Category: Economics

Should libertarian economists vote Democrat?

Jeffrey Frankel, a member of President Clinton’s CEA, charges (Milken Institute Review, registration required) that:

When it comes to economic policy, Republican and Democratic administrations have switched places since the 1960s. The Republicans, who were so long identified with free markets and less-is-more government, have become the party of fiscal profligacy and market intervention. Democratic presidents have (by comparison) become the agents of fiscal responsibility and arms-length microeconomic policies.

Robert Ekelund and Mark Thornton have a rebuttal in the latest issue of the MIR (3rd quarter, 2003) but it’s a strange “rebuttal” that begins:

We certainly agree with Jeff Frankel (Milken Institute Review, 1st Quarter 2003) that the “Republicans have become the party of fiscal irresponsibility, trade restriction, big government and failing-grade microeconomics.” However, we would argue that there is less mystery to this exchange of economic platforms with the Democrats than meets the eye. The Republican Party was established in the 19th century as a party of big government and economic intervention.

For my take see my earlier post, The Beast Isn’t Starving.

Manufacturing fallacies

Some fallacies just keep coming back no matter how many times they have been exploded. Jobs in the manufacturing sector are disappearing and have been doing so for 30 years. The reason this has occured, however, is not because we have “sent the good jobs overseas” and it is not because our manufacturing sector is “rusting.” Jobs have disappeared because the manufacturing sector has been spectaculary successful. When measured in terms of what ultimately matters, output, the U.S. manufacturing sector has more than doubled in size over the past 30 years. We are now producing more “stuff” than virtually ever before and because of productivity improvements we are doing it with less labor. The graph below from The Economist is for the G7 countries, not just the U.S., but it conveys the correct idea. (For the US data see Robert Hall’s recent testimony before Congress).

“Job destruction” is a vital aspect of progress. If we had not destroyed millions of farm jobs most of us would still be working in agriculture today.
manufacturing.gif

Franco Modigliani, in memory

Nobel Laureate Modigliani passed away several days ago. Read this tribute, which explains Modigliani’s views on religion, his flight from the Mussolini regime as a boy, and his opposition to Berlusconi. Here is one of the more personal bits:

When I saw the holes in his socks I liked and admired him even more. I thought, here is a man who doesn’t give a damn about appearance; someone who is all meat, no smoke.

Is “dollar pessimism” justified?

Brad DeLong reproduces and responds to a well-reasoned critique of the pessimistic view that he and Paul Krugman share about the prospects for the American dollar.

The main point of the critique:

These authors–and the conventional wisdom generally–miss two, closely related points. First, foreign investors’ risk exposure to dollar assets has essentially nothing to do with the current account deficit. Second, the ability of U.S. households, firms, and the government to service their liabilities has essentially nothing to do with whether those liabilities are owed to foreign or domestic investors.

Click on the link to read Brad’s response, it is not easily summarized.

My take: Given the composition of my assets, my implicit position in the dollar market is long, but probably more because of inertia than anything else.

This link will keep you busy for a long time

“The philosophers have only interpreted the world, the point, however, is to change it.” So said Karl Marx. Economists Ian Ayres and Barry Nalebuff agree, though not in a way that Marx would have imagined. Their new book: Why Not: How to Use Everyday Ingenuity to Solve Problems Big and Small offers their ideas on how to make the world a better place.

How do you feel about brake lights that indicate how fast you are decelerating?

Or how about “animal repelling devices”?

…[there are] a disturbing number of dead animals along [the road]. I personally did everything in my power to avoid hitting anything (there is a racoon on US301 that owes me his life since I nearly lost mine!) So I spent a lot of time thinking about it. Maybe a device that would be like a license plate on the front bumber, emitting ultrasonic sounds and infrared light? Wild colors, loud sounds, & flashing lights might displace the animals from the road area until things quieted down.

The new idea I need least: Movie titles at the end of movies, so you know what you just watched on TV.

The new idea I need most: A special signal for when your car is making a U-Turn.

The authors also want to offer Palestinians stock in Israeli companies, in return for a peace settlement. Here is a pre-publication New York Times review, which refers to “Daredevil Ideas from the Anti Dilberts.”

And sorry Barry, but I have to vote “no” on “colored salt,” I don’t care how bad my eyes get.

Jim Crow in professional sports

I have already written a post on this topic. My central query was why segregation lasted as long as it did in major league sports. I have since learned more:

1. Black players were common in professional football in the late 19th century and through 1933, when segregation was introduced by team owners.

2. The pressure to segregate came from fan demand, and was enforced by game commissioners, working through a collusive league structure.

3. John McGraw, manager of the New York Giants (baseball), regularly tried to sneak African-Americans onto his team, claiming that they were “Cuban.” The baseball commissioner was both strong and racist, however, so he failed in these attempts.

4. Early football leagues were chaotic and had little power, including little power to enforce segregation in the early days of the sport.

5. Paul Brown, coach of the Cleveland Browns football team, decided to play black players in 1946.

6. The Los Angeles Rams quickly followed suit, in part because they wanted public funds for a stadium, and needed to avoid possible legal problems.

7. The Washington Redskins were the last football team to integrate, and only when they received “artfully applied pressure” from the Kennedy Administration.

8. Bill Walsh, the very successful coach of the San Francisco 49ers, hired a racially conscious sociologist to his staff, in recent times, to manage race relations on his team.

All points are from the recent and excellent Tackling Jim Crow: Racial Segregation in Professional Football, by Alan H. Levy.

How and why does democracy matter?

Last week Casey Mulligan presented his paper on democracies and autocracies at George Mason; the work is co-authored with Ricard Gil and Xavier Sala-i-Martin.

The main result is surprising: democracies don’t allocate their public budgets much differently than do autocracies. Of course this result requires that we adjust for national income and other relevant factors. The data cover 142 countries from 1960-1990.

The authors do find notable differences between democracies and autocracies. Autocracies are more likely to use the death penalty, restrict free speech, and spend on the military. The paper doesn’t mention death squads, but autocracies are more likely to do that too. At the same time, spending on social programs, spending on education, and various taxation issues do not differ significantly across the two kinds of regimes.

The authors also use some case studies. Chile, Spain, Greece, and Portugal have all moved from autocracy to democracy in recent times. Yet again changes in economic policy are hard to find.

How should these results be interpreted? One hypothesis suggests that special interest groups rule under both systems, and that voting doesn’t matter much. More plausibly, to this economist, autocracies have to be concerned with public opinion too. Autocrats want to secure their stream of rents, which leads them to restrict political competition. At the same time, the autocrat will try to secure a content populace. David Hume wrote long ago that governments are founded on opinion and consent.

I still see a strong case for democracy, not only on moral grounds but also practically. Once people get the democratic idea into their heads, and have a high level of wealth, democratization is extremely difficult to stop. Just look at Taiwan and South Korea. It is better to go with the tide of the times rather than to fight it.

Do girls cause divorce?

OK, you probably already read Steven Landsburg on Slate.com. But this article of his is too good a link to pass up. It turns out that divorce is considerably more likely when the child is a girl, rather than a boy. Here are two choice bits:

In the United States, the parents of a girl are nearly 5 percent more likely to divorce than the parents of a boy. The more daughters, the bigger the effect: The parents of three girls are almost 10 percent more likely to divorce than the parents of three boys. In Mexico and Colombia the gap is wider; in Kenya it’s wider still. In Vietnam, it’s huge: Parents of a girl are 25 percent more likely to divorce than parents of a boy.

Here is another:

Take a typical unmarried couple who are expecting a child and have an ultrasound, which more often than not reveals the child’s sex. It turns out that such couples are more likely to get married if the child is a boy. Apparently, for unmarried fathers, the prospect of living with a wife and a son is more alluring than the prospect of living with a wife and a daughter.

It seems that fathers enjoy marriage more when there is a son around the house, confirming an old stereotype. The original research was done by Gordon Dahl and Enrico Moretti.

Shutting up talkers

Robin Hanson suggests that time is a scarce, yet unpriced resource in group conversations, conferences, and seminars. We are all familiar with the conference participant who talks too much, this is really just tragedy of the commons. So let’s attach a price to talking.

Robin argues that each person should receive a fixed number of tokens. Every now and then a buzzer will go off randomly. If you are talking when the buzzer goes off, you lose a token. If you lose all your tokens, you can’t talk any more. So presumably you will speak only when you feel it is important, to conserve your time. My note: I don’t see why the randomization is necessary, why not just use something like chess clocks to limit how much each person talks?

Robin and I have talked of trying this out. Would it work? I can see a few problems:

1. It may violate fairness norms to shut up a person who has lost all of his tokens.

2. Without rationing, smarter people can persuade/bully their way into talking more, and this is better than giving everyone equal time. (Note: you can have non-egalitarian variants of the scheme, or perhaps allow people to donate their tokens to the smart.)

3. The methods and procedures of implementation may distract from the discussion. Imagine the buzzer going off in the middle of your briliant point.

4. Conferences are not about ideas production, they are about the production of publicity, and the device does not work toward this end.

I am most concerned with #2 and #4, but I still see merit in the idea. If and when we try it, I will let you know, let me know if you have ever tried some version of the proposal.

Here are some other wild ideas that Robin likes, most or all of them wilder than the buzzer idea.

Addendum: Here is Robin’s own description of the idea.

New economic policy blog from England

The Adam Smith Institute has recently started its own blog. The focus is on current events, in both Britain and around the world, the perspective is market-oriented.

Friedrich Hayek is well-know for writing an essay “Why I am Not a Conservative,” here is Madsen Pirie’s take, from ASI, entitled Why F A Hayek is a Conservative. Pirie is one of the main bloggers on the site.

Self-deception conference

Tomorrow I am attending a conference on self-deception, directed by Robin Hanson and me. We will have numerous luminaries, including Robert Trivers and Thomas Schelling, in attendance. By the way, blogging will continue.

Here are a few self-deception pointers for the day:

However much I examine my vanity, I can’t see in it the same disagreeable tone of the vanity of other people, all of which is just a further stage of vanity.

by the poet Carlos Drummond de Andrade.

Or, did you know that Stalin, when revising his official biography for publication, ordered that this sentence be inserted:

Stalin never let his work be affected by the least shadow of vanity, presumption or idolatry.

Thomas More once wrote:

Most men like their own writing best of all.

All of these bits are from Lies We Live By: The Art of Self-Deception, by a very underrated Brazilian economist named Eduardo Giannetti. Few economists are so well-read in the humanities, so ironic at the right moment, and so on the mark in their understanding of human psychology. If anyone out there knows Eduardo’s email address, please forward it to me, I would like to write him.

Economics and literature

I just received my copy of The Literary Book of Economics, compiled and edited by Michael Watts of Purdue University.

I love the book, it contains excerpts from literary works that present economic themes. On opportunity cost, you get to read Robert Frost on “The Road Not Taken”.

On equality, you get to read Kurt Vonnegut’s “Harrison Bergeron”, one of the most biting critiques of egalitarianism ever penned. The story is truly short, just a few pages, do click on the link and read it if you have the time.

Here is the opening to the story:

THE YEAR WAS 2081, and everybody was finally equal. They weren’t only equal before God and the law. They were equal every which way. Nobody was smarter than anybody else. Nobody was better looking than anybody else. Nobody was stronger or quicker than anybody else. All this equality was due to the 211th, 212th, and 213th Amendments to the Constitution, and to the unceasing vigilance of agents of the United States Handicapper General.

Or are you familiar with the economic proposition, sometimes associated with Aaron Wildavsky, that the demand for safety rises with wealth and income? British poet Alexander Pope first stated that idea in 1737, for his short poem “Imitations of Horace,” click here.

You don’t have to read this book in one fell swoop, it offers 348 pp. of wonderful browsing. In addition to the authors cited above you get John Milton, Ayn Rand, Thomas Mann, John Steinbeck, Victor Hugo, and George Orwell. Highly recommended.

The Politician and the Mechanic Conspire to Rip Me Off

Virginia requires yearly “safety” inspections of automobiles. Yesterday, it was my turn – it cost me $15 bucks and an hour of my time. What a pain. Merrell, Poitras and Sutter (MPS) (summary here, reference below) estimate that nationally inspection programs cost in excess of a billion dollars a year (I think this is a serious underestimate – see below). What do we get for our time and effort? Not much. MPS find that mandatory inspections do not reduce highway fatalities or injuries. Not surprising really since there are already good incentives to maintain one’s car and accidents are most often caused by factors, primarily driver behaviour, that are not inspected. (By the way, yes there is an externality but if self-interest alone causes you to replace a broken headlight then on the margin the externality is irrelevant – economists often forget this point.)

MPS arrive at the billion plus figure by summing inspection fees and travel time. But the major cost of the inspection system, in my opinion, is unnecessary repairs. Mechanics have an incentive to indicate a car needs repairs and it is difficult to know when they are speaking the truth. This problem is bad enough when you have brought your car to the mechanic voluntarily – at least then you know the car has a problem. But the potential for opportunistic behaviour is worse when you are required to take your car in for inspection and if you don’t follow the mechanic’s advice you fail. The mechanics know they have you over a barrel and act accordingly.

The citation for the MPS study is Merrell, D. Poitras, M and Daniel Sutter. 1999. The Effectiveness of Vehicle Safety Inspections: An Analysis Using Panel Data,” Southern Economic Journal, Volume 65, pp.571-583.

Eating Apes

1. Bushmeat hunters in Africa typically earn in the range of $250 to $1050 a year.

2. In one sampled African market, ape meat cost about twice as much as beef or pork.

3. “In the big cities of Central Africa, it seems relatively easy to find a gorilla head or some hands, or perhaps a chimpanzee hand or two or four, for sale in the medicinal and fetish markets…In a Brazzaville fetish market, a dealer once offered me a gorilla head for the equivalent of $40 and a hand for about $10.”

4. Hunters of ape meat often rely on the trails cut by loggers

5. Ape meat supply has largely gone underground in recent years, although in a given market most people know whom to ask to get the meat.

6. Many village and hunter-gatherer societies have a special word for “meat-hunger.”

7. Central Africans eat at least as much meat per person as Americans or Europeans do.

8. Hunters claim that if a champanzee is wounded and cornered and about to meet his death, that he will beg for his life with the same expressions that a human being would use.

9. One hunter wrote: “It is this lurking reminiscence of humanity, indeed, which makes one of the chief ingredients of the hunter’s excitement in his attack of the gorilla.”

All of these bits are from Eating Apes, by Dale Peterson. This is a remarkably intelligent and disturbing book, the photos are unforgettable. The author is sympathetic to the plight of the great apes but he also understands how markets work, what the life of the poor is like, and why a naive ban on hunting is unlikely to succeed.

By the way, today’s Cnn.com reports that the Orangutan may be extinct within 10 to 20 years.

Neuroeconomics and trust

Today’s Financial Times runs a feature article on neuroeconomics, an offshoot of experimental economics.

Why do people cooperate in experimental games?

…during the games, Prof Smith’s team scanned players’ brains using functional magnetic resonance imaging. The FMRI scan showed that players who co-operated were using parts of their brain called Brodman’s areas 8 and 10. These areas had previously been associated with thinking about the mental activities and the motivations of others, and of delaying gratification to receive higher rewards later. Non-cooperative players did not use these parts of the brain, and neither did those who knew they were playing against computers instead of human opponents.

This, argues Prof Smith, is consistent with the reciprocity explanation: players are thinking about the likely responses of other players and deciding to trust them.

Brain scans are not the only tool of neuro-economists. Other approaches include measuring pulse rates, skin conductivity and hormone levels. And as a result of such experiments, neuroeconomics boasts an eclectic collection of findings – one of them being that ovulating women are less trustworthy than the rest of us…

Would you like to hear more about ovulating women?

Prof [Paul] Zak has also found that women who take part in the trust game while they are ovulating send back substantially less money to their fellow player than other women or than men – crudely, they are less trustworthy. He explains: “The physiological reason is that progesterone suppresses the effect of oxytocin. The evolutionary biological reason is that is that if you’re about to get pregnant, you should be very careful about overreacting to the social signals you receive. In addition, you don’t want to be giving away resources.” Prof Zak points out that since trust is fundamental to economic development, a better understanding of the oxytocin and the physiology of trust could be fundamental for promoting development. The Bangkok Post has already picked up on his work: the newspaper says that since the oxytocin stimulants massage, food and sex are much beloved of Thais, Thailand’s economic development is assured.

For those interested, GMU researcher Kevin McCabe has started a fledgling neuroeconomics blog.