Category: Political Science

The Economics of the Intifada

The number of Palestinians who worked daily in Israel before the intifada was more than 150,000; the figure now is fewer than 35,000.

Of the 2.2 million Palestinians on the West Bank, 50 percent now live below the poverty line, compared with 22 percent in 2001; the figure is now 68 percent in teeming Gaza, with its 1.3 million people.

The percentage of Palestinians with savings declined from 70 percent to 13 percent.

Before the second intifada, some $500 million a year was provided in aid; the average annual figure for the last four years is more than $1 billion, about $310 a person, the highest per capita rate in the world.

Some 500,000 of the 3.5 million Palestinians are in dire economic straits, said David Shearer, the head of the United Nations agency’s office here. Some 40 percent now feel insecure about feeding their families; 29 percent feel severely insecure, and half of them are heavily dependent on foreign aid. Some 30 percent are watching their savings dwindle. “They are the new poor, and they are slipping down,” Mr. Shearer said.

Here is the full story.

Yet many Palestinians support the intifada, and obviously some are willing to die for it. I conclude that economists need a better theory of human irrationality. Analogies from expressive voting theory suggest that (many) Palestinians support the intifada because their voices are not decisive. The support is seen as a kind of “cheap talk,” leading to a collective insanity which perhaps no single person intended. But do individual Palestinians who support the intifada really mind that so many other people go along with them? Doubtful, the contrary is sooner true, namely that people prefer that their peers follow their position.

In my (admittedly unorthodox) view the degree of decisiveness is not the key to determining the degree of human rationality. I would sooner believe that the amount of pride at stake is what turns on the irrational part of our brains, whether we are decisive or not. Remember, Stalin was convinced that Hitler was not going to invade anytime soon.

Should we prefer a monopolistic or competitive Jihad?

Matt Yglesias asks MR to address whether we would prefer, all other things equal, terrorists organized into a single group, or organized into competing groups. The answer to this question will not be a priori, but here are a few relevant considerations:

1. If terrorists perform their acts for fundraising purposes, or for criminal status, you would probably rather face a monopoly opponent. They are more likely to rest on their laurels.

2. If you think that terrorists are deterrable, at least in principle, you would prefer an easily identifiable monopoly opponent.

3. If you think that terrorists are likely to engage in internecine warfare with each other, you would prefer the more competitive set-up. (I’ll predict that if anyone kills, or has killed, bin Laden, it is one of his own people.) This is especially true when the terrorists are far away from you; they can fight without major spillover effects on your citizenry.

4. Perhaps the production of terrorist attacks involves significant economies of scale. In that case you would prefer the smaller competing groups. Nuclear weapons probably involve such economies, but suicide bombings can be organized on quite a small scale.

My guess: In Iraq you would prefer a smaller number of groups, since there is some chance of striking a deal with them. And there we are more worried about the suicide bombers than a loose nuclear device, so economies of scale do not overturn this conclusion. We are less likely to ever “trade” with al Qaeda and its offshoots, so in that case I would prefer splintering. Furthermore al Qaeda has a greater long-run nuclear potential, so it is more important to deny them potential economies of scale. I suspect we do not much mind if western Pakistan becomes a scene for terrorist infighting, whereas such conflicts could scuttle reconstruction in Iraq.

Our Presidential candidates

…conservatism as we have known it is now over. People like me who became conservatives because of the appeal of smaller government and more domestic freedom are now marginalized in a big-government party, bent on using the power of the state to direct people’s lives, give them meaning and protect them from all dangers. Just remember all that Bush promised last night: an astonishingly expensive bid to spend much more money to help people in ways that conservatives once abjured. He pledged to provide record levels of education funding, colleges and healthcare centers in poor towns, more Pell grants, seven million more affordable homes, expensive new HSAs, and a phenomenally expensive bid to reform the social security system. I look forward to someone adding it all up, but it’s easily in the trillions. And Bush’s astonishing achievement is to make the case for all this new spending, at a time of chronic debt (created in large part by his profligate party), while pegging his opponent as the “tax-and-spend” candidate. The chutzpah is amazing. At this point, however, it isn’t just chutzpah. It’s deception. To propose all this knowing full well that we cannot even begin to afford it is irresponsible in the deepest degree. I’ve said it before and I’ll say it again: the only difference between Republicans and Democrats now is that the Bush Republicans believe in Big Insolvent Government and the Kerry Democrats believe in Big Solvent Government. By any measure, that makes Kerry – especially as he has endorsed the critical pay-as-you-go rule on domestic spending – easily the choice for fiscal conservatives. It was also jaw-dropping to hear this president speak about tax reform. Bush? He has done more to lard up the tax code with special breaks and new loopholes than any recent president. On this issue – on which I couldn’t agree more – I have to say I don’t believe him. Tax reform goes against the grain of everything this president has done so far. Why would he change now?

That’s Andrew Sullivan, and I think I am headed out to The Crying Bar.

Does the European Parliament favor free trade?

Of 384 studied members of the European Parliament, only 12 appear to favor free trade for Europe on a consistent basis. The Swedish representatives appear to be the most free market, the French appear to be the most protectionist. There is one Spanish woman who has voted for free trade every time.

Here is the study.

Thanks to Mit dem Kopf voran (an excellent German-language blog) for the pointer.

Back to the Future of Iraq

In the weeks after the Iraq war “concluded” there was lots of discussion about reforming the economy. But the opening of the second front pushed those plans into remission. I hope that it is not yet too late to leave Iraq with better economic institutions. Yet as we seek a way out, our influence diminishes and the chance that the war was fought for nought increases. I was pleased, therefore, to see Nancy Birdsall of the Center for Global Development and Arvind Subramanian, a division chief at the International Monetary Fund try to push reform back onto the agenda.

As the United States, the United Nations, and the Iraqi Governing Council struggle to determine what form Iraq’s next government should take, there is one question that, more than any other, may prove critical to the country’s future: how to handle its vast oil wealth. Oil riches are far from the blessing they are often assumed to be. In fact, countries often end up poor precisely because they are oil rich. Oil and mineral wealth can be bad for growth and bad for democracy, since they tend to impede the development of institutions and values critical to open, market-based economies and political freedom: civil liberties, the rule of law, protection of property rights, and political participation.

Can Iraq avoid the pitfalls that other oil-rich countries have fallen into? The answer is yes, but only if it is willing to implement a novel arrangement for managing its oil wealth with the help of the international community…. the Iraqi people should embed in their new constitution an arrangement for the direct distribution of oil revenues to all Iraqi households — an arrangement that would be supervised by the international community.

The article is in the latest edition of Foreign Affairs, it is well worth reading but if you don’t have a subscription you can find a more succint version of the argument here.

Thanks to Dave Meleney for the pointer.

Will John Kerry bring fiscal discipline?

No, but a Republican Congress might:

My AEI colleague Eric Engen and I [Kevin Hassett] just completed a detailed analysis of the Kerry spending proposals. To perform the analysis, we combed through Kerry’s web site and public statements to assemble a list of every spending promise he has made, and then dug through the public record to find third-party cost estimates for each of his proposals. When necessary, we adjusted the period for the existing score to the 10-year budget window using standard techniques. When we could not find such cost estimates, we relied on numbers that were supplied by the Kerry campaign. When the Kerry campaign did not provide cost estimates, we set the score for that promise to zero.

Even with that generous accounting, the Kerry spending promises add up to an extraordinary amount of money. Our best estimate is that Kerry’s proposals will add up to between $2 trillion and $2.1 trillion over the next ten years. Since the revenue from his tax proposals relative to the current baseline is actually negative, this implies that the Kerry proposal would increase the deficit by perhaps as much as $2.5 trillion over the next ten years.

On August 3, 2004, the Kerry campaign responded to criticisms such as this with a revised budget plan. The main difference between the first and second plans is that the campaign now claims to be able to save about $300 billion from eliminating corporate welfare. Even if we include this rather implausible savings in our estimate, the net increase in the deficit associated with Kerry’s proposals is on the order of $2.2 trillion.

What would he spend the money on? According to our analysis, roughly half of this additional spending is attributable to Senator Kerry’s health care proposals that would add more than $900 billion in federal outlays. Education expenditure accounts for nearly one quarter of Kerry’s new spending, with almost $500 billion added over ten years. A $400 billion expansion of military personnel and benefits for veterans comprises most of the remainder of Kerry’s spending plans, with the balance distributed among numerous social programs and increases in international aid.

I have not been through these numbers, but Kerry has not exactly been running on a platform of spending cuts. Most of all, I’d like to see a further analysis, weighting each number by the probability it will pass into law.

Thanks to TCS for the link.

The Bush vision for term two

The Bush team apparently has announced its economic priorities for a second term. The general vision speaks of an “ownership society,” here is one sketchy summary. Partial social security privatization stands at the center of the plan. Brad DeLong wonders where the money will come from. Rather than pursuing this issue, I have wondered what the vision should look like. Here are a few ideas:

1. Eliminate all farm subsidies, tariffs, quotas and price supports.

2. Tell Western Europe it is paying for its own defense from now on.

3. Admit that the Medicare drug prescription bill was a mistake. Repeal it, and consider a revenue-neutral benefit that does not discriminate against prescription drugs. Introduce means-testing for Medicare to stop that program from bankrupting us. I would rather cut this benefit than repeal the tax cuts [tax shifts, correctly, though spending discipline could turn them into real tax cuts.] The long-run benefits of greater capital accumulation remain significant.

4. Negotiate bilateral free trade agreements as rapidly as possible. Start with Japan, the second largest economy in the world.

5. Strengthen America’s commitment to science. This will have implications for educational policy, immigration policy, and regulatory policy. Don’t restrict stem cell research. Hope that science comes up with affordable and politically sustainable solutions for global warming and clean energy independence. You might have libertarian objections to science subsidies, but the realistic alternative today is more government intervention.

6. Strengthen early warning systems against infectious diseases. Increase research into cures, vaccines, immunity, and the like. We don’t want the world to lose fifty million people to avian flu or some other malady.

7. Take in more immigrants, but demand higher levels of skills and education. At the very least, take in any revenue-positive immigrant.

8. Abolish the Department of Education.

9. Abolish the Department of Energy.

10. Repeal all corporate welfare.

11. Repeal the corporate income tax. Repeal the Alternative Minimum Tax. Admittedly these are “ifs,” depending on fiscal considerations.

12. Get on TV and tell the nation that a free economy is a critical source of our strength. Tell them you mean it, and then mean it. Economic growth is the greatest long-run gift we can give to the world.

What I liked about Bush, way back when, was that he seemed willing to talk tough truths and then follow through. Where has that gone?

Decentral Intelligence Agency

I have yet to see a good argument for creating a new director of intelligence. It’s true that the intelligence agencies failed to share information. But an epi-central director of intelligence doesn’t solve that problem and may make it worse. The implicit model of the 9/11 Commission is command and control – move all the information from the roots of the tree to the top of tree and then one all-encompassing-mind will evaluate it and make the right decision. Does that model sound familiar? Sure it does, that’s the model of economic planning that is currently lying on the ash-heap of history. It’s the model that Mises and Hayek subjected to withering criticism in the socialist calculation debate of the 1930s.

In brief, consider the following two defects of the economic Czar model. First, even if the information were to make it all the way to the top it would be difficult, well nigh-impossible, for a single mind to grasp it all and make it useful. This is especially true when there are no prices and hence no way of aggregating the information into a common unit (the so-called terror market was one way of alleviating this problem). Second, information is lost as it moves up the hierarchy – it has to be because not all information is easily communicable, bandwidth isn’t infinite, and the people at the top demand information loss because as you move up the tree the amount of information becomes overwhelming.

An intelligence-Czar faces exactly the same problems. So what can be done? The intelligence agencies need tools that can spread information rapidly and widely and that are open to anyone with information whether they are at the bottom or the top of the hierarchy…Sound familiar? Yes, blogs and wikis are the right idea. And no I am not being flip. A central information repository that everyone can access may be part of the solution but centralizing information is not the same as centralizing decision making authority (remember “groupthink?” – the solution to our intelligence problems must face the problems of 9/11 and the problems of Iraq which are not the same.) Other ideas are to reward information sharing instead of hoarding – we should probably classify less information not more – and to rotate staff across bureaus in order to encourage collaboration and informal information sharing. Others more expert in this area will have more specific suggestions but my primary suggestion is that the models to follow are those of markets, webs, and networks.

Addendum: See also Tyler’s related and important discussion.

Profits and an Independent Press

He who pays the piper, picks the tune. In China, that moral has proved to be a surprising link between economic reform and political reform.

More than a quarter century after China launched economic reforms while continuing to restrict political freedom, the government still owns and controls all of the country’s newspapers and television stations. But journalists have fought off party censors in one sensitive subject area after another, and they are waging a daily battle for even greater freedoms.

This push is driven in part by economics. In a sweeping industry overhaul, the government is withdrawing subsidies from state media outlets, holding them responsible for their own profits and losses and opening the door to private investment. The market has led newspapers to set aside propaganda and deliver stories that readers are actually interested in. Many have turned to gossip or entertainment, but there is also a financial incentive to produce a scarce commodity: journalism that challenges the government.

That’s from a very good Washington Post story about a courageous newspaper editor in China, jailed for questioning the local police.

Osama by November?

There’s nothing like an election to concentrate the mind, or so says The New Republic.

This spring, the administration significantly increased its pressure on Pakistan to kill or capture Osama bin Laden, his deputy, Ayman Al Zawahiri, or the Taliban’s Mullah Mohammed Omar, all of whom are believed to be hiding in the lawless tribal areas of Pakistan. A succession of high-level American officials–from outgoing CIA Director George Tenet to Secretary of State Colin Powell to Assistant Secretary of State Christina Rocca to State Department counterterrorism chief Cofer Black to a top CIA South Asia official–have visited Pakistan in recent months to urge General Pervez Musharraf’s government to do more in the war on terrorism….

This public pressure would be appropriate, even laudable, had it not been accompanied by an unseemly private insistence that the Pakistanis deliver these high-value targets (HVTs) before Americans go to the polls in November….The New Republic has learned that Pakistani security officials have been told they must produce HVTs by the election. According to one source in Pakistan’s powerful Inter-Services Intelligence (ISI), “The Pakistani government is really desperate and wants to flush out bin Laden and his associates after the latest pressures from the U.S. administration to deliver before the [upcoming] U.S. elections.”

Is more Congressional oversight good?

The bipartisan committee on terrorism has argued that Congress did not exercise sufficient oversight of the CIA and other intelligence agencies. For a pithy analysis read Daniel Drezner here and here.

More oversight will make the intelligence agencies, however they are structured, more risk-averse. The President or Congress will peep in every now and then, and the agencies will scurry to respond to the emergency of the day. They will work harder not to look bad. This is hardly the best way to encourage imaginative, long-run thinking in defense of our nation.

Excess risk-aversion already happened with Iraqi WMD. One CIA analyst noted: You have to understand,” he said. “We missed the Indian and Pakistani nuclear tests last spring. We’re under a lot of pressure not to miss anything else.”

Now you might think that risk-aversion in intelligence is a good thing. Should we not take all possible care to protect America against foreign threats? But bureaucratic risk-aversion is not the same as a secure national defense. It brings groupthink, excess formalism, protecting against yesterday’s threat, and an unwillingness to take responsibility for mistakes. Furthermore it can make effective pre-emption virtually impossible; decisionmakers and their allies will no longer trust their intelligence communities.

Rather than making intelligence agencies more accountable, how about making them more independent? Create some small, elite groups and staff them with the best people we can find. Pay them well. Give them arsm-length protection from political pressures. Treat them like the Federal Reserve, an independent agency renowned for the quality of its staff. Give them a culture of internal pride. Richard Clarke reminds us that: “It is no accident that the only intelligence agency that got it right on Iraqi weapons of mass destruction was the Bureau of Intelligence and Research at the State Department – a small, elite group of analysts encouraged to be independent thinkers rather than spies or policy makers.”

Sometimes the way to get what you want involves less control, not more control.

Daniel Drezner and Jean Buridan

Daniel Drezner remains on the fence, concerning the next Presidential election.

He writes about supporting Bush, Kerry, or perhaps a third party candidate (unlikely). But why should he restrict himself to “pure strategies”? Why can’t he support some candidate with some positive probability? How about, for instance, “I support Bush with p = 0.63.” Or “I support Kerry with p = 0.57”, and so on. That way we would know how strong (or weak) his current view is.

We could interpret those p’s in several ways. First, it could be Dan’s current estimate of where his final support will end up. Second, it could be a general measure of expected relative enthusiasm for the candidates.

It is not enough to make up your mind, you should also give the world some sense of your confidence in such judgments. And “Bush with p = .50000001” is a very different story than “Bush with p = .997”. (As an aside, note a potential paradox of voting. How many meta-rational voters, aware of their own fallibility, can justifiably believe that their error-prone participation will improve the final outcome?)

Then a question arises. Once you are playing around with these p’s, you don’t need to have a final point of view at hand. You will have some “p” right now.

Dan writes: “This year I can’t muster even the tiniest amount of enthusiasm for any candidate.” Fair enough, but why not give us a number?

What about me?

Alex is precluded by the Constitution, so can I go with “Dan with p = 0.73”? He is photogenic, and could handle both economics and foreign policy.

Addendum: I enjoy asking people the mischievous question “with what probability do you believe in God?” It is amazing on one hand what strong opinions people have on religion, and on the other hand how ill-prepared they are to come up with an actual number.

The Eye of the Needle

“If I could have the answers to five questions in political science/sociology, the appeal of Stalinism to intellectuals would be one of them,” wrote Tyler not long ago. There are few statements, in my judgment, that shed more light on his question than the following passage from the diary of Joseph Davies, US Ambassador to the USSR from 1936-38. (His diaries were later published as Mission to Moscow).

Davies freely admitted that Stalin was guilty of massive atrocities, but admired him anyway for his good quasi-Christian intentions. I kid you not:

Both Germany and Soviet Russia are totalitarian states. Both are realistic. Both are strong and ruthless in their methods. There is one distinction, however, and that is as clear as black and white. It can be simply illustrated. If Marx, Lenin, or Stalin had been firmly grounded in the Christian faith, either Catholic or Protestant, and if by reason of that fact this communistic experiment in Russia had been projected upon this basis, it would probably be declared to be one of the greatest efforts of Christian altruism in history to translate the ideals of brotherhood and charity as preached in the gospel of Christ into a government of men… That is the difference – the communistic Soviet state could function with the Christian religion in its basic purpose to serve the brotherhood of man. It would be impossible for the Nazi state to do so. The communistic ideal is that the state may evaporate and be no longer necessary as man advances into perfect brotherhood. The Nazi ideal is the exact opposite – that the state is the supreme end of all. (Journal entry, July 7, 1941)

This all makes me very glad that Liberation Theology did not come along earlier. A Christian Marxism would have fared far better with the common man.

On the Contradictions of the People

Larry Bartels has gotten national attention for his work on Bush’s income tax cut, inheritance tax cut, and public opinion. (Here is the full article; here is the digest version; here is what Alex Tabarrok had to say about Bartels). Bartels’ main point is that public opinion verges on contradictory: the public believes that inequality has gone up, agrees that inequality is bad, agrees that the rich should pay more taxes, BUT still supports two tax cuts that mostly benefit the rich.

Bartels is right, although since I belong to the tiny minority of people who favors however much inequality the free market delivers, for once I have to celebrate the public’s folly.

What Bartels does not seem to realize, however, is that the contradiction he laments is only one of many. Here are a few more:

1. Spending. The public wants less total government spending. In the 1996 General Social Survey, for example, here were the public’s views on cutting government spending:

Strongly in Favor of 40%
In Favor of 41%
Neither in Favor nor Against 10%
Against 4%
Strongly Against 2%
Don’t Know/No Answer 3%

However, the public also opposes cuts in virtually every kind of government spending except for foreign aid! Browse any of the numbers at the GSS webpage by clicking on “subject,” then “spending.”

2. Regulation. The public leans strongly toward less government regulation of business. From the 1996 GSS:

Strongly in Favor of 15%
In Favor of 33%
Neither in Favor nor Against 31%
Against 14%
Strongly Against 3%
Don’t Know/No Answer 3%

But the public is favorable toward virtually all particular forms of regulation. Browse any of the numbers at the GSS webpage by clicking on “subject,” then “economy.”

3. Welfare. 64% believe we spend too much on welfare, according to the excellent National Survey of Public Knowledge of Welfare Reform and the Federal Budget. But only 26% are willing to actually enforce a 2-year limit if welfare recipients would have to take a “low wage that would make it difficult to support a family.” Just 16% favor cutting off benefits to a person who is “unable to get a job” (whatever that means).

Since low-wage jobs are the only ones that former welfare recipients are likely to get (and who should do low-wage jobs, if not former welfare recipients?!), the public is in a quandary. It wants to spend less, but as a practical matter is unwilling to kick anyone off the rolls. In fact, the public heavily favors not only job training, but guaranteed government jobs/community service when the deadline runs out. Yea, that’ll save a lot of money.

The big lesson is that public opinion is not just wrong, but downright silly. On balance, the leftists who hate the Bush tax cuts should be thankful. If the public started being logical, we could easily see spending cuts, deregulation, and American citizens “forced” to take the “demeaning” jobs currently done by illegal immigrants. As Eric Cartman would say, “Sweeeeeeet!”