Month: November 2006

Voters are not fiscal conservatives

In all three states where TABOR-style spending caps [Taxpayer Bill of Rights] were placed on the ballot, they were defeated…voters in recent years have repealed TABORs across the country, notably
in Colorado, where the first one was enacted in 1992.  Yesterday, the
three new attempts to institute the rules were flatly rejected.

That is from a very happy Ezra Klein.

America and Europe, continued

It is true that some European nations are at a par with the United States, and Norway (oil) and Luxembourg (financial services and small population) are above the United States.  But keep in mind that these figures for the top European performers are averages.  Creating low-wage jobs or taking in immigrants will lower such an average butthis effect should not downgrade the true economic performance of the United States. 

A further question is how much "cherry-picking" in Europe should be allowed (e.g., ruling out Greece), while not doing the same for within the United States.  Louisiana and Mississippi are a drag on U.S. averages, and DC probably looks like Luxembourg.

Note also that high rates of government employment, as we find in many parts of Europe, tend to overstate measured gdp.

If we look at recent rates of growth, whether of productivity or of gdp, the U.S. clearly is ahead of Europe, although a forthcoming U.S. slowdown may change that ranking at least for a while.  Much of this seems to stem from information technology, as best we can determine, not "American catch-up."  Try also the Lewis book on productivity.  The micro-evidence all suggests that the U.S. has obtained an ongoing flexibility lead in certain key categories, most of all retailing.

In short, if we view the numbers in context, they still indicate a serious economic problem for social democracy.  Try some demographic projections as well, and their implied economics, a topic on which Quiggin and CT commentators were conspicuously silent.

None of this is counting the America’s greater future capacity to either respond to globalization or absorb immigrants.  I’ve heard many a European envying the future of the American economy, but I’ve never heard of an American envying the future of the French or German economy (except perhaps at CT). 

As I said in my original essay, I still see two "plausible" scenarios for Europe not collapsing.  Eichengreen is yet more optimistic than I am.  But if defenders of social democracy continue to deny the problem, there is no reason to be optimistic at all.

What I’ve been reading

1. Dave Eggers, What is the What.  Despite its preciousness, I quite liked A Heartbreaking Work of Staggering Genius.  Sadly this quasi-fictional tale of a Sudanese refugee reveals that most contemporary writers are lightweights, pure and simple.

2. Gore Vidal, Point to Point Navigation: A Memoir.  I loved Palimpset, volume 1, but this follow-up is junk.  Julian is his best book, but overall he has more misses than hits.

3. Othello.  I’ll teach this in my spring Law and Literature class.  I read Shakespeare as despising the Moor for turning his back on his natural Muslim allies and fighting them in Cyprus.  In a strange way Othello deserves some of the bad treatment he receives — why should anyone trust him?

4. The new Stephen Dubner book…I am not reading it yet, but I don’t want to be slow with the news.  Discover the other Dubner.

5. Steven Johnson, The Ghost Map: The Story of London’s Most Terrifying Epidemic.  This is from the guy who brought us Everything Bad is Good for You, except it turns out that cholera isn’t good for you, it is bad for you.  A brisk and readable story of public health issues in Victorian London.

6. Gabriel Garcia Marquez, Chronicle of a Death Foretold [Crónica de una muerte anunciada].  I regard One Hundred Years of Solitude as a good but overrated book; this slim volume may well be his most exciting fiction and it is clearly the most humorous.  I’m also fond on his non-fiction book about the kidnapping and volume one of his memoirs, plus of course the short stories; that is what he will be known for.

Where is Marginal Revolution?

The IP address for the NBER is  I’d like to know the IP address for Marginal Revolution but it’s more complicated because MR is hosted by Typepad.  Does anyone know if there is a numerical address for MR like that for the NBER?  Please comment if you know it or can find it.  Thanks in advance!

P.S.  This for a classroom discussion of Domain Name Registrars that I am working on.

For the curious

At about 8:30 a.m., is giving the Republicans a 13 to 15 percent chance of Senate control.  The Webb-Allen race, described by newspapers as "too close to call," is being called for Webb; Allen’s chance is about five percent.

Addendum: Chris Masse reports: if Virginia and Montana go Democratic, as of morning yesterday, the prediction markets called every race correctly.

Does downward nominal wage rigidity matter?

Michael Elsby says no.  In his view, if downward nominal wage stickiness is a potential problem, the relevant class of firms will simply start workers off at a lower nominal wage, raising it over time as need be.  The result will be "wage compression."

Elsby also claims that the Phillips curve trade-off between inflation and unemployment is not stronger at low levels of price inflation.  That suggests that nominal wage rigidity doesn’t much matter at the macro level.  If it did, proximity to that zero nominal cut point ought to boost the benefits of inflation, but it doesn’t seem to.

I am surprised by this argument, but I don’t (yet?) see reason to reject it.

The European Economy Since 1945

An excellent book appeared on my doorstep yesterday, by Barry Eichengreen:

Thus Europe, which had relied on extensive growth in the 1950s and 1960s, had no choice but to switch to intensive growth from the 1970s on.  The problem was that institutions tailored to the needs of extensive growth were less suited to the challenges of intensive growth.  Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty. Now the role of finance was to take bets on competing technologies, something for which financial markets were better adapted.  The generous employment protections and heavy welfare-state charges that had given labor the security to accept the installation of mass-production technologies now became an obstacle to growth as new firms seeking to explore the viability of unfamiliar technologies became the agents of job creation and productivity improvement.  Systems of worker co-determination, in which union representatives occupied seats on big firms’ supervisory boards, had been ideal for helping labor to verify that owners were investing the profits resulting from its wage restraint but now discouraged bosses from taking the tough measures needed to restructure in preparation for the adoption of radical new technologies.  State holding companies that had been engines of investment and technical progress were no longer efficient mechanisms for allocating resources in this new era of heightened technological uncertainty.  They were increasingly captured by special interests and used to bail out loss-making firms and prop up declining industries.

I have never read a better paragraph on what the European economies have done right and subsequently did wrong.  Note that Eichengreen is, broadly, a social democrat.  Eichengreen (who is more optimistic about Europe than I am) believes that Europe can turn things around, without chucking the basic model, but he doesn’t for a moment deny that Europe faces an economic crisis relative to the American model. 

I am still shocked by the response of the CrookedTimber commentators to my short essay on social democracy over there.  It is not just a question of how one reads the productivity and growth numbers, but also there is a commonly accepted narrative of what is wrong with the major European economies.  Eichengreen is the one doing service to the social democratic cause.

Daniel Ortega is back

The ever-invigorating Leiter Reports [addendum: in this case Professor Hellie] writes:

Excellent!  Daniel Ortega, a true peoples’ hero, appears poised to make his comeback.  Caveat: he used to be a Good Guy, overthrowing one of the more vicious Central American caudillos, and valiantly stood up for years against a ruinous US proxy war, dunno what he’s been up to these days.

Here is what Daniel Ortega has been up to.  His defenders may wish to note he was cleared.

Hail Robert Fagles

There is a new translation of Virgil’s Aeneid:

There are twin Gates of Sleep.
One, they say, is called the Gate of Horn
and it offers easy passage to all true shades,
The other glistens with ivory, radiant, flawless,
but through it the dead send false dreams up toward the sky.
And here Anchises, his vision told in full, escorts
his son and Sibly both and shows them out now
through the Ivory Gate.

Aeneas cuts his way
to the waiting ships to see his crews again,
then sets a course straight on to Caieta’s harbor.
Anchors run from prows, the sterns line the shore.

I don’t know all of the Aeneid translations, but I prefer this to Mandelbaum (my previous first choice), West, or Fitzgerald.  The overall approach strikes me as a more accurate Fitzgerald.  Highly recommended.

The economics of remittances

Just how beneficial are remittances?  One loyal MR reader writes on his blog:

While undoubtedly a portion of remittances are sent back to the U.S. via purchasing power to buy U.S. goods and services, a portion is also kept in-country and used as an alternative monetary system or held by a foreign government as a source of "hard" currency to prop up its domestic money.

Money that leaves the U.S. and never comes back is great for the U.S. government.  Essentially it bought goods and services without ever having to pay up on it’s end of the IOU.  Therefore, shouldn’t Americans support remittances?  America doesn’t run out of money – we’ll just print more.

I am more interested in the effects on the receiving country.

Assume that dollars are sent rather than exchanged for pesos and that the remittance money never returns to the United States.  In essence we are inflating the parallel currency in Mexico (or Vietnam, or wherever).  This means more wealth for the people who receive the remittances.  But who loses? 

Some of the new money will just be inflationary.  People who compete with remittance receivers in consumer markets will face higher prices.

Output and employment will rise in regions with unemployed or underemployed resources, or simply in monopolized sectors.  If a Mexican uses the money to bribe a policeman, or hire a doctor, the quantity effect may outweigh the price effect.  This is the main source of net benefits to the receiving country.  But in perfectly competitive sectors this is just pure inflation.  Note that rural Mexico, where most of the remittances go, is far from perfect competition.

There is also an precautionary insurance gain from having more savings held in dollars, distinct from whatever is finally purchased with those dollars.

Of course, not all of the dollars will stay in Mexico.  Mexico, as a nation, gains to the extent those dollars buy goods and services from the United States, assuming of course U.S. markets are large enough that more Mexican buyers won’t push up prices for subsequent buying Mexicans.  So the best outcome, at least for Mexico, is if the remittances go to people who will carry them back across the border or spend them on imports.

If the dollars are exchanged into pesos, through Western Union, the story differs.  The rate for dollar-peso exchanges moves against the dollar.  This hurts people who have already accumulated dollar-denominated assets; usually those are previous receivers of remittances and of course American tourists who visit Mexico or who buy amates.  It also will hurt Mexican exporters.  Mexican importers gain accordingly.

In sum, it is a complicated story.  Yes, in many regards remittances are more like inflation — albeit in a parallel currency — than like real wealth transfers.  But there are also some important efficiency gains.

We also should not assume that distribution and efficiency are fully separate.  Perhaps the remittances go to people who know better how to invest the money.  Perhaps not.

Comments are open for analysis of remittances, but general talk of Mexican immigration will be deleted…

More new growth wisdom: Dani Rodrik and Jason Hwang

How does the introduction of new goods affect growth?  While recent
evidence has highlighted the role of new goods in raising the diversity
and sophistication of a country’s production structure, which in turn
matter for growth, little evidence tells us why.  I propose a simple
channel of impact relying on two building blocks.  One, there is a
convergence force operating at the product level.  The further behind
the frontier you are in a given product, the faster you raise quality.
Two, new goods are introduced with a greater distance to the frontier
than in existing goods.  I construct a Schumpeterian growth model with
these features to show how entry into new goods influences aggregate
outcomes by determining the range of products in which convergence
occurs.  Detailed trade statistics provide strong support for both
building blocks of the model.  Using unit values as a proxy for quality,
I find that unit values exhibit strong convergence – at about 5% a year
– for the great majority of products in the sample.  Also the gap in
unit values relative to the world frontier is larger for new goods.
Confirming a key prediction of the model, I further show that, holding
constant levels of development, unit values are inversely related to
measures of diversification and sophistication of a country’s exports.
This last finding helps to explain a recently documented puzzle
regarding the high sophistication and low unit values of Chinese
exports. (To be posted in early November)

Perhaps I will not be convinced (what goods can be produced reflects an unobserved heterogeneity in underlying conditions), but Hwang is worth watching.

Bryan Caplan is irrational

That’s how he knows so much about the American voter, this week at Cato Unbound.  His research (likely to be one of the top books for next year) outlines the claim that voter irrationality is the fundamental force behind bad policy.  Unlike the well-known theories of "rational ignorance," Bryan stresses that the irrationality is willful rather than the result of simple misinformation.  That makes the problem harder to dislodge.

So what are Bryan’s remedies?

Above all, relying less on democracy and more on private choice and free markets.  By and large, we don’t even ask voters whether we should allow unpopular speech or religion, and this "elitist" practice has saved us a world of trouble.  Why not take more issues off the agenda?  Even if the free market does a mediocre job, the relevant question is not whether smart, well-meaning regulation would be better.  The relevant question is whether the kind of regulation that appeals to the majority would be better.

Another way to deal with voter irrationality is institutional reform.  Imagine, for example, if the Council of Economic Advisors, in the spirit of the Supreme Court, had the power to invalidate legislation as "uneconomical."  Similarly, since the data show that well-educated voters hold more sensible policy views, we could emulate pre-1949 Great Britain by giving college graduates an extra vote.

I don’t think those reforms would work, if only because voter irrationality has to be given enough free play so that it doesn’t explode or boil over into a more fundamental revolt.  (Matt Y notes: "Voting and legislatures aren’t a very good mechanism for generating knowledge, but they at least serve as peaceful mechanisms for resolving coflicts of interest, which are simply endemic in the policy arena.")  In addition Bryan is legislating policy or procedural outcomes by fiat, rather than explaining how they might come about through the (irrational) status quo.

My idea?  Voter irrationality often makes American policy, especially foreign policy, more magnanimous than it otherwise would be.  And truly rational voters simply would not show up at the polls, thereby ruining democracy. 

So we need voter irrationality, although we should seek to improve its content. (Note also that many good policies are based on irrational voter views, such as the belief in meritocracy.)  Irrationality is what keeps us going, and that is why Bryan Caplan, like American democracy, is so extremely productive. 

Addendum: Greg Mankiw wants fewer people to vote.  Here is my previous post on whether or not you should vote.


Today I am in Florida giving a seminar to a group of Federal judges on the law and economics of Federalism and Crime.  One of the surprising things that I discovered in my research is that cities, counties, and even most states can legally banish criminals from their borders.  I say most states because, for example, the Georgia state constitution makes banishment illegal.  Georgia judges, however, have found a way around the law they have imposed "158-county" banishment.  (If you guessed that Georgia has 159 counties give yourself two points.)

Banishment is a particulary noteworthy example of a negative spillover – banishment benefits the state doing the banishing but only at the expense of other states.  I will suggest to the Federal judges, therefore, that state banishment should be illegal.

There are some arguments for banishment from a city or county.  Banishment, for example, can remove a criminal from negative peer influences.  Whether the advantages outweigh the spillovers is an open question but city and county banishment should be left to the states because the state government can internalize the city/county spillover.