How to resolve the fiscal cliff
In my latest column, I suggest another strategy, one the current Republican Party seems quite far from:
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.
Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice.
If people already rationally expect these tax increases, this signal would do neither good nor harm, but perhaps such an approach would nudge political expectations closer to reality without draining the economy.
And this:
In the minds of many moderate and independent voters, the Republicans are currently identified with dysfunctional politics. But this proposal would let them take a credible stand against obstructionism. If the president didn’t like such a deal, he would be the naysayer, and the resulting publicity would shine a bright spotlight on the tax-and-spend mismatch. Suddenly, it would be the Republicans emphasizing the classic American line that “we are all in this together.”
Read the whole thing.
Markets in everything
Private investors in Switzerland, Austria and Germany are lining up to buy gold bars the size of a credit card that can easily be broken into one gram pieces and used as payment in an emergency.
The story is here and for the pointer I thank the excellent Mark Thorson.
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.
Assorted links
1. Some advances in science from this year.
2. In praise of edited volumes.
3. Mexico will be doing major educational reform.
4. Interview with me on India.
5. Robert Gordon is too pessimistic about the future (and doesn’t get driverless cars).
The FT does Lunch with Tyler Cowen
I thought John McDermott did an excellent job, here was one part I liked:
There is no doubt Cowen is ruthlessly and admirably efficient; an infovore. I suggest he’s also, however, “phenomenally smart”. “I don’t know what that means,” he says. “I mean, I can absorb a lot of information about basketball. I like basketball but I’m not like being smart about it.” And then he’s off again … “Sports is remarkably cognitive. I think it’s underrated just how smart it is. Actually, if I had more time, I would spend more time with sports. Watching it, reading about it, I think it’s oddly underrated.”
The rest of the chat covers food, economics, the future of technology, my life history, and some other matters too. I also liked this sentence:
He looks up and breaks the news: “They don’t have any food.”
The interview took place on the hottest day in Virginia history. And please note that when I refer to the Free Democrats of Germany, I don’t mean the party circa 2012.
In Texas, not all joint products are legal (the value of pets)
Last May, the Texas Banking Commission, which regulates funerals and cemeteries [does that make sense to you?], deep-sixed burials of pets in cemeteries for homo sapiens. But Texas still welcomes human burials alongside animals in pet cemeteries.
Do not underestimate the power of arbitrage:
…some Texans are also opting for their own burials–sans Bootsie—in pet cemeteries. The cost of room and board, notes the clip, beats its counterpart in people cemeteries by a mile. So why not think outside the box?
For the pointer I thank Lou Wigdor.
Assorted links
Do interest groups reward politicians for their votes in the legislature?
That is the title of the job market paper of Sungmun Choi, here is the abstract:
Abstract: Interest groups lobby politicians in various ways to influence their policy decisions, especially, their voting decisions in the legislature. Most, if not all, of the studies on this issue examine “pre-vote” lobbying activities of interest groups that occur before politicians vote in the legislature. In this paper, however, I examine “post-vote” lobbying activities of interest groups that occur after politicians vote in the legislature. I first develop theoretical models to show how such post-vote lobbying can be sustained. Then, by using data on the amount of monetary contributions given by interest groups to the members of the U.S. House of Representatives who have served in the 109th (2005-06) through 111th (2009-10) Congress, I find evidence that the politicians who voted in favor of the Emergency Economic Stabilization Act (EESA) of 2008, one of the most significant pieces of legislation and possibly the biggest government bailout in U.S. economic history, received more monetary contributions from the interest groups in the financial sector after passage of the EESA.
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.
Maxim Pinkovsky on managed care
This result is not a shocker, but I have never seen the actual work done on this point:
The Impact of Managed Care Backlash on Health Care Costs
During the late 1990s, there was a substantial cultural, media and legal backlash against the cost-containment practices of managed care organizations (particularly, HMOs). Most states passed a variety of laws in this period that restricted the cost-cutting measures that managed care firms could use. I exploit panel variation in the passage of these regulations across states and over time to investigate the effects of the managed care backlash, as proxied by this legislation, on health care cost growth. I find that the backlash had a strong effect on health care costs, and can statistically explain much of the rise in health spending as a share of U.S. GDP between 1993 and 2005 (amounting to 1% – 1.5% of GDP). I also investigate the effects of the managed care backlash on intensity of care, hospital salaries and technology adoption. I conclude that managed care was largely successful in keeping health care costs on a sustainable path relative to the size of the economy.
The paper is here, and it is Maxim’s job market paper from MIT. A number of his other papers, at the link, look interesting as well.
*India’s Tryst with Destiny*
The authors are Jagdish Bhagwati and Arvind Panagariya and it is the new book on the contemporary Indian economy. Self-recommending and absolutely excellent, full of useful details. It is not yet on U.S. Amazon, but it is available in India and perhaps elsewhere.
Vices and more vices
Lately a few people have been linking to 2006 posts on the vices of various political philosophies. If you are curious, here is my post on the libertarian vice. Here is my post on the liberal vice. Here is my post on the conservative vice. I still like these posts.
Since I have written these posts, several additional acts of vice have been committed.
Assorted links
1. The influence of Bork on antitrust.
2. James Wood on Knausgaard and others.
3. The nature of Australian worker’s compensation.
5. When women dare to outearn men (pdf), and summary here.
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.