Would cocaine legalization help Colombia?

by  Tyler Cowen in

Alvaro Vargas Llosa says yes:

In a country that has made admirable progress on other fronts, the drug
war is preventing the government from finishing off the narco-terrorist
organizations.  Between 2002 and 2005, Uribe’s “democratic security”
policy successfully pushed those organizations, especially the Marxist
empire known as FARC, away from many cities.  There was a one-third drop
in the number of murders and a two-thirds drop in the number of
terrorist attacks.  The economy picked up handsomely.  But then a
stalemate ensued in the campaign against the terrorists that cannot be
attributed only to the country’s jungles.  The mafias that owe their
existence to the criminalization of cocaine continue to generate enough
funds to match every attempt by the government to beef up its military
capability.

Legalizing or decriminalizing cocaine would do much to improve America’s inner cities and it ought to be seriously considered, even if it means more doped-up middle-class white teenagers.  But legalization — whether in Colombia or the United States — is not obviously the way out for Colombia. 

The positive scenario is that legalization eliminates the profits from the drug trade and the Colombian nasties pack up shop and go away.  In a legal market, Merck would outcompete the drug barons.  Maybe they would grow more coffee.

I see two negative scenarios.  First, cocaine production has been a boon to the Colombian economy.  It is no accident that Colombia experienced no currency crisis, unlike most other Latin countries.  (For contrast, here are some arguments that cocaine has hurt the Colombian economy; I don’t believe it.)  The rural Colombian economy might well collapse, taking civil order with it.

Second, the Colombian civil war is 40 years old and it predates the importance of cocaine.  Narco-traffickers set up processing labs in Colombia because the government did not control the country in the first place.  Legalizing cocaine would devastate their incomes, and probably bring political assassinations and military conflicts into the capitol.  It is not clear Colombia can handle it.  Keep in mind these same groups once, when threatened with more extraditions, stormed the Supreme Court and almost got away with it.  Cocaine profits, however evil they may be, give the guerrilla groups some stake in the status quo. 

That said, cocaine legalization probably would have helped Colombia in the late 1970s, before the paramilitaries became so rich.  That doesn’t mean the same idea will work today.

The bottom line: There is no simple way out of the Colombian mess.  Slow evolution away from cocaine production, combined with increasing economic diversification, is probably the best hope.  Chemical substitutes, such as Ecstasy, mean that the cocaine market
will slowly dry up anyway.  This slower change, which can’t be pinned
on any government, is a better way out of the current mess than a
drastic and more sudden legalization.  In the meantime, Uribe’s policy of getting tough has paid some dividends, and there is no reason to think these gains cannot be extended.

Addendum: Anne Applebaum argues for opium legalization in the context of Afghanistan.  But note that opium production may account for as much as 2/3 of Afghani gdp.  It is unclear that Afghanistan would keep these markets in a purely legal setting, so how would the country survive the shock to its real income?  Or should we give them a monopoly and cartelize their industry to boost profits but limit consumption?

Micro-credit puzzles

by  Tyler Cowen in

There is a new approach to micro-credit:

…a very great deal has been written on the subject of microfinance.  But a lot of it makes relatively little sense, especially to economists like Joe Stiglitz [TC: I would not have worded it that way].  For one thing, interest rates on microcredit are enormous: 30% to 60% is common, and rates over 100% are not unheard-of.  And yet default rates remain very low: how is this possible? And how is it possible that demand for loans seems to be unrelated to the interest rate charged?  And why is it that borrowers seem to have little if any interest in medium-sized loans, even when they’re offered?

A forthcoming paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz not only asks those questions, but goes a long way to answering them, too. It turns out that the main factor behind all these puzzles is the place of women in society, and especially extreme illiquidity in the market for women’s labor…

While there exists a labor market for male labor, for women, the outside labor market is largely missing in most of the developing countries, especially in the rural areas.  Even where the market for female labor exists, the ‘selling price’ is, in general, much lower than the ‘buying price’, due to the transaction costs that might reflect social norms regarding women’s participation in the formal labor market (like Purdah) along with the usual search, information and monitoring costs.  The existence of a transaction cost band implies that many households fall within the band, and the female labor endowment becomes non-tradable for such a household (i.e., household specific missing market for female labor).  This implies that the shadow wage rate for the non-traded part of the household labor is determined by the complementary resources available to a household, like land.  For a poor household with little land, the shadow wage, in the absence of microcredit interventions, is very low, possibly close to zero.  The availability of microcredit enables this nontraded part of the labor to be productive.

Translated into English, a little bit of credit acts as a catalyst for women outside the labor market, turning them into economically productive individuals.  Once they become economically productive, they can pay back small loans.  But they’re not productive enough to pay back medium-sized loans.

To put it another way, how can the marginal product of capital be so high?  Perhaps the interest on a microloan isn’t a pure return on capital, it is also a return on labor.  Without a tiny bit of capital, the labor can’t be tapped.  (So the marginal product of capital isn’t really all that high in Indian slums, for instance.)  Supposedly that is why microcredit works, and why larger loans are much less popular.

This is ingenious, but the theory won’t hold up if it focuses on liberating the labor power of women.  There are plenty of micro-credit markets where most of the loans finance the productive efforts of already-employed men.  A more realistic explanation has to consider micro-credit as micro-insurance (what if the kid needs to go to the doctor?, liquid funds are needed now), and the high rate of implicit taxation which needy relatives impose on spare household liquidity.  Both of these factors will get the private return from borrowing to be high, without requiring a comparably high rate of economic growth.

Here is the link.  Here is my earlier column on micro-credit.

Home

by  Tyler Cowen in

I arrived three hours early and went through six different and thorough searches at the airport; I do look like a drug dealer.  By my fourth day it had become clear how many wealthy Colombianas have had plastic sugery, of the disproportionate kind if you get my drift.  Colombia now has more people than Spain.  The American government freezes the funds of the families of Americans who have been kidnapped.  I found Bogotá safer than Madrid.

The Italian edition of Vanity Fair just listed Bogotá as one of the six up-and-coming tourist hotspots; Sibiu, Romania and the Kurile Islands (Russia) also made the list, enjoy.

When is democracy an equilibrium?

by  Tyler Cowen in

…democracy may only be stable when one group is dominant.  We provide a test of a key aspect of our model using data from "La Violencia", a political conflict in Colombia during the years 1946-1950 between the Liberal and Conservative parties.  Consistent with our results, and contrary to the conventional wisdom, we show that fighting between the parties was more intense in municipalities where the support of the parties was more evenly balanced.

Here is the paper, here is a non-gated version.

We don’t know our own conscious experience

by  Tyler Cowen in

Eric Schwitzgebel reports:

Philosophers since Descartes have been taken with the idea that we know our
own conscious experiences or "phenomenology" directly and with a high
level of certainty.  Although infallibilism in this regard has been under
heavy attack since the 1960’s, philosophers still generally assume that our knowledge
of our own phenomenology is quite good and that, for example, we are extremely
unlikely to be grossly mistaken about our own current phenomenology when we
concentrate extended attention on it.  I argue against this claim.

In "How
Well Do We Know Our Own Conscious Experience? The Case of Human Echolocation",
Michael S. Gordon and I argue that although there is something it is like for a
human being to echolocate, we have very poor knowledge of the experience of
echolocation.  In "How
Well Do We Know Our Own Conscious Experience? The Case of Imagery" I
suggest that our knowledge of even something as basic and prevalent as our
visual imagery is surprisingly poor.  In "Why Did
We Think We Dreamed in Black and White?", I present the common 1950’s
opinion that we dream primarily in black and white as an example of a case in
which people have been grossly mistaken about their own subjective experiences.
("Do People Still Report Dreaming in Black and White? An Attempt to Replicate a Questionnaire from
1942" provides empirical evidence that popular opinion about the
presence of colors in our dreams has indeed changed since that period.)

"The
Unreliability of Naive Introspection" provides a brief general overview
of several domains in which introspection of conscious experience appears to be
unreliable.  A more ambitious general paper on this topic is in the works.

"Introspective
Training: Reflections on Titchener’s Lab Manual" explores, through an
examination of the historical case of E.B. Titchener, the prospects of training
to improve the quality of introspective judgments.  "Difference
Tone Training: A Demonstration Adapted from Titchener’s Experimental Psychology"
provides the reader the opportunity to train herself in a roughly Titchenerian
way.

I am also working on a book manuscript with Russell T. Hurlburt, a
psychologist at UN Las Vegas and a leading proponent of experience sampling as a
means of generating accurate descriptions of moments of conscious
experience.  The book centers around an edited transcript of a series of
interviews Russ and I jointly conducted with a subject who was wearing a random
beeper and who was asked to take note of her experiences whenever the beeper
went off.  In the course of the interview, Russ and I concretely confront
the question of how much to believe the subject’s reports of randomly selected
moments of her experience.  If her reports are largely accurate, then the
transcripts also provide, in unprecedented detail, a portrait of moments of an
ordinary person’s phenomenology.

Read his home page and blog.  Here is Eric on conjugal love.

Addendum: Will Bryan Caplan take the bait and present his argument that such studies are a priori false because the studies themselves rely on data from consciousness?  Of course this counterargument is wrong.  We can make lots of mistakes, but still hold the capacity to measure some of those mistakes.

Whither conservatism?

by  Tyler Cowen in

Take that word in the broad rather than narrow sense.  Jim Kalb writes:

As time went on the movement followed the usual shift in emphasis from
quality to quantity: from the traditionalist, libertarian and
anti-totalitarian ideas that got it started to the forces that gave it
the means to exercise power: politic and well-connected
neoconservatives, spokesmen and operatives who could influence and
mobilize masses of religious and populist voters, and those simply
interested in power as such.  GWB’s big government borderless
“conservatism” brought that process to a conclusion: no conservative
principle at all, just power, political management, and scraps of
liberal and conservative ideology made up into banners.  At this point,
with the failure of the Bush administration, the whole thing seems to
have come to an end.  It seems that those who want to resist the reign
of quantity and the managerial state, and work toward a better way of
life, need to start again from basics.  We are back in 1945.

There is much truth to this.  As to the future, Brad Thompson offers an Objectivist viewpoint.  Here is my take on reviving classical liberalism.

Models of me

by  Tyler Cowen in

I expect Tyler Cowen
to jump in here and point out that this applies to food, too: you
should try something new frequently, rather than sticking to old
favourites.

Here is the modeler, a few remarks:

1. If you are in a good restaurant, try something that doesn’t sound appealing.  If it seems bad to most customers, it is on the menu for some other good reason, such as how it tastes.

2. The best argument against trying new things is wanting to keep the pleasures of anticipation.

3. Beware those who try many new things, it is often their sneaky form of conservatism.  In many fields of interest, trying new things is the only sustainable routine.

4. The person who tries new things only "every now and then" is often, in real terms, the greater innovator.  Such occasional quests for novelties have greater potential to be true earthquakes.

5. People have only so much toleration for novelty in them; no one embraces novelty consistently and in all fields of life.  Spend your tolerance for novelty wisely.

6. To prevent "trying new things" from becoming stale in its own terms, I have two tips.  First, spend time with children,.  Second, try "not trying anything new for a while," that is if you can.

7. Many people try new things for pre-emptive reasons; "I’d better try it before it tries me."

Pagamos con pesos?

by  Tyler Cowen in

The New York Times reports (and more):

Pizza Patrón, a Dallas-based pizza chain with many Latino customers,
has begun accepting pesos as payment, hitting a nerve in the nationwide
immigration debate.  Critics call the idea unpatriotic.

I see five readings:

1. This is testament to the remarkable new-found stability of the Mexican peso.  Immigrant arrivals still hold pesos rather than ditching them ASAP.

2. People could have free banking or competing currencies already, if they wanted it.

3. The pizza chain is receiving lots of positive publicity with its Latino customers.  I saw this same item on Primer Impacto last week.

4. If everyone accepted pesos, currency substitution effects would make the demand for dollars harder to predict, and thus monetary policy would be harder to implement.  Inflation would accelerate the velocity of monetary circulation to a greater degree, if dollar inflation is high just switch from dollars to pesos.

5. Change is given at the rate of twelve pesos to the dollar, so this is price discrimination against patriotic and possibly unsavvy Mexican customers.

How one fictional Indian views Hollywood

by  Tyler Cowen in

I liked the special effects, of course, but on the whole
the film [a Schwarznegger movie] bored me.  Like many of these American
films, it had one good idea and clung to it so hard that it seemed poor
in emotion and range.  The scenes seemed flat because even in the most
dramatic moments the American actors spoke quietly to each other, as if
they were discussing the price of onions.  And there were no songs.
Finally, ultimately, most American films were sparse and unrealistic,
and didn’t interest me very much.

That is from one character in Vikram Chandra’s Sacred Games, my early pick for novel of the year.

Otherwise I am learning just how good a writer Roberto Bolaño
can be, I see Bogota women run into the men’s room to avoid even a
slight line at the ladies room, and I’ve figured out how to eat well
here, it is fundamentally a baking culture.

Why I don’t believe in liquidity traps

by  Tyler Cowen in

The core idea is that the government prints more money but people just hold it.  If nominal interest rates are low, OK, maybe no one wants to buy more bonds (however under some assumptions this will lower bond prices and raise rates again, bonus points if you can work through the whole analysis with real and nominal rates and price level paths).  But they will buy more goods, thereby stimulating aggregate demand.  If they won’t buy more goods, just print even more money.  The spending impulse will kick in. 

For another view, Paul Krugman argues people may not expect the inflation to continue for long enough, and therefore won’t spend their money but will instead expect a future deflation further down the road.  I think that creating and maintaining the inflationary expectations is quite easy, especially if the inflation will boost output and employment and thereby make politicians popular with voters.  If you print money, people don’t think "hmm…that is inflationary…that means someday the central bank will have to deflate, I’ll wait six years and spend this new money when prices are really low."  Yes, I see the intertemporal equilibrium concept, but nope, that fails Psych 101.  Krugman also borrows the idea of an ongoing negative real rate of interest, but this describes Battlestar Galactica, not the twentieth century.

Open market operations, when tried, seem to have worked in 1932.  Was Japan in a liquidity trap in the 1990s?  They could have printed more money and given it to me.  With an interpreter at my side, I would have spent it right away.  Who knows, maybe you could have helped me.  Here is a good critique of Krugman on Japan.

Perhaps there is a knife edge setting where printing too little money leads to hoarding and printing too much money leads to hyperinflation.  So a risk-averse central bank is stuck.  I doubt this, people don’t act so closely in accord but rather they adjust their cash balances at different speeds.  So again, just print some more money to get out of the liquidity trap.

What is the evidence for a liquidity trap?  Low nominal rates and the absence of a recovery?  That’s not much evidence.  I suspect real coordination problems are at fault in most of these settings, and hoarding is at most a secondary issue.  Few serious economic problems are purely monetary in nature, yet the liquidity trap encourages us to embrace that dangerous idea.

The bottom line: I once wrote a paper arguing the liquidity trap is possible.  Now I think that Milton Friedman was right all along.