A Parting Thought: Market v. Political Entrepreneurship

Thanks again to Alex and Tyler for having me as a guest blogger this week. It has been a pleasure sharing thoughts with you about ideas, fashion, and politics.

My last nugget for the week is about how market and political entrepreneurs learn differently from failure. Market entrepreneurs learn from the relentless forces of profit and loss. They even host conferences and websites where they speak openly about their failures. In part because political entrepreneurs lack the same signals of profit and loss, this type of learning does not happen to the same extent in political markets. My co-author Wayne has further analysis on our blog.

Ideas and Political Entrepreneurs: The Case of Airline Deregulation

Following up on my post from yesterday, the Civil Aeronautics Board (CAB) regulated U.S. airline rates and routes from the 1930s through the 1970s. It also kept mountains of data. Aspiring Ph.D. candidates found worthy dissertation material from the agency’s files. The research lent support to an important idea—regulation was failing in this market—but no one listened to these young academic scribblers.

By the early 70s, an established academic produced a groundbreaking treatise arguing for sensible regulation. Alfred Kahn would soon make the jump from academic to regulator—of public utilities in the State of New York, not airlines.

By the mid-1970s, criticism of airline regulation had moved from academics to economists in think tanks (Brookings, AEI) and in government. At an economic conference on inflation convened by the Ford Administration, the delegates focused unexpectedly on a different idea: existing regulations were producing high prices. Yet as every economist in Washington knows, many reform ideas never become policy. Then came the political entrepreneurs.

First, Senator Ted Kennedy. An ambitious member of the Senate Judiciary Committee and chairman of the subcommittee on administrative procedure, Kennedy saw an opportunity to attack the over-regulated and under-competitive airline industry by critically examining the rules it played by.

Most judiciary subcommittee hearings were mind-numbingly boring, but airlines were sexy, and Kennedy turned the CAB hearings into high theatre, trotting out real but outrageous examples. A flight from Los Angeles to San Francisco (intrastate and thus not CAB-regulated) cost half as much as a flight from Washington to Boston (interstate and CAB-regulated). Even the dimmest reporter could connect the dots. The CAB looked bad. Kennedy looked good, as did the odds for reform.

Then the Carter Administration tapped Kahn to run the CAB. He allowed “experiments” in price flexibility (Super Saver fares). He approved new routes. Eventually, he questioned the agency’s purpose. The CAB had to go. This meant Kahn had to sell a very big idea to the madmen in authority, the decision-makers in Congress.

An accomplished economist who dabbled in theatre on the side, Kahn played his role perfectly. The former academic scribbler was funny, smart, patient and on point. He was a master communicator with press and politicians alike.

Kahn built on Kennedy, who built on the work of intellectuals in Washington’s think tanks and policy circles, who in turn built on good academic research. Importantly, he found allies across the political spectrum, from the American Conservative Union to Common Cause, from business interests to consumer groups. This odd mix prevented easy dis­missal of reform as the pet project of the left, the right, or any special interest.

With passage of the Airline Deregulation Act of 1978, Congress closed the CAB and left behind an unprecedented example of radical reform. A better idea had made its way from academic scribblers, through the intellectuals and on to madmen in authority, who were compelled to act. Yet so much of the story hinges on the actions of Kennedy and Kahn—two very different individuals, two very effective political entrepreneurs.

Ideas and Political Entrepreneurs: Explaining Institutional Change

None of my entries this week has directly discussed Wayne Leighton’s and my new book, Madmen, Intellectuals, and Academic Scribblers. This post briefly conveys the book’s motivation and argument. A follow up post will illustrate the argument with the case of airline deregulation.

Alex describes Madmen as “revolution without romance,” analogous to Jim Buchanan’s account of public choice as “politics without romance.” It’s an apt comparison because although Madmen is rooted in public choice, we explain why public choice cannot account for political change without incorporating ideas and entrepreneurship.

To do so, we focus throughout the book on three questions:

1. Why do democracies generate policies that are wasteful and unjust?

2. Why do failed policies persist over long periods, even when they are known to be socially wasteful and even when better alternatives exist?

3. Why do some wasteful policies get repealed (for example, airline rate and route regulation) while others endure (such as sugar subsidies and tariffs)?

Traditional public choice answers question #1 (concentrated benefits & diffuse costs) as well as question #2 (transitional gains trap). Yet wasteful institutional arrangements do sometimes get repealed or reformed. In addition to airlines, other network industries such as trucking and energy pipelines were significantly deregulated in the 1970s, followed by income tax reform in the 80s, spectrum license auctions and welfare reform in the 90s, and more.

Madmen argues that better institutions derive from better ideas, through a political process that is driven by key players: madmen, intellectuals, and academic scribblers.

The academic scribblers originate ideas, which must then face off with vested interests and long-held beliefs in the status quo. The “intellectuals” (Hayekian traders in ideas) propagate the ideas they think are best. When political opportunity strikes, it then becomes in the interests of the madmen in authority (those who grip the levers of political power) to implement the new idea and change the rules of the game (that is, to change the institutions). New rules reshape people’s incentives, which in turn directs people’s decisions toward different outcomes—for better or worse.

The process can be revolutionary, creating new institutions through a crisis such as war or depression. Lenin and the Bolsheviks come to mind; so do the American Founders and Franklin D. Roosevelt. At other times, this process can be evolutionary, not born out of a crisis but emerging as part of a nonviolent battle of ideas.

At the end of the day, ideas do not surmount established interests on their own; nor do ideas automatically shape new institutions when political opportunity strikes. Instead, institutions change when political entrepreneurs notice areas of weakness in the structure of ideas, institutions, and incentives, and then find ways to implement different rules in those areas. The entrepreneurs in political change may be philosophers, opinion makers, political leaders, or other types of influencers. What they have in common is access to a stock of ideas, a knack for perceiving times when a different idea can take hold, and the grit to drive madmen in authority toward changing institutions accordingly.

That’s stating things generally. Alex’s post gives flavor to the argument in the case of spectrum license auctions. And tomorrow I will follow up to show how Alfred Kahn and Teddy Kennedy were political entrepreneurs who revolutionized the airlines by implementing a different idea.

Some links for you

Good reads that haven’t been covered here on MR:

1. Institute for Justice on too much eminent domain discretion imparting bad incentives on redevelopment agencies.

2. The beginning of the end for corn ethanol?

3. My co-author Wayne Leighton on Bruce Yandle’s Bootleggers and Baptists: “it’s much more than a clever label for an interesting phenomenon; it’s serious political theory”.

4. Robert Sirico and Jeff Sandefur’s new book on how to be a hero.

5. Michael Makowsky and Stephen Miller on the effect of intelligence and education on the intensity of environmentalist beliefs.

Constraining Predation: Formal and Informal Institutions

If a monopoly on legitimate force (government) is set up to prevent private predation, then what constrains government predation? This new paper presents intriguing results (a snippet of the abstract):

Previous findings suggest that informal, cultural rules underlie constraints on government predation. Following this logic, this study asks how contract enforcement is achieved – through formal or informal mechanisms? After controlling for reverse causality, the empirical results suggest that informal cultural mechanisms protect against private predation and support contracting institutions while the formal institutions are insignificant.

The author is Claudia Williamson and it follows on her article in Public Choice and her Journal of Law & Economics piece with Carrie Kerekes. While limited by the quality of available measures of informal rules, this work is building a case that cultural norms do much heavy lifting when it comes to constraining both private and government predation.

Whither Fashion Copyright?

The Innovative Design Protection Act (S.3523) would extend copyright protection for three years to fashion designs, including “undergarments, outerwear, gloves, footwear, and headgear; handbags, purses, wallets, tote bags, and belts; and eyeglass frames.” (Bill text.) Despite being introduced in every Congress since 2006, the bill has barely eked out of committee and no version has been brought to a floor vote.

On the surface, it seems that Congress should have done more with this proposal. It would make U.S. law commensurate with designer protections in France, Canada, and other countries. Supporters argue this would save U.S. jobs and constrain foreign pirates from stealing American ingenuity. Congress has previously carved out copyright protections for other useful articles. And there is a popular industry lobby behind the proposal. What’s more, the courts have recently protected fashion designs. So why haven’t the authors of the bill celebrated yet?

Bad politics?

1. Because fashion design in the U.S. is centered in a relatively few locales, it doesn’t yield political gains to a sufficient number of congressional districts or states. But this explanation is a false start because legislation like this gets logrolled all the time.

2. It is simply a bad idea and doesn’t pass even Washington’s sniff test. This ascribes much credit to Congress in sifting good ideas from bad.

3. The lobby, while part of it is popular and noticeable, is not unified behind the idea. High-end designers have been backing the idea from the start, but clothing and shoe makers dug in their heels early and later came on board nominally (they prefer reducing import tariffs).

Bad timing?

4. A version of the fashion copyright bill was first introduced in the House in 2006, just as the housing bubble was going pop. With Washington focused on the financial crisis, terrorism, and unemployment, and with a growing public furor over economic inequality, the deck has been stacked against distributing rents to high-end designers.

5. Increased party polarization over the past decade has made it difficult to establish winning coalitions for bills like these. A few days ago I asked Chris Sprigman (co-author of “The Piracy Paradox”) about this. He said, “That’s generally true, but hasn’t been true of copyright. Copyright has mostly been bipartisan.” While he and Kal Raustiala predicted after the recent election that the GOP could potentially take a more reluctant stance on copyright: “then as if on cue, the whole Republican Study Committee fracas over the “anti-copyright” report erupted.” Chris elaborates here.

In sum: It’s conceivable the bill could just hang around long enough and a political opportunity will emerge. Yet having barely made it out of committee, and with no floor vote in either chamber, the proposal hasn’t been put to a serious political test. So it could just be too politically risky. Everyone buys clothes and shoes, and they presumably like that they’re spending less and less on apparel. Plus, through their regular shopping experiences, they can also see vividly that knockoffs are the reason they have inexpensive options. Do elected officials really want to test those waters? It’s difficult to see a winning coalition forming against the potential backlash that fashion copyright would generate.

More on these issues from MR:

Alex covered the rapid cameo of the Republican Study Committee’s “radical but sensible position paper on copyright.

Tyler covered “The Piracy Paradox” in his February 2006 entry, “How does the fashion industry work without copyright?” See also his: “Can we do without digital rights management?” and why the economics of food recipes resists copyright (“Food relies so much on execution…”); and why the French prioritize copyright.

Inexpensive Fashion: ¡Viva!

The Economist recently reported that

A GIANT photo of a model in tiny underwear is in danger of causing car-crashes on a busy intersection in Mexico City. The billboard announces the arrival of H&M, a Swedish fashion retailer, which opened its first Latin American store in Mexico City on November 1st. A fortnight earlier Forever 21, an American chain, celebrated its debut in the country. That followed the first opening of a Mexican store by Gap, another American clothing giant, in September. The new entrants promise high fashion at low prices: even more distracting than those skimpy H&M briefs is their miniature pricetag of 69 pesos ($5.30).

A catalyst to this beneficent development was Mexico’s recent reduction of apparel tariffs, but the driving force has been the steady march of fast fashion giants like H&M, Zara, and Forever 21, whose designs imitate the ever-changing trends established within fashion’s higher segments. Vilified by some of fashion’s upper crust, these copycats do more than merely copy. They adapt designs in ways that serve economic functions. As I’ve written elsewhere:

Copyists enable the industry to meet the range of consumer preferences by segmenting the market… When design copyists compete to imitate and adapt design originators, they also discover manufacturing and distribution shortcuts that help reduce unit costs. By removing a seam here or there, using less costly fabric, inventing an electronic inventory system, and so forth, fashion copyists reduce their own costs and can offer designs to consumers in even lower-priced market segments. It is only in recent decades that people of even modest purchasing power began to have access to fashionable, tasteful looks. “Queen Elizabeth owned silk stockings,” Joseph Schumpeter famously observed. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” Similarly, Frédéric Bastiat expressed wonder at the market’s ability to feed Paris without a central plan. The same holds for the spontaneous order of the fashion world. Paris gets clothed as well, good sir.

¡Vivan las imitaciones! [corrected EJL]

The Returns to Being Nice

Santa Claus may know if you’ve been naughty or nice — but does the market? This from the June issue of Scientific American (gated):

“When Nice Guys Finish First” by Daisy Grewal

  1. People who are nice are those who score high on the agreeableness personality trait. They are generous, considerate of others and pleasant. Such people benefit from good personal and work relationships. They are more likely to get a job—and to keep it.
  2. Being exceedingly agreeable does have drawbacks, however. Nice people tend to earn less than their more demanding colleagues and to get passed over for promotions
  3. Nice people should pay attention to their posture when they find themselves in leadership positions or in situations in which they need to exert authority over other people.

Sounds nice, but there’s no way it’s domain general. I expect returns to niceness are high for service professionals like real estate agents (see all those smiling faces on billboard ads?) and primary care physicians, but rapidly diminishing for win-or-lose professions like litigating and coaching sports. I also wonder about politicians. For academics, niceness probably pays in teaching more than research (or blogging?). Certain icons of creativity were also known to treat the people close to them boorishly, like Steve Jobs or Jackson Pollock.

In this working paper on siblings and twins, scoring high on agreeableness doesn’t seem to affect labor market success; instead, the market rewards extraversion and punishes neuroticism. Twins and siblings get put through the empirical ringer in this paper—unlike Santa, the market rewards nice boys and nice girls differently. Oh, how naughty.

Ideas vs. Interests

My inner sociologist says to me that when a good idea comes up against entrenched interests, the good idea typically fails. But this is going to be a hard thing to suppress. Level playing field forecasting tournaments are going to spread. They’re going to proliferate. They’re fun. They’re informative. They’re useful in both the private and public sector. There’s going to be a movement in that direction.

That is Philip Tetlock in a conversation with Daniel Kahneman on the importance of revolutionizing prediction methods. Is CBO listening? Hat tip: the amazing Giancarlo Ibarguen.

Some links for you

I will spend big chunks of Tuesday and Wednesday driving with my family across the highways of Appalachia and the Great Lakes. So here are some quick links (some of which belong in the category, “in case you missed it”).

1. How can one be British without speaking English?

2. CQ Weekly sizes up the CBO in this even-handed, conventional review.

3. Reducing transactions costs in New York’s taxi market.

4. Keeping transactions costs high in San Francisco’s taxi market.

5. Bruce Schneier reviews Harvey Molotch’s new bookAgainst Security: How We Go Wrong at Airports, Subways, and Other Sites of Ambiguous Danger.

“The state of intoxication is a house with many mansions.”

So reads the preamble to the Winter 2013 issue of Lapham’s Quarterly, titled merely “Intoxication.” A tribute to tanking oneself, the anthology collects some 60 essays, poems, and stories from across the ages. As though anticipating Alex and Tyler’s trip to the Subcontinent, Lapham’s preamble traces the dignified heritage of the drink to those sacred Hindu texts (page references omitted):

Fourteen centuries before the birth of Christ, the Rigveda … finds Hindu priests chanting hymns to a “drop of soma,” the wise and wisdom-loving plant from which was drawn juices distilled in sheep’s wool that “make us see far; make us richer, better.” Philosophers in ancient Greece … rejoiced in the literal meaning of the word symposium, a “drinking together.” The Roman Stoic Seneca … recommends the judicious embrace of Bacchus as a liberation of the mind “from its slavery to cares, emancipates it, invigorates it, and emboldens it for all its undertakings.”

The litany continues through the Persians, Martin Luther, Samuel Johnson, and Baudelaire. Next to Plymouth and the American experiment.

The spirit of liberty is never far from the hope of metamorphosis or transformation, and the Americans from the beginning were drawn to the possibilities in the having of one more for the road. … The founders of the republic in Philadelphia in 1787 were in the habit of consuming prodigious quantities of liquor as an expression of their faith in their fellow men—pots of ale or cider at midday, two or more bottles of claret at dinner followed by an amiable passing around the table of the Madeira. Among the tobacco planters in Virginia, the money changers in New York, the stalwart yeomen in western Pennsylvania busy at the task of making whiskey, the maintaining of a high blood-alcohol level was the mark of civilized behavior. The lyrics of the Star-Spangled Banner were fitted to the melody of an eighteenth-century British tavern song. The excise taxes collected from the sale of liquor paid for the War of 1812, and by 1830 the tolling of the town bell (at 11 A.M., and again at 4 P.M.) announced the daily pauses for spirited refreshment.

Add in all other intoxicants, and we have some dark comparisons within a realm of human experience that’s about worth Spain’s economy:

If what was at issue was a concern for people trapped in the jail cells of addiction, the keepers of the nation’s conscience would be better advised to address the conditions—poverty, lack of opportunity and education, racial discrimination—from which drugs provide an illusory means of escape. That they are not so advised stands as proven by their fond endorsement of the more expensive ventures into the realms of virtual reality. Our pharmaceutical industries produce a cornucopia of prescription drugs—eye opening, stupefying, mood swinging, game changing, anxiety alleviating, performance enhancing—currently at a global market-value of more than $300 billion. Add the time-honored demand for alcohol, the modernist taste for cocaine, and the uses, as both stimulant and narcotic, of tobacco, coffee, sugar, and pornography, and the annual mustering of consummations devoutly to be wished comes to the cost of more than $1.5 trillion. The taking arms against a sea of troubles is an expenditure that dwarfs the appropriation for the military defense budget.

Words to ponder this holiday season, when more bottoms are up than usual, and as the complex world of 2013 awaits. Cheers, Sarah Skwire, for the pointer.

Why Does Government Spending Increase Under Term Limits?

Many thanks to Alex for introducing me yesterday. Having written several papers on term limits, I will use my first post of the week to raise a new question that has emerged from this aging policy intervention: Why does government spending increase under term limits?

Back in the 1990s, when about half the states’ voters slapped term limits on their state legislators, the idea was to rein in government spending and decrease the growth of government. Instead, spending per capita increased in those states relative to states without term limits. See this empirical paper, this survey article, or this book this book for details.

These results are counterintuitive insofar as we put stock in the intended mechanism, which was simple: As legislators spend more time in office, they tend to vote for more government spending – so if legislators are required by law to spend less time in office, they’ll spend less money.

There are two problems with this. First, the premise that tenure and spending positively correlate has not held up to empirical scrutiny. Most papers found no positive link between tenure and spending, although a few reported small effects.

Besides, even if there were a strong tenure-spending correlation without term limits, that correlation is not likely to hold up once term limits are imposed. This is due to a version of the Lucas Critique (or Goodhart’s Law), which in general argues that observed behavioral patterns are not invariant to policy interventions. In this case, term limits will change the dynamics between voters and politicians in ways that lead to greater spending. More specifically, three explanations seem plausible.

  1. Term limitation exacerbates fiscal commons problems within the legislature. Because term limits decrease the variance of tenure within a legislature, the relative power of party leaders and ranking committee members will decrease. As the distribution of power flattens, this increases the proportion of legislators who possess access rights to budget items, thus decreasing the control rights that a relatively few leaders and committee chairs would otherwise have. When everyone can get their pet project through, more projects get through.
  2. Term limits shorten legislators’ time horizons. If legislators use their time in office to advance their careers, and if the career-value of being in the statehouse increases with the support of more spending, then term limits can impart an incentive to spend more and sooner. For example, rank-and-file legislators support more spending to secure leadership positions, and leaders let more projects through in order to quickly build durable coalitions.
  3. Term limits might lure legislators into very wasteful forms of pork spending, according to this paper by Michael Herron and Kenneth Shotts:

Term limits can, in some cases, inhibit voters from selecting representatives who deliver particularistic benefits, and, in these cases, term limits reduce pork spending. On the other hand, when pork is extremely socially inefficient, representatives who want to deliver pork to their districts have incentives to refrain from doing so to reduce future pork in other districts. In this scenario, term limits actually prevent legislators from promoting future spending moderation and thus paradoxically increase pork spending.

These explanations can, of course, be mutually inclusive. I suspect there is more to #1 and #2, if only because they are more salient.

In general, term limits increase spending because voters and legislators rationally respond to changes in their institutional environment. As this question invites further study, good papers will unpack the specific mechanisms that drive those responses.

— Notes: Since most people seem surprised by the actual effects of term limits, here are pointers to similar findings: Gubernatorial term limits worsen fiscal volatility — this paper (co-authored by my co-author Pete Calcagno) and this paper (by my dissertation advisor Bob Tollison) — because governors invest less in reputation (this paper). States with legislative term limits might also have worse bond ratings (here). Here on MR, neither Alex nor Tyler have put much stock in term limits, though Alex is less skeptical.