Category: Political Science

The inequality that matters

by  Tyler Cowen in

Here is a new and longish piece by me, on the inequality debates, in The American Interest.  It's about which kinds of inequality matter and which do not.  Most of them do not:

A neglected observation, too, is that envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers–not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on.

Furthermore there is a natural rising inequality in a world of strivers and slackers.  But some forms of inequality are more dramatic and are associated with unstable incentives:

If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets…The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

An understanding of the Black-Scholes idea of synthetic positions drives home the point that such strategies are very hard to stop by regulatory means.  Furthermore politicians have incentives to play the very same socially risky strategies; if things are "good now" they will get reelected and they pay few penalties for the severity of their eventual mistakes.  The fight against excess leverage is probably a non-starter (who now wishes to "slow down" the recovery?).  It is possible that our current system of state capitalism is "Arrow-Hahn-Debreu gameable" and that the financial sector has opened a hole in the proverbial bathtub and is sucking on a very large straw.

There are many other points about inequality in this piece which I have not presented on MR.

The fiscal response to hurricanes

by  Tyler Cowen in

…in the eleven years following a hurricane an affected county receives additional non-disaster government transfers of $70 per capita per year. Private insurance-related transfers over the same time period average only $3.60 per capita per year. These results suggest that a non-trivial portion of the negative impact of hurricanes is absorbed by existing social safety net programs.

That is from Tatyana Deryugina. who is currently on the job market from MIT.

Elsewhere from the MIT students, here is Daniel Keniston's paper on price bargaining in the rickshaw market, and whether fixed prices would be better (they would exclude some low valuation users, it turns out).  You'll find all the MIT job market candidates, and their papers, here.

Politics and the market

by  Tyler Cowen in

Mr. Mendelsohn has worked with Michelle Obama extensively on her anti-obesity campaign. But that didn’t stop him from starting a Capitol Hill-area burger spot, Good Stuff Eatery, and We, The Pizza, which opened four months ago.

More generally:

…the area surrounding the Capitol is awash in milkshakes, grilled cheese sandwiches and mildly baroque pizza.

The culture that is Wisconsin

by  Tyler Cowen in

The state of Wisconsin has gone an entire deer hunting season without someone getting killed. That’s great. There were over 600,000 hunters. Allow me to restate that number. Over the last two months, the eighth largest army in the world – more men under arms than Iran; more than France and Germany combined – deployed to the woods of a single American state to help keep the deer menace at bay. But that pales in comparison to the 750,000 who are in the woods of Pennsylvania this week. Michigan’s 700,000 hunters have now returned home. Toss in a quarter million hunters in West Virginia, and it is literally the case that the hunters of those four states alone would comprise the largest army in the world.

That is from Apollo, via Andrew Sullivan.

Sentences to ponder

by  Tyler Cowen in

Here is where some of the Republican economic thinkers are at:

"You're pushing back the subsidies and putting money back in Medicare where it belongs," [Douglas] Holtz-Eakin said Tuesday, speaking at a health reform conference sponsored by The Galen Institute and the American Action Forum, for which he runs Operation Healthcare Choice. "That's a very effective budgetary strategy."

The full story, mostly boring, is here.

A simple public choice theory of the Ireland bailout

by  Tyler Cowen in

In a very good piece, Barry Eichengreen writes:

One can interpret the intransigence of the German government and its EU allies in two ways.

  • First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”
  • Second, policymakers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems.

My model here is simple.  The Germans fear that if Ireland pulls the plug on the bailout deal, some of the other PBIIGS will meet immediate financial crises, and that spills over onto both German lending banks and Germany as the country holding the eurozone together.  Ireland feels that if it pulls the plug on the bailout deal, the Germans don't lend enough support and a) they lose what's left of their banking system, and b) their next government bond auction goes very, very badly.

I agree with the critics of the current arrangement, but I don't think they're facing up to how bad the alternatives will be (see also Megan).  Predictively speaking, I am betting on Irish electoral resentment to carry the day.  But in the meantime, EU bond purchases are kicking the can down the road.

A simple theory of WikiLeaks

by  Tyler Cowen in

Recall Timur Kuran's theory of preference falsification: many people follow the herd rather than revealing their true views, and this is most common in autocracies.  In those cases, public opinion may suddenly flip.  WikiLeaks, by making some truths common knowledge, has its biggest effects on autocracies, even if the leaks are from the United States.

Two possible results of the recent revelations could be that the Sunni Arab autocracies will have to cozy up more to Iran (their citizenries don't hate Iran so much, and so they might filp against their own leaders) or that China abandons North Korea altogether.  In the former the government has to match the public opinion and in the latter case perhaps the public opinion can flip against North Korea and confirm a trend already underway in the government.

What about democracies?  The most likely result (though not from this recent batch) is to encourage war-mongering attitudes against potential enemies, due to perceived slights.  Such feelings are usually produced collectively, and subject to sharp triggers, following the revelation of knowledge or pseudo-knowledge.  Remember the Zimmermann telegram?

Here are comments from Douthat and Wilkinson.

*Perfecting Parliament*

by  Tyler Cowen in

The author is the highly intelligent Roger Congleton (my colleague) and the subtitle is Constitutional Reform, Liberalism, and the Rise of Western Democracy.  Here is the home page summary:

This book explains why contemporary liberal democracies are based on historical templates rather than revolutionary reforms; why the transition in Europe occurred during a relatively short period in the nineteenth century; why politically and economically powerful men and women voluntarily supported such reforms; how interests, ideas, and pre-existing institutions affected the reforms adopted; and why the countries that liberalized their political systems also produced the Industrial Revolution. The analysis is organized in three parts. The first part develops new rational choice models of (1) governance, (2) the balance of authority between parliaments and kings, (3) constitutional exchange, and (4) suffrage reform. The second part provides historical overviews and detailed constitutional histories of six important countries. The third part provides additional evidence in support of the theory, summarizes the results, contrasts the approach taken in this book with that of other scholars, and discusses methodological issues.

The book's introduction is here (pdf).  It is the best public choice/historical account of the rise of democracy that I know of and there is also a very interesting chapter on Japan.

Ideas Behind Their Time

by  Alex Tabarrok in

We are all familiar with ideas said to be ahead of their time, Babbage’s analytical engine and da Vinci’s helicopter are classic examples.  We are also familiar with ideas “of their time,” ideas that were “in the air” and thus were often simultaneously discovered such as the telephone, calculus, evolution, and color photography.  What is less commented on is the third possibility, ideas that could have been discovered much earlier but which were not, ideas behind their time.

Experimental economics was an idea behind its time.  Experimental economics could have been invented by Adam Smith, it could have been invented by Ricardo or Marshall or Samuelson but it wasn’t.  Experimental economics didn’t takeoff until the 1960s when Vernon Smith picked it up and ran with it (Vernon was not the first experimental economist but he was early).

(Economics, and perhaps social science in general, seems behind its time compared say with political science.)

A lot of the papers in say experimental social psychology published today could have been written a thousand years ago so psychology is behind its time. More generally, random clinical trials are way behind their time.  An alternative history in which Aristotle or one of his students extolled the virtue of randomization and testing does not seem impossible and yet it would have changed the world.

Technology can also be behind its time.  View morphing (“bullet time”) could have been used much more frequently well before The Matrix in 1999 (you simply need multiple cameras from different angles triggered at the same time and then inserted into a film) but despite some historical precedents the innovation didn’t happen.

Ideas behind their time may be harder to discover than other ideas–“if this is so great why hasn’t it been done before”? is an attack on ideas behind their time that other innovations do not have to meet. Is this why social innovations are often behind their time?

What other ideas were behind their time?  Are some types of ideas more likely to be behind their time than others?  Why?

Addendum: See Jason Crawford on Why did it take so long to invent X?

Time inconsistent markets in everything

by  Tyler Cowen in

Diplomatic ties with El Salvador remain solid amid reports that the Central American nation was considering switching its recognition to Beijing, the Ministry of Foreign Affairs (MOFA, Taiwan) said yesterday.

Salvadorean President Mauricio Funes was quoted by The Associated Press (AP) as saying that his government was “exploring” the possibility of establishing diplomatic relations with the People’s Republic of China (PRC).

Funes said the decision would depend on “what is best for the country,” business-wise, adding, “we’re exploring new markets,” AP reported.

Funes’ comments came as a trade fair opened in San Salvador that included representatives from more than 50 Chinese firms, AP said.

And this:

The loss of El Salvador would be extremely embarrassing to President Ma Ying-jeou (馬英九), who has said that the apparent truce between Taiwan and China concerning attempts to gain diplomatic allies at the other’s expense was a major accomplishment of his administration.

Foreign affairs analyst Alexander Huang (黃介正) of Tamkang University said in Taipei that it was very unlikely that China would risk undermining Ma’s position by poaching El Salvador, particularly ahead of the special municipality elections on Saturday.

More here, and here.  The first and context-setting installment of the story was here.

David Brooks on Tolstoy

by  Tyler Cowen in

Tolstoy devoted himself to activism and spiritual improvement – and paid the mental price. After all, most historical leaders write pallid memoirs not because they are hiding the truth but because they’ve been engaged in an activity that makes it impossible for them to see it clearly. Activism is admirable, necessary and self-undermining – the more passionate, the more self-blinding.

Here is more.  By the way, here is the Pope on padded pipes.

The war of politics and finance

by  Tyler Cowen in

There is talk of upping the euro bailout fund:

European Central Bank council member Axel Weber said governments can increase the size of the European Union-led bailout fund if necessary to restore confidence in the euro.

“Seven hundred and fifty billion should be enough to assure the markets,” Weber said at the German embassy in Paris late yesterday. “If not, it will have to be increased.”

The Spanish approach the same issues with another tone:

Spain has warned financial traders betting against its debt that they will lose money, in a defiant challenge to the markets which are driving Madrid’s cost of borrowing sharply higher.

José Luis Rodríguez Zapatero, Spanish prime minister, on Friday ruled out any rescue package for the country even as the premiums demanded by investors to hold Spanish sovereign debt over that of Germany’s rose to euro-era highs.

You can find more detail at ElPais.com; most significantly it is a much bigger headline in the FT than in the Spanish paper. 

In a nutshell, we’re watching the most pitched, highest-stakes, most determined battle between politics and finance which has been staged. I am expecting finance to win. It’s not just about PIGS and the future of the eurozone, it’s settling a very general question about the relative power of politics and finance.  Either way, it is an event of momentous importance.

Arnold Kling on the political spectrum

by  Tyler Cowen in

Here in the United States, one thing that strikes me about my most liberal friends is how conservative their thinking is at a personal level. For their own children, and in talking about specific other people [TC: especially in the blogosphere!], they passionately stress individual responsibility. It is only when discussing public policy that they favor collectivism. The tension between their personal views and their political opinions is fascinating to observe. I would not be surprised to find that my friends' attachment to liberal politics is tenuous, and that some major event could cause a rapid, widespread shift toward a more conservative position.

Here is more.  I would make the related point that, in the economics profession, academic liberals are especially likely to believe in statistical discrimination: "Does he have a Ph.d. from Harvard or MIT?"  On the right, Chicago's previous reputation as an outsider school blunts this tendency, plus there have been Arizona, VPI, and other off-beat centers of market-oriented thought.

Simon Johnson analyzes the Dublin gambit

by  Tyler Cowen in

There is little doubt that Ireland, as a one-off situation, is handled easily, albeit at greater expense than anyone would like.  But how does the game tree run?

…the Irish leadership has every incentive to delay until other countries can be dragged into turmoil. The crisis will become euro-zone wide, at which point all eyes will turn to some combination of the European Central Bank, the German taxpayer, and the IMF. But the ECB can’t pay and the German taxpayer won’t pay. Does the IMF have the resources to tackle Spain, let alone a bigger country like, say Italy or even France?

The U.S. could add sufficient funding to the mix — this is what it means to be a reserve currency — but the mood in Washington has shifted against bailouts.

As an alternative, Europe could place a call to Beijing to find out if China would like to commit some of its $2.6 trillion in reserves to keep European creditors whole. This would be an enormous opportunity for China to vault to a leading global role. Perhaps it was a good idea to place Min Zhu, a top Bank of China official, in a senior position at the IMF.