Month: May 2010

The 1964 Civil Rights Act in the 21st Century

by  Alex Tabarrok in

Rand Paul's remarks about the 1964 Civil Rights Act brought forth lots of talk about libertarians and lunch counters but almost no discussion of how the Civil Rights Act actually works in the twenty-first century. Yesterday provided a nice reminder.   

I won't comment on Lewis v. City of Chicago directly because it was decided on technical matters (the Supreme Court ruled that black firefighters in Chicago did not miss a deadline to argue that a test disproportionately hurt their chances of employment). The underlying facts, however, are of interest not because they are especially unusual but because they are common.  From Fire Law: 

The case, Lewis v. Chicago, involved alleged discrimination against African American applicants for the Chicago Fire Department who took a test in 1995.

The department set a passing score of 64 on the exam. Applicants who scored at least 64 but below 89 were informed that they passed the test, but would probably not be hired given the number of candidates who scored 89 or above. [26,000 applied and there were only a few hundred jobs, AT]  Applicants scoring 89 and above were classified as “well qualified”.

The majority of “well-qualified” applicants were white. Only 11 percent were black… 

The trial court sided with the black applicants, and ordered the city to hire 132 randomly selected African American applicants who scored above 64. The court also ordered the city to divide backpay owed among the rest of the black applicants.

White, Asian and Hispanic applicants who also scored above 64 but below the 89 standard were not offered employment or backpay.

Perhaps you are wondering about the tests?  You would be hard pressed to find any obvious racial bias.  I haven't found the Chicago test online but you can find similar tests from New York (also the subject of lawsuits) here.  Here is a sample questions from New York.

Test
Nowadays the Chicago fire department simply gives everyone an easy test and then they hire randomly.

How rich are we?

by  Tyler Cowen in

Arnold Kling makes some good points:

…after a crash it is very tempting for people to believe that the previous prosperity was false. However, there is a good economic case for presuming that it is a recession that is an aberration, not prosperity. For example, a graph of long-term GDP growth shows a steady upward trend, to which we return even after severe recessions.

We still have the capacity to produce the output we produced in 2006. Therefore, to a first approximation, we should still be able to consume what we consumed in 2006.

I have a few responses:

1. The problem is not in reattaining the 2006 level per se, but rather that people in 2006 expected an entire future path of growth which now appears further away.  They made plans based on these expectations and we are not yet in a position to make comparably luxurious plans.  Ireland is an extreme example of this point and do note that their capital stock has not been destroyed.

2. As I've written elsewhere, I remain an optimist about the future path of utility, though perhaps not gdp.  Many of today's innovations improve people's lives directly, without necessarily generating much revenue or employment.

3. This problem also resembles the equity premium issue.  Each crisis there is some probability that "this time is different" and upward growth will not resume or at least not for a long time.  Until that expectation is cleared away (if indeed it is cleared away), the real living standard is genuinely lower, most of all in expected value terms.

4. I'm still an optimist about the much longer run, whether for utility or gdp.  In fact the greater the current labor market troubles, the greater the long-run "human capital dividend" from reallocating resources.  Sooner or later, we'll have another burst of important innovation, comparable to that of 1870-1940.  We just don't have it now.

My favorite things Turkey

by  Tyler Cowen in

1. Novelist: Orhan Pamuk.  My favorite books by Pamuk are the ones rooted most firmly in Istanbul and Turkey, namely The Museum of Innocence and Istanbul and also Snow.  Those are some of my very favorite books, period.

2. Non-fiction book, set in: There is Runciman and Kinross and Stephen Kinzer.  Is the Osman book good?

3. Movie, set in: From Russia With Love and Topkapi come to mind; my knowledge of Turkish cinema is weak.

4. Opera, set in: The Abduction from the Seraglio, maybe the Beecham recording, or Krips, plus I like the overture of the Harnoncourt version, much more Turkish-sounding than the others.  And I don't have to tell you my favorite Rondo.

Uh-oh, suddenly there is too much Orientalism in this post.  Reverse course!

5. Favorite recording showing the unities behind Turkish and classical music: Istanbul, Dimitrie Cantemir, by Jordi Savall.  Quite the revelation and it makes you wonder how well we understand the true story of classical music.

6. Singer: Tarkan comes to mind and he is well represented on YouTube.  There is an entire strand of Turkish popular song, in the direction of Sezen Aksu, YouTube here.  But overall my pick is Edip Akbayram, imagine a Turkish version of Tropicalia.

7. Economist: Dani Rodrik, Daron Acemoglu, Timur Kuran, and Faruk Gul are the best-known Turkish economists I can think of.  I believe Nouriel Roubini was born in Turkey but I don't think he counts as Turkish.

8. Music mogul: Ahmet Ertegun, founder of Atlantic Records.

9. Classical pianist: I still have mixed feelings about Fazil Say, who is very subjective with the score.  Idil Biret has some good recordings of romantic music and piano transcriptions.

10. Cynic: Diogenes, who in a few ways was an early version of Robin Hanson, though I am not suggesting Robin is a cynic in the lower case sense.

The bottom line: Textiles and the decorative arts weigh in as strong additional positives, but I wish there were more Turkish writers I liked.  

*Lost*: commentary on the final episode

by  Tyler Cowen in

Most of all, it reminded me of Jacob's Ladder and especially Michael Powell's Stairway to Heaven (A Matter of Life and Death), two movies worth rewatching in any case.  The final scene, while the credits roll, is simply that of a plane crash with no survivors.  I view the show's cosmology as reflecting the existence of all possible universes and we get to see, and live with, a few of them.  That includes the universe where they all die in the initial crash, the universe where they all die in the hydrogen bomb explosion, the universe where the hydrogen bomb creates an alternative reality, the universe where there really is a miraculously surviving "Oceanic Six," the universe where the main island narrative happens, the universe where it is all a dream of Jack's, and bits of others as well.  This Leibnizian move "explains" the show's numerous unanswered questions, such as those about the lottery numbers and many more.  It was possible, so it happened, toss in the anthropic principles as well.

The most striking moment of the final episode was when Locke tells Jack, quite sincerely, that he does not in fact have a son.  The question remains how the different universes fit together or interact and in some manner it seems they do.  The final episode is extremely effective in bringing out the dreamy and speculative tones of many of the previous episodes.

Most of all I viewed the ending as tragic.  It was not mainly about any particular account of the metaphysics of the island.  It was about how few couples had the chance to actually live together, love together, and stay together.  The perfect reunions of the couples in the "we're all dead" scenario only drove this point home.  I found this contrast moving.

At the end, the door is left open for Jack (the body of Jack?) to become the next smoke monster on the island and you can spot some clues to this effect, such as Jack's body being strewn on the stones in the same manner as it was for The Man in Black.

I saw two major weaknesses in the denouement.  First, Widmore is dispatched too summarily in the penultimate episode.  That thread of the story is not so much hanging (which would have been OK), but rendered irrelevant.  Years of dramatic gravitas were swept away in a single, hastily executed murder scene.  Second, Ben is a weak and poorly defined character in the final episode and runs around like a puppy dog, with no clear moral stance.  Since he usually dominates any scene he is in, this is strikingly incongruous.

Overall I thought it was the best final episode of a series I have seen, with close competition from The Sopranos.

Regulation vs. tort

by  Tyler Cowen in

Paul Krugman writes:

Well, here’s the thing: regulation demonstrably does work where tort law doesn’t. Consider the environmental issue: in reality, the perpetrators of oil spills never pay most of the cost; but in reality, environmental regulation has led to much cleaner air and water. (Look up the history of Los Angeles smog or the fate of Lake Erie if you don’t believe me.)

So why does regulation work? If polluters can buy off the system ex post, after a disaster, why don’t they manage to totally corrupt regulation ex ante? There’s a lot to say about that, and I’m sure there’s a literature I haven’t read. But one thing we tend to forget in this age of Reagan is the importance and virtues of a dedicated bureaucracy: when you have professional government agencies with a job to do, and treat them with respect, that job often gets done.

I'll offer a few points:

1. Here is Susan Rose-Ackerman on regulation vs tort (JSTOR).  This is a standard piece in the area, and although she does not stress public choice arguments, the upshot is not extremely far from Krugman's conclusions.  She thinks that tort can replace regulation to only a limited degree.

2. I agree with Krugman that the "tort only" position espoused by some libertarians does not work.  Yet I do not think his remarks are pointing at the best possible understanding of the question.  For instance…

3. There is in fact an agency regulating off-shore drilling and in the case under question it totally failed.  How can Lake Erie, an orthogonally related success, be cited but this very directly relevant failure not be mentioned? 

Furthermore standard accounts of this failure blame regulatory capture, and the Congressional desire for revenue for this failure, not the ideology of free market economics.  You might also blame voter sentiment, since Obama seemed to pick up some advocacy of off-shore drilling from the Republicans and arguably this happened because that position proved to be one of the few effective Republican arguments in the last election. 

4. There are plenty of problems where tort works better than regulation, most notably when behavior cannot be controlled or measured easily ex ante or where the correct decision relies on the producer's decentralized information.  This encompasses numerous areas, from medical practices to accident law to injuries resulting from the handling of guns to, most of all, many micro-components of highly regulated sectors.  Here is a legal and moral defense of tort law.

5. Off-shore drilling is closely related to these cases.  For a number of obvious reasons, it is hard for the regulator to monitor how safe an off-shore platform really is.  We thus rely a lot on ex post penalties in this area (regulatory as well as tort), not because of ideology but because the ex ante proscriptions don't have as much bite as we would like.  This reliance on the ex post penalty also means that "regulation plus tort" (never mind "regulation alone" or "tort alone") may not work so well in this area, with or without free market ideology.

6. Krugman seems to argue that regulators are more protected from the ravages of bad ideology than are judges.  Maybe yes, maybe no (see below), but such a comparative argument is unnecessary.  The most salient point for Krugman's conclusion is simply that optimality requires a bit of regulation and a bit of tort law and that to do without regulation is, in some regards, to be too lax.  He could justify his main conclusion much more simply than he does.  (That said, I still believe in less regulation than Krugman does, though I accept the logic of this argument.)

7. If we need to make the said comparison – the corruptibility of regulation vs. the corruptibility of tort law – an independent judiciary need not do worse than a respected bureaucracy and indeed the former is arguably more protected from political interference.  It's also the case that the judiciary is more likely to overturn very bad behavior from other parts of the government.  This is an advantage for judicial approaches over reguatory approaches and it is a further sign of (partial) judicial independence.

8. I worry when numerous bloggers and writers — not just Krugman — hold a primary theory of regulatory failure based on regulators who do not agree with them ideologically.  This is at odds with a big chunk of the relevant public choice literature, which stresses knowledge and incentives, yet without ruling out ideological bias as a factor.  Political science approaches to regulation offer greater scope for ideological bias as a major cause of regulatory failure, but still it is hardly the dominant theory to the exclusion of others.  In this matter we should follow the literature, and evidence, which are there for the taking.

Should the large banks be broken up?

by  Tyler Cowen

Here is one piece of evidence which says no.  The bottom line seems to be that large banks are better at mobilizing capital internationally:

An essential step to see if this view has ground is analysing how multinational banks have been faring in the months of the crisis, in comparison to domestic banks. Given the key role of these multinational banks in supporting the real economy, whether their subsidiaries in host countries have been restraining the amount of resources provided to local residents during the recession.

In a recent paper prepared for the Economic Policy panel in Madrid (Barba Navaretti et al. 2010), we provide both aggregate and micro evidence that multinational banks have actually contributed to the stabilisation of financial markets in Europe and to the provision of credit to the real economy (notwithstanding the systemic nature of the crisis).

The aggregate banking statistics of the Bank for International Settlements show that the total local claims held by the affiliates (branches and subsidiaries) of multinational banks in host countries in Europe have been stable and even increasing between the beginning of 2007 and the third term of 2009, both in absolute terms and normalised by GDP or total financial activities (Figure 1 for total local claims in local currency). Claims have been rising also in the major Central and Eastern European Countries where foreign banks account for the dominant share of total banking activities. This pattern is consistent with broader worldwide evidence.

Here is the conclusion:

Contrary to popular belief, our results show that a world with only small and domestic banks is no safer. Rather, we show that the size and the global extensions of the activities of multinational banks positively contributed to hedging the downturns of the crisis, even in transition economies.

The call

by  Tyler Cowen in

Bloomberg offers up this piece of not very surprising news:

European Union finance ministers pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts.

I view this as the number one policy question facing the global economy today.  Do you favor patches to keep the current system up and running, or do you think we need an as-smooth-as-possible combination of defaults and devaluations?  I fall into the latter camp and I believe that no such feasible patches exist.  I believe that Hayek — not of The Road to Serfdom but rather the critic of rationalist constructivism — is being vindicated more and more every day.  Do any current European leaders understand his perspective?  We will see.

Which path shall it be?  What's your call?

From Angus, here are some harsh words, but on spending I cannot say that I disagree.  I am often a Keynesian methodologically, yet in practice I am usually quite skeptical of fiscal policy.

How will Greece get off the dole?

by  Tyler Cowen in

My NYT column is here, here is an excerpt:

Consider the World Bank’s Doing Business index, which ranks countries according to the quality of their regulatory environment for commerce. The index places Greece at No. 109, just behind Egypt, Ethiopia and Lebanon. For the category of “high-income countries,” the Greek ranking is next to last, ahead of only Equatorial Guinea, which has oil wealth.

Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.

As the World Bank index suggests, government funds are often spent hindering production rather than supporting it. This gives one clue as to why the numbers make Greece appear richer than it really is. Public expenditures are valued at cost when measuring gross domestic product, yet arguably the quality of Greek public services, per dollar spent, is less than that of many wealthy countries. Nonetheless Greece plunged ahead and joined the euro zone in 2001, with some unfortunate consequences.

A few scattered points which did not make it into the column:

1. Count the economic collapse of Greece as an intellectual victory for Douglass North and his brand of "institutions matter" economics.

2. I don't see any reason why a narrower Eurozone has to collapse.

3. Greece with a default and a floating exchange rate could do OK (though not spectacularly well).  The real question is how to get from here to there.

4. I don't have any problem suggesting that Greece needed, and still needs, to collect more tax revenue.  Yet many writers on "the left" will bend over backward to avoid uttering these simple words: "The Greek government spent too much money."  It's true, the Greek government spent too much money.  Be worried if you are reading a writer who does not admit (much less emphasize) that upfront.

5. In addition to greater wealth, here are some reasons why California is not like Greece:

The United States has rich and poor regions, but the 50 states are forced to run balanced budgets, and there is greater mobility within the nation, based on a shared language and culture. Major national policies, like President Obama‘s health care plan, are not judged primarily in terms of which states win and lose; in fact the largely opposed “red states” get a lot of the benefits through higher Medicaid subsidies.

Addendum: Arnold Kling comments.

Sixteen products they sell only at the Chinese Walmarts

by  Tyler Cowen in

1. Crocodiles

2. Bulk rice (TC is this true?)

3. Mixed meat (check out the photo below)

4. Orange juice and cooking oil, wrapped and bundled together

5. Turtles

6. ???? (check out the photo)

7. Walmart brand spirits

8. Rib cages (have I seen those in Mexico Walmart?)

9. Assorted dried reptiles

10. "Beautiful boxes of liquor"

11. Frogs

12. "A Large selection of chopsticks"

13. Ducks (TC: dubious)

14. Great Value Brand Hot and Spicy Beef Granules

15. Pig faces

16. Antibacterial bikini underwear for men (awesome photo)

The link, with photos is here, and I thank Leon Bergen for the pointer.