by a kind of multiplicative formula, under which many things have to go the right way for an attack to happen at all.  9-11 is probably an example here, but without a fixed infrastructure for providing training and motivation and coordination, most terrorists aren’t actually that well organized and they can’t pull much off.  Read Diego Gambetta on 9-11.  Now that U.S. troops are (mostly) out of Iraq, the replicable attacks aren’t there any more either.

4. It remains possible that the U.S. still will retaliate against North Korea, or perhaps already has retaliated in a non-public manner.  It is also possible we have let news of such retaliation or pending retaliation leak to ISIS and other groups in some fashion.

And a final point: in the MR comments section Boonton wrote:

I think this illustrates a difference in perception between North Korea and, say, Al Qaeda. If Al Qaeda was offended by some movie (say the last Batman movie which featured some type of Middle Eastern prison that was nonetheless within walking distance of Gotham city), people would be up in arms about all theaters pulling the movie. Yet not so much North Korea, why?

Al Qaeda is recognized as having an actual agenda is is assumed to be a somewhat rational agent. Hence most of us will give credit to the anti-appeasement argument with them. If we pull one movie they will keep making demands.

North Korea, in contrast, is perceived as an irrational state lead by a child-man dictator. In other words, most in the west see it as essentially an entire nation that is literally mentally ill. We are willing to indulge them a bit because we are not quite sure how ill they really are and just like a deranged person may try to stab you over a napkin on the ground, this is the type of state that may start a nuclear war over a Seth Rogan movie.

Is this perception correct? Is North Korea not just mentally ill ‘on the ground’ but also at the top? Is the inner circle populated by cold rationalists cynically exploiting propaganda to control the masses or have they actually drunk the most Kool-Aid of the entire bunch?!

“Both” is a possible answer of course.

Nicaragua plans to begin building access roads and highways on Monday near the country’s Pacific coast as it starts work on a $50 billion inter-oceanic canal meant to rival Panama’s century-old waterway.

…At an estimated cost more than four times the size of Nicaragua’s $11 billion economy, the project has raised doubts among analysts who point to HKND’s lack of experience in major infrastructure projects and question the need for another Central American canal. Panama is planning to complete a $5.25 billion expansion of its waterway next year.

“I think there is some skepticism about it getting built and getting built on time and on budget,” said Lee Klaskow, a marine shipping analyst with Bloomberg Intelligence. “There are a bunch of active volcanoes in and around the area.”

Nicaragua’s canal would also require higher locks than Panama’s since it is 20 feet more above sea level he said.

There is more from Bloomberg here.  Here is further coverage:

No feasibility study, environmental-impact report, business case or financing plan has yet been released. Instead come platitudes from the Sandinista government of Daniel Ortega about how it will bring a jobs bonanza and end poverty.

So far, it has brought as much fear as hope. Since Chinese-speaking surveyors, backed by Nicaraguan soldiers and police, began assessing land and houses along the canal’s proposed 278km (172-mile) route a few months ago (see map), peasants fearful of their land being expropriated have taken to the streets 16 times. On December 10th several thousand, shouting “We don’t want the Chinese”, protested in Managua, the capital, despite police efforts to keep them in their villages, activists say. Boatmen in Punta Gorda on the Caribbean coast have refused to ferry heavy machinery to be used to begin construction, fearing their livelihoods will be harmed.

Maybe the equilibrium here is “start first, plan later” — what does that imply about the nature of the underlying game?   We’re going to see how good that vaunted Chinese soft power really is.

There is a good interview with Paul Fischer, who has studied this and related topics, here is one bit:

The way Americans are shown is equally counterfactual. There’s a long-running film franchise in North Korea that Kim Jong-il started called — depending on how you translate — Unknown Heroes or Unsung Heroes. It’s all about undercover spies, and the villains in every single one of them are dastardly Americans with bad hair and plans to kill children or poison people with AIDS. So there’s a sense in which the anger about The Interview being offensive to North Koreans is a little bit of the pot calling the kettle black. One of the weird things about The Interview situation is that in real life Kim Jong-un is this short, fat young guy who’s running a failed, bankrupt irrelevant state. I haven’t seen The Interview, of course, but from the trailers they make Kim Jong-un look like this broad-shouldered, badass cigar-smoking leader of an awesomely dangerous state. It’s actually a flattering portrayal. But it’s like with any kind of bully: They don’t get the joke. The fact that the joke exists is threatening.

There is a video example  of Americans in North Korean film at the link.  This is interesting too:

The country found The Interview‘s portrayal of Kim Jong-un to be hugely offensive. Are the Kims ever portrayed by actors in North Korea?
I believe there’s one film biography of Kim Il-sung — called either The Sun of Korea or The Star of Korea — where he’s played by an actor. Allegedly, this was a guy who they brought in and gave plastic surgery to so that he looked like Kim Il-sung and then, when they were done with him, they sent him off to the concentration camps. That’s the only time, because the thinking was, How do you have a guy play god? How do you paint god? So, with the Interview, the idea that there was an American playing the great leader, and playing him for laughs, and getting killed at the end — that just couldn’t be allowed.

Here are the last few paragraphs from Global Times:

The US society stands on the upper stream of global competition of culture. It needs to show some good manners instead of being too aggressive. The American elites should not just speak like gentlemen, but behave like them.

The biggest motive for Sony Pictures may be the box office, by putting out a sensational story. However, if the movie really was shown on a large scale, it would further upset the already troubled US-North Korea ties.

Some people in the US have complained that China has been suppressing Hollywood’s freedom of creativity through economic power. Actually China should further stick to principles when dealing with Hollywood.

Apparently, it is easier to show them the economic consequences than trying to reason with them.

There is this bit too:

Americans always believe they can jab at other countries’ leaders just because they are free to criticize or make fun of their own state leaders. Actually the countries targeted in Hollywood movies are very selective, such as the Cold War era’s Soviet Union, North Korea and Iran.

China used to be also portrayed in a negative light occasionally. Now that the Chinese market has become a gold mine for US movies, Hollywood has begun to show an increasingly friendly face, just in order to attract more Chinese viewers.

The full analysis is here, interesting throughout, via the excellent Adam Minter.

This cracks me up:

The illustrations on the banknotes show generic examples of architectural styles such as renaissance and baroque rather than real bridges from a particular member state, which could have aroused envy among other countries. “The European Bank didn’t want to use real bridges so I thought it would be funny to claim the bridges and make them real,” Stam told Dezeen.

The article headline is “Fictional bridges on Euro banknotes constructed in the Netherlands.”  Perhaps this will prove a broader and subtle metaphor for making the eurozone actually work…

For the pointer I thank Joel Cazares.

There is a new article by Seitz, Tarasov, and and Zakharenko:

This paper develops a quantitative model of trade, military conflicts, and defense spending. Lowering trade costs between two countries reduces probability of an armed conflict between them, causing both to cut defense spending. This in turn causes a domino effect on defense spending by other countries. As a result, both countries and the rest of the world are better off. We estimate the model using data on trade, conflicts, and military spending. We find that, after reduction of costs of trade between a pair of hostile countries, the welfare effect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.

There are ungated versions here, and for the pointer I thank the excellent Kevin Lewis.  Kevin also directs our attention to this paper: “…these results provide evidence for a relationship between feelings of disgust and the endorsement of equality-promoting political attitudes.”

Here for instance is the CR symposium on John Tomasi’s Free Market Fairness.  I believe there will be more to come.

From Arthur R. Kroeber, here is the summary on his economics:

This popular reading is unduly negative. Here is another that fits the facts at least as well: After a brief scare, the property market stabilized, in large measure thanks to the removal of unreasonable restrictions on house purchases, rather than an unsustainable blowout in credit growth. By the end of the year the economy was still growing at the fastest pace of any major economy (7.3 percent), although a slowdown next year seems likely given the apparent intention to constrain credit growth. In June the Politburo approved the biggest fiscal reform in 20 years, which aims to restructure troublesome local-government debts and revamp the tax structure to cut back on perverse incentives. November saw a significant opening of the capital account, as the “Hong Kong-Shanghai Stock Connect” program permitted investors in those two financial hubs to put money directly in each others’ stock markets. Partly in anticipation of this event, Chinese stocks staged a big rally in the second half of the year which made Shanghai the world’s second best performing market in 2014. And in December the People’s Bank of China released draft rules for deposit insurance, setting limits on the government’s unlimited guarantee of the financial system and setting the stage for full deposit-rate liberalization in the next year or two.

That is not exactly my view, but this is an intelligent, optimistic account of the current China.  The post is interesting throughout, and most of it is not on economic issues at all: “This record is stronger than that of any other major world leader in the last two years”  Recommended.

Hyattsville is considering a charter amendment that would lower the voting age to 16 as part of its effort to encourage more voter participation.

If adopted, the Prince George’s County city — home to 18,000 people less than a mile from the District of Columbia border — will follow Takoma Park in neighboring Montgomery County as the second municipal government in the nation to extend voting rights to minors.

There is more here.

…the swaps push-out rule — section 716 of Dodd-Frank, which would require banks to book their derivatives in subsidiaries that are not their insured depository institutions — may be killed as part of the new deal to fund the government. Or here is Mike Konczal arguing to preserve the rule. You don’t need me to tell you how terrible the politics (all politics) are — Why do financial regulation in an unrelated spending bill? Why rewrite financial regulation based on a draft by Citigroup lobbyists? — but let’s spend a minute on why it’s not worth caring about.

First: The rule doesn’t apply to most derivatives. Federal Deposit Insurance Corporation Vice Chairman Tom Hoenig:

“In fact, under 716, most derivatives — almost 95% — would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank. The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.”

[This is now Levine again.]  I have my biases, but I have a hard time believing equity derivatives will bring down a bank. Uncleared CDS, I’ll grant you, has a rough track record, though the market is slowly moving away from it in general. But the big derivatives risks, by notional, were going to be allowed to remain in the depository banks anyway. “Oh but no one could be blown up on interest rate swaps,” you say, as the Fed discusses the timing of rate increases.

Second: Pushing out derivatives into non-insured subsidiaries doesn’t make them go away. Defenders of the rule cite the example of AIG, which foundered on uncleared CDS and brought down the financial system. AIG: not an insured bank! Neither was Lehman! The people arguing for the swaps push-out rules are not people who, in other contexts, would say that only insured depository banks get any government support. They’d say that “too big to fail” banks (you know: derivatives dealers) pose risks to the financial system even in their non-bank subsidiaries, risks that lead to an implicit expectation of government support beyond the explicit FDIC insurance. Here, they are right. If JPMorgan blows itself up trading CDS, that will be a problem for everyone, whether it happens in the insured bank or some uninsured subsidiary. The rule won’t stop that. The rule is (was?) fine, but it’s not worth getting upset about. This is all theater.

The link is here.

“Something out there is killing everything, and you’re probably next.”

You can view the talk here.  It is called “The Great Filter.”