The New Arthashastra

The Arthashastra, the science of wealth and politics, is one of the world’s oldest treatises on political economy. Written by Kautilya, legendary advisor to the Indian King Chandragupta Maurya (reign: 321–298 BCE), the Arthashastra has often been compared to Machiavelli’s The Prince and has been a touchstone in Indian political economy for well over a thousand years.

In Service of the Republic: The Art and Science of Economic Policy by [Kelkar, Vijay, Shah, Ajay]Vijay Kelkar and Ajay Shah, two long-time advisors to the Indian government, have written the new Arthashastra, In Service of the Republic: The Art and Science of Economy Policy. In Service doesn’t go into great detail on current policies in India (Joshi’s Long Road is the best recent overview), it instead distills timeless wisdom on the making of political economy.

When faced with a potential government intervention, it is useful to ask three key questions. Is there a market failure? Does the proposed intervention address the identified market failure? Do we have the ability to implement the proposed intervention?

Public policy failures are born of: (1) The information constraint; (2) The knowledge constraint; (3) the resource constraint; (4) The administrative constraint; and (5) The voter rationality constraint. These five problems interact, and jointly generate government failure, of both kinds; pursuing the wrong objectives and failing on the objectives that have been established.

A government organization that is riven with corruption is not one which was unlucky to get a lot of corrupt people. It is one where the rules of the game facilitate corruption.

The competitive market process should force the exit of low-productivity firms. This does not happen when the low-productivity firms violate laws–e.g. a low productivity firm may emit pollution, while the high-productivity firm incurs the higher costs associated with the pollution control required in law….When enforcement capabilities, of laws or of taxes, are improved…production will shift from low-productivity firms to high-productivity firms. This reallocation will yield GDP growth, in and of itself.

There are two pillars of intervention in banking in India. On one hand, the state regulates banking. In addition, the Indian state produces banking services through the ownership of bank….There are conflicts between these two [pillars]. Regulation by the state may be indulgent towards its own entities….this calls for strong separation between the two pillars.

Kelkar and Shah are especially concerned with policy making in the Indian context of low state-capacity:

A policy pathway that is very successful in (say) Australia may not work in India as it is being placed in a very different setting. Envisioning how a given policy initiative will work in India requires deep knowledge of the local context.

If the fine for driving through a red light is Rs 10,000, there will be pervasive corruption. Jobs in the highway police will be sought after; large bribes will be paid to obtain these jobs. There will be an institutional collapse of the highway police. It is better to first start with a fine of Rs 100, and build state capacity.

(On that theme see also my paper with Rajagopalan, Premature Imitation.)

In Service to the Republic is the book that every policy maker and future policy maker should be given while being told, “before you do anything, read this!”

Addendum: I will be in India next week and after a visit to Agra and Hampi, I will be giving some talks at Ramaiah University in Bangalore and later in the month at the Indian School of Public Policy.

How to retaliate against foreign adversaries

That is the topic of my latest Bloomberg column, here is one excerpt:

Maybe Trump’s threat to attack cultural sites was not meant literally, but rather as a brash reminder that his retaliatory actions will not be constrained by world opinion, international law or the views of American elites. If so, such a signal, to be effective, has to harm the Iranian regime. Trump’s message shows that he doesn’t understand the calculus of retaliation very well.

Assassinating a military leader by drone, by contrast, is something the U.S. can do but the Iranian government cannot, at least not easily or without provoking even greater retaliation. That makes such a policy an effective deterrent in the short run, as it hurts the actual decision maker, and indeed that is what Trump chose to do.

By mentioning cultural sites, he in essence has decided to follow a very strong signal of action with a much weaker signal of words. If you are a hawk, you should understand that Trump’s talk of cultural sites is weakening his core message that retaliation will be effective. It is usually better game theory to follow up a highly impactful action with relative silence, but silence never has been Trump’s strong suit.

There is much more to the argument at the link.

Is scholarly refereeing productive at the margin?

No, basically:

In economics many articles are subjected to multiple rounds of refereeing at the same journal, which generates time costs of referees alone of at least $50 million. This process leads to remarkably longer publication lags than in other social sciences. We examine whether repeated refereeing produces any benefits, using an experiment at one journal that allows authors to submit under an accept/reject (fast-track or not) or the usual regime. We evaluate the scholarly impacts of articles by their subsequent citation histories, holding constant their sub-fields, authors’ demographics and prior citations, and other characteristics. There is no payoff to refereeing beyond the first round and no difference between accept/reject articles and others. This result holds accounting for authors’ selectivity into the two regimes, which we model formally to generate an empirical selection equation. This latter is used to provide instrumental estimates of the effect of each regime on scholarly impact.

That is from a new NBER paper by Aboozar Hadavand, Daniel S. Hamermesh, and Wesley W. Wilson.  This is exactly the kind of work — critical, data-driven self-reflection about science — what Progress Studies wishes to see more of.

Prediction difficulty seems to be rising

That is the topic of my latest Bloomberg column, here is one excerpt:

My main prediction for 2020, if it can be called a prediction, is trend exhaustion: For the first time in a long while, several important trends have come to an end.

What do I mean by that? Trends ebb and flow, of course, but at any given moment many of them embody one of two distinct states: momentum, or reversion to the mean. The first is a continuation of past progress, either upward or downward. The second is a movement back toward “normal,” however that may be defined.

The relevant list of exhausted trends includes the U.S. labor market, Chinese economic growth, the growth of populist parties, and numerous others.  And:

One implication is that the coming year may hold an especially large number of surprises. Alternatively, rational people (and readers of Philip Tetlock, who has studied the difficulty of forecasting the future) might discard their hubris and not be very surprised at all.

Recommended.

Monday assorted links

1. Amish rules: “Children of richer Amish parents are less likely to leave the community.”

2. Those new service sector jobs: “When Mark Holmgren had his arm amputated this spring, he couldn’t stand the thought of his severed limb ending up in the trash. Instead, he had his arm bones cleaned, mounted and preserved for posterity.”

3. Making sugar more efficient.

4. A Grand Canal museum for China?  I will visit.

5. Which books are abandoned the most often? (Gwern, a knotty problem of estimation)

6. Further evidence on U.S. consumers bearing tariff costs, also relevant for market power debates.  And yet further data on the question.

What is Full Employment?

As Tyler argued last week one of the most common analytical inaccuracies on Twitter is to blame the Fed for being too conservative with monetary policy over the last few years. I see this problem on both the left and the right. One of the ways the argument goes is as follows::

This month’s unemployment rate is lower than last month’s unemployment rate. Thus, we could not have been at full employment last month.

Followed by:

Monetary policy should be less conservative. If only we had been more aggressive earlier, we could have reached where we are sooner and made millions of people better off.

All of this is wrong. To begin, full employment does not mean the lowest possible unemployment rate. We are at full employment when we are at the natural rate of unemployment and as Milton Friedman wrote:

The ‘natural rate of unemployment’….is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information about job vacancies and labor availabilities, the costs of mobility, and so on.

The natural rate can change over time, even in a sustained direction, as the structural characteristics of the economy change, as demand, supply, demographics, information and so forth change. Change does not mean disequilibrium. When the production of apples is bigger this year than last year we don’t jump to the conclusion that last year the apple market was out of equilibrium. Similarly, the fact that unemployment was lower this year than last year does not mean that we weren’t at full employment last year.

The point of Friedman’s 1968 piece was that monetary policy can’t do much to influence the natural or full employment rate. Thus, the second half of the argument also doesn’t follow. In other words, it doesn’t follow from the fact that unemployment is declining that monetary policy last year could have achieved this year’s unemployment rate last year. My children are taller this year than last year but that doesn’t mean I could have accelerated their growth by feeding them more last year.

Monetary policy can make a big difference in arresting a negative spiral of declining spending leading to declining income leading to declining spending….Keynes was right. Scott Sumner was also right to call for more aggressive monetary policy in 2008-2010. But that was a disequilibrium event, now long over. When children are starving, you can get them to grow faster by feeding them more, but don’t try using that rule in normal times. Today we are in normal times. The economy has been growing steadily for over a decade. We are not in a downward spiral and wages and prices are not stuck at 2008 levels. In fact, since the end of the recession a large majority of workers are in new jobs! Indeed, a good chunk of the labor force has retired since 2008 to be replaced by entirely new workers. Nothing sticky there.

Standard macro models do not imply that monetary policy can always lower unemployment. (I can’t believe I have to write that in 2020 but the great forgetting is well upon us). Indeed, the standard models, as Tyler discussed, are all about testing and deepening our understanding of the Friedman list, most notably “the cost of gathering information about job vacancies and labor availabilities.” Bottom line is that nobody ever said that we had to like the Walrasian equilibrium but like it or not, monetary policy can’t do much to change it.

“Let them eat Whole Foods!”

This latest front in the food wars has emerged over the last few years. Communities like Oklahoma City, Tulsa, Fort Worth, Birmingham, and Georgia’s DeKalb County have passed restrictions on dollar stores, prompting numerous other communities to consider similar curbs. New laws and zoning regulations limit how many of these stores can open, and some require those already in place to sell fresh food. Behind the sudden disdain for these retailers—typically discount variety stores smaller than 10,000 square feet—are claims by advocacy groups that they saturate poor neighborhoods with cheap, over-processed food, undercutting other retailers and lowering the quality of offerings in poorer communities. An analyst for the Center for Science in the Public Interest, for instance, argues that, “When you have so many dollar stores in one neighborhood, there’s no incentive for a full-service grocery store to come in.” Other critics, like the Institute for Local Self-Reliance, go further, contending that dollar stores, led by the giant Dollar Tree and Dollar General chains, sustain poverty by making neighborhoods seem run-down.

Here is the full article, via Walter Olson.

Those old service sector jobs

At Fountain Court Chambers in central London, the senior clerk is called Alex Taylor. A trim, bald 54-year-old who favors Italian suiting, Taylor isn’t actually named Alex. Traditionally in English law, should a newly hired clerk have the same Christian name as an existing member of the staff, he’s given a new one, allegedly to avoid confusion on the telephone. During his career, Taylor has been through no fewer than three names. His birth certificate reads “Mark.” When he first got to Fountain Court in 1979, the presence of another Mark saw him renamed John. Taylor remained a John through moves to two other chambers. Upon returning to Fountain Court, in 2008, he became Alex. At home his wife still calls him Mark.

Alex/John/Mark Taylor belongs to one of the last surviving professions of Dickensian London. Clerks have co-existed with chimney sweeps and gene splicers. It’s a trade that one can enter as a teenager, with no formal qualifications, and that’s astonishingly well-paid. A senior clerk can earn a half-million pounds per year, or more than $650,000, and some who are especially entrenched make far more.

Clerks—pronounced “clarks”—have no equivalent in the U.S. legal system, and have nothing in common with the Ivy League–trained Supreme Court aides of the same spelling.

Here is the full story, interesting throughout, via the excellent Samir Varma.

The politics of zero-sum thinking

The tendency to see life as zero-sum exacerbates political conflicts. Six studies (N = 3223) examine the relationship between political ideology and zero-sum thinking: the belief that one party’s gains can only be obtained at the expense of another party’s losses. We find that both liberals and conservatives view life as zero-sum when it benefits them to do so. Whereas conservatives exhibit zero-sum thinking when the status quo is challenged, liberals do so when the status quo is being upheld. Consequently, conservatives view social inequalities—where the status quo is frequently challenged—as zero-sum, but liberals view economic inequalities—where the status quo has remained relatively unchallenged in past decades—as such. Overall, these findings suggest potentially important ideological differences in perceptions of conflict—differences that are likely to have implications for understanding political divides in the United States and the difficulty of reaching bipartisan legislation.

That is the abstract of a new paper by Shai Davidai and Martino Ongis.  Via Matt Grossmann.

Sunday assorted links

1. NYT covers Prager U.

2. A retirement home for whales?

3. Disagreement on disagreement.  Note that the top option “Willing to bet on position” is incoherent, because to each bet there is a counterparty with the opposite opinion.  Of those indicators, I say go first with the Turing test score.

4. A two-meter floodwall for St. Mark’s square in Venice?

5. Henry Oliver with advice for Dominic Cummings.

6. “Northern Virginia is estimated to get 71 percent of the new jobs in the period, compared to 15 percent in the District and 14 percent in suburban Maryland…”  NoVa on the march.

State support for nuclear power

John Cochrane, in a series of interesting observations on State Capacity Libertarianism, notes:

I don’t see just why nuclear power needs “state support,” rather than a clear workable set of safety regulations that are not excuses for anyone to stop any project.

Apart from the fact that our government created nuclear power at great expense and hurry, I would most of all cite the Price-Anderson Nuclear Indemnities Act of 1957  Here is Wikipedia:

The Act establishes a no fault insurance-type system in which the first approximately $12.6 billion (as of 2011) is industry-funded as described in the Act. Any claims above the $12.6 billion would be covered by a Congressional mandate to retroactively increase nuclear utility liability or would be covered by the federal government. At the time of the Act’s passing, it was considered necessary as an incentive for the private production of nuclear power — this was because electric utilities viewed the available liability coverage (only $60 million) as inadequate.

I am less clear on where the insurance industry stands on this matter today, but in general American society has become far more litigious, and it is much harder to build things, and risk-aversion and infrastructure-aversion have risen dramatically. Furthermore:

  • Jurisdiction is automatically transferred to federal courts no matter where the accident occurred.
  • All claims from the same incident are consolidated into one Federal court, which is responsible for prioritizing payouts and sharing funds equitably should there be a shortfall.
  • Companies are expressly forbidden to defend any action for damages on the grounds that an incident was not their fault.
  • An open-ended time limit is applied, which allows claimants three years to file a claim starting from the time they discover damage.
  • Individuals are not allowed to claim punitive damages against companies.

So the odds are that without a Price-Anderson Act America’s nuclear industry would have shut down some time ago, with no real chance of a return.

More generally, I am not sure which level or kind of liability should be associated with “the free market,” especially when the risks in question are small, arguably ambiguous, but in the negative scenarios involve very very high costs.  Which is then “the market formula”?  That question does not make much sense to me, so it seems to me that, details of the Price-Anderson Act aside, all scenarios are by definition somewhat governmental.

What are the most important lessons for Dominic Cummings and British civil service reformers?

Please leave your suggestions in the comments, only on-topic comments are welcome.  If you are not quite up to speed, again here is a link to the relevant Dominic Cummings blog post.  Or here is a good summary from The Economist.

After digesting all of your marvelous inputs, I will write a synthetic post of my own, with the best of your ideas and some of mine as well.

Saturday assorted links

Nuclear Energy Saves Lives

Germany’s closing of nuclear power stations after Fukishima cost billions of dollars and killed thousands of people due to more air pollution. Here’s Stephen Jarvis, Olivier Deschenes and Akshaya Jha on The Private and External Costs of Germany’s Nuclear Phase-Out:

Following the Fukashima disaster in 2011, German authorities made the unprecedented decision to: (1) immediately shut down almost half of the country’s nuclear power plants and (2) shut down all of the remaining nuclear power plants by 2022. We quantify the full extent of the economic and environmental costs of this decision. Our analysis indicates that the phase-out of nuclear power comes with an annual cost to Germany of roughly$12 billion per year. Over 70% of this cost is due to the 1,100 excess deaths per year resulting from the local air pollution emitted by the coal-fired power plants operating in place of the shutdown nuclear plants. Our estimated costs of the nuclear phase-out far exceed the right-tail estimates of the benefits from the phase-out due to reductions in nuclear accident risk and waste disposal costs.

Moreover, we find that the phase-out resulted in substantial increases in the electricity prices paid by consumers. One might thus expect German citizens to strongly oppose the phase-out policy both because of the air pollution costs and increases in electricity prices imposed upon them as a result of the policy. On the contrary, the nuclear phase-out still has widespread support, with more than 81% in favor of it in a 2015 survey.

If even the Germans are against nuclear and are also turning against wind power the options for dealing with climate change are shrinking.

Hat tip: Erik Brynjolfsson.