Monday, October 22, 2012

"Inefficient" Redistribution, or "Efficient" Insurance?

This crossed my mind this morning. I'm wary of lowering downside risk without some mitigation of the rewards, i.e. a mean preserving spread. But the new institutional economics has a lot to say about this. For example, one seeming paradox is that democracy complements markets, yet is more prone to social redistribution. North and his various coauthors have argued in several places that, for one thing, this cannot be explained by simple neoclassical theories, and two, that it may not be such a paradox.
Oddly, the argument made by Jon Stewart (and which they guy with the funny name was hesitant to endorse) is close to what the institutional school has argues for some time.
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The main roles of the state in promoting social welfare (that is, the overall well being of society) are (1) protecting private property rights (from both internal and external bandits); (2) lowering transactions costs; and (3) mitigating the risks associated with market participation. For example, a feudal system may not have promoted much "efficiency", but it did provide a framework for protecting both elites and non-elites from violence.
Fast forward a bit. Why is it today that the most market-oriented economies are also both democratic and the most prone to "inefficient" redistribution? Is it mere rent-seeking by special interests? Hardly, although this may be partly the case. In fact, it seems that the most well-organized interests influencing the government would be opposed to redistribution in the form of social security, medicare, health care, welfare, etc. The argument that North and others make (and one that liberal politicians should be making more) is that reducing risk is important to a well-functioning market economy because it makes it easier for citizens to participate in the market.
Two things I disagree with from the video: (1) it's not just about lowering risk - for justify this in the context of market mechanisms, there has to be a premium that individuals pay when they realize the "high returns" outcome, i.e. higher average tax rates for the rich and wealthy; (2) it's not about "entrepreneurship", it's about market participation in general.

Thursday, October 4, 2012

The Political Economy of the Romney Tax Plan

I reeeeeally want to try to give Candidate Romney the benefit of the doubt today. I want to think that he's an honest, sincere man who wants to do the right thing for the country when it comes to tax policy. I want to be part of the 53 percent of Americans who favors Romney's arguments on taxes. I also want to be able to blow off the contradictory comments by his VP nominee, saying that under their plan people will pay less in taxes to the federal government, while maintaining that the plan would be revenue neutral ("it would take me too long to go through all of the math" wasn't even the worst part of the interview!). I even want to ignore the fact that Mr. Romney won't give sufficient details about his plan for think tanks like the Tax Policy Center to score it. Even the conservative Heritage Foundation cannot give a definitive analysis of how Romney's plan would achieve budget-neutrality. In fact, all Heritage does do is criticize the TPC's analysis for not having enough information. Touche.
But I want to ignore all of those inconsistencies in the analysis. Let's imagine that there are enough deductions that can be eliminated to compensate for the several hundred billion dollars in rate reductions Mr. Romney proposes. Let's assume that the secret details of Mr. Romney's plan to broaden the base through eliminating deductions will work. What, then, is the political equilibrium of the legislative bargaining process?
What I would suggest is that any political equilibrium would result in all or most of the loophole-closings would get tossed out of the bill through the influence of special interests, ideological gridlock. I would also suggest that, in  order to get the bill through, some degree off logrolling will have to occur during the amendment process. (Don't take my word for it, take it from the conservative Cato Institute, a Koch-funded far-right think tank.) But, the one (and possibly only) part of Mr. Romney's plan that is likely to come through the process relatively unscathed is the tax cuts. I doubt Romney is not as attached to the principle of broadening the base as he is to cutting rates; hence, I doubt that that any first-term president seeking reelection would veto a tax cuts that increase the deficit by not eliminating loopholes. A second-term president might.
So, if I'm going to come away from listening to Mr. Romney's tax proposals and still believe that he's being honest, I also have to come away thinking he's incredibly naive.

Friday, July 20, 2012


PAC spending in the last week:

CommitteeEntire Cycle TotalLast Week TotalLast 24 Hours TotalSupportedOpposedSuper PAC
Republican National Cmte (R)$9,485,456$9,485,456$0$0$9,485,456
Priorities USA Action (D)$14,900,294$1,244,192$0$0$14,900,294x
Restore America's Voice PAC (R)$582,952$111,900$0$0$582,952x
America's Next Generation(R)$106,500$42,500$0$0$106,500x (D)$367,171$33,552$0$5,400$361,771
National Rifle Assn (R)$110,952$31,459$0$0$110,952
National Right to Life Victory Fund (R)$163,260$6,786$0$0$163,260x
Candidate money spent last week:

CandidateEntire Cycle TotalLast Week TotalLast 24 Hours TotalSupportedOpposed
Obama, Barack (D)$27,761,536$9,678,101$0$2,852,327$21,064,674
Romney, Mitt (R)$32,603,333$1,277,744$0$7,285,760$25,161,173

I added rough party affiliations for the PACs, but it's worth noting that spent some money in opposition to a democratic candidate for the House of Representatives.
Notice more generally how the money is all piling into the "opposed" column. Source:

Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (9780521761734): Douglass C. North, John Joseph Wallis, Barry R. Weingast: Books

By Douglas North, John Wallis, and Barry Weingast.
In the middle of this book right now. Makes some interesting arguments about democracy and capitalism, and how countries make the transition from "Natural States", with limited access to modern states, with open access. The discussion of property rights will please the political right; the discussion of the role of government and public goods will please the left. Both groups will walk away from the book equally unhappy with his discussion of special interest groups (spoiler alert: special interests are not all bad!). The argument for how and why democracy is essential for modern capitalism is the only convincing logical case I've seen and is not based on some half-baked liberty argument.

A Couple of Links on Immigration

Migration and Remittances during the Global Economic Crisis and Beyond: Myths and Realities | A blog about migration, remittances, and development:

Children of Immigrants Study More -

Outsourcing and the Campaign

I've had a little time to reflect on the Bain-outsourcing-Romney stuff. So here are a couple of observations, which I share with the Free Exchange editors at the Economist.
(1) Outsourcing is good on the net, not just for the country receiving the investment, or even some vague global sense. It is welfare-improving for the US in the aggregate.
(2) Outsourcing can be pareto-improving, meaning that not only does it increase income, wealth and efficiency on average, but it is possible to ensure that no one is worse off.
Point (1) implies that, even if you support President Obama, the criticism of outsourcing by itself is misplaced. That includes this criticism by Paul Krugman. We should be outsourcing when it is profitable to do so.
Point (2) is tougher. Basically, it qualifies the political feasibility of (1) by implying that, in order to bring everyone on board with free trade, outsourcing, etc., you need pretty extensive structural adjustment assistance programs also known as the Welfare State. Here, as the Economist correctly points out, we could learn a little something from the 1997 incarnation of Professor Krugman when he says that voters aren't nuanced enough in their understanding of trade and public policy to grasp this subtlety - or care. They know jobs are gone, and US companies are growing operations in China. They win, I lose.
The Economist article points out that Obama could come out with a more nuanced and correct argument. But really, either candidate could take up this mantle and make it part of their platform without abandoning their core values. Mr. Romney, for his part could say, "yes, I am for free markets and outsourcing, and the fact that it puts some folks out of work only highlights the need to reform existing welfare programs so they help people who really want to work." Mr. Obama, instead of spewing protectionist garbage could say, "see, people are hurt by some aspects of free markets and we need social programs like my health care law to make markets work better for everyone" (he could even throw in some of his "shared prosperity" catchphrases).
But neither candidate is doing this. Obama is pretending to be protectionist (when we all know he won't govern that way); Romney is acting like the attacks are simply unfair, which doesn't seem to help much - do we really want a crybaby for a President? Obama's strategy, sadly, is the politically effective one, and I expect to see much more of it through November.

Thursday, July 19, 2012

Some Links on Trade

Trade Policy and R&D.

New Services Trade Database

Is Anti-Dumping a Good thing After All

More on High-Tech Education

More classes are being offered, by prestigious universities - I'm not talking about your diploma mill online courses from the for-profit sector - online, including some I might be interested in myself. More shockingly, many of these classes are being offered free of charge. The question is, "Is this a threat to my job?"
I think not. These sites are very aware of supply-side factors, but they say little about the demand side. While it's true that information transfer does not need to be as costly or labor intensive as it is, it is exactly what many average students need. Motivated, intellectually-curious students can easily absorb information, but many students are not sufficiently motivated or intellectually curious to do so.
Instead, I still think that technology is an effective complement to labor-intensive instruction at many liberal arts colleges and universities, but perhaps less so at large state flagship universities, and will make personalized (but still labor intensive) instruction more enhanced.

Monday, July 9, 2012

A fourth and hybrid perspective on the future of on-line education — Marginal Revolution

Articles like this one sorta irritate me because they pretend that we haven't been here before. Distance education is not a new thing; the technology has merely changed. If you could get an equivalent value out of your education without contact time in meatspace, why didn't correspondence courses take over the market decades ago? I am surprised that bloggers like Tyler Cowen are not more cognizant of this.

Wednesday, July 4, 2012

How the Fed Came to Be

An interesting brief history of banking in the US, 1811-1913. More here.

What They Don't Tell You at Graduation -

What They Don't Tell You at Graduation -

Some Links on International Economics

A very interesting post on the political economy of trade policy. Econbrowser: Thirty Years Ago Today: Racial and ethnic animosity play an important role; however, you'd think politicians would try to veil that dimension more than they do here or here.

Also very interesting, new research on the role of industry fragmentation and global supply chains. Unilateral tariff liberalisation | vox.

How big are the gains from trade? « Trade Diversion: Some research has suggested much smaller gains from trade based on some of the classical models. When one takes a more modern approach (especially accounting for "cross-industry variation in trade elasticities") the gains from trade are as big as they ever were (around 25-45 percent of GDP for the US).

The World Bank has published a new book on migration and remittances: Migration and remittances during the crisis and beyond.

Thursday, June 21, 2012

Links on institutions

Commodity Prices and Institutions

Property Rights and Growth - some interesting historical perspective. For more on property rights in medieval England, I am currently reading North, Wallis, and Weingast, Violence and Social Orders.

The Value of College

Now for my two cents on the debate in the blogs over what college is for. Is there significant value-added that justifies the cost? Some bloggers (and especially the commenters) have suggested that it is largely signaling your ability and/or your motivation. Others claim that there is revealed value deriving from the large and widening differential in lifetime earnings between high school and college graduates. An interesting discussion and summary can be found here, where Steve Postrel argues that the inflated demand for college education by students and by employers boils down to the fact that college is getting dumbed down, but high school is getting dumbed down by a proportionally greater margin. This implies that the increase in demand (and tuition) is fundamentals-based.
I found the argument about the dual decline in high school and college quality compelling at first, but I always have to remind myself to be skeptical about the perceptions of academics about the quality of the average student "back in my day." For example, Mr. Postrel notes that, " It used to be that everybody could read and understand something like Orwell’s Animal Farm, but the typical college graduates could also understand Milton or Spencer."  But I am a bit skeptical. It may have used to be that more graduates survived Milton or Spencer, but I'm not sure that the typical graduate really grasped deep literature or philosophy as deeply as Postrel suggests. Much of his "evidence" is based on perceptions by professors. This is likely to be biased by the fact that professors tend to be right-tailers.
I'm inclined to believe that at most levels depth of understanding has been sacrificed for breadth of coverage, and perhaps we need to rethink where we are on the margin. Judging from economics curricula, I would say that this is the case. More topics are covered in, say, intermediate microeconomics, but with less mathematical rigor and depth than when I was taking it almost 20 years ago. Additionally, grade inflation has made completing the degree (and doing so with a reasonably high GPA) somewhat less informative than it perhaps once was).
Which brings me to "signaling". Let's suppose it's all about signaling. Many have used this to suggest that college doesn't "do" anything that job market experience or military service or whatever can do just as well, which in turn leads some (like Mark Cuban) to conclude that college education is a bubble. Why? If the signal is valuable for both applicants and firms, then why does this not have value. Which brings me back to Milton. Did kids who learned Milton ever use that knowledge (or the literary analysis they applied in their class) on the job? So, as my students frequently wonder "why did I have to learn that stuff?" Because, for employers, it is useful to know that someone wants to learn new things, or that they can learn new things.
Ninety percent of the folks in my intermediate microeconomics class in college will never solve a Lagrangian optimization problem again, and probably have forgotten how. But having been able to learn the necessary calculus to do it is worthwhile, and signalling that ability is not trivial.

Friday, May 11, 2012

Exponential Economist Meets Finite Physicist | Do the Math

Exponential Economist Meets Finite Physicist | Do the Math:

Interesting piece, but not very mindful of history. The Malthusians have been proven wrong time and again. Physical limits exist, but 400 years is a long time. Plus, geoengineering is already here. A trumped up straw-man "debate" written from one side of the issue does not much convince me.

Tuesday, April 17, 2012

Paul Romer on Ending Poverty

I'm less bullish on charter cities than some of my other colleagues in institutional economics. It seems like institutional arrangements would be sensitive to the prevailing local relative prices and preexisting distribution of property rights (a la North, 1981).

Saturday, February 11, 2012


This article seems to lament the low rankings the US brings in on STEM education. At first blush this seems serious. But, is STEM really the future? Is STEM a comparative advantage worth pursuing (assuming we don't already posess it)? It seems like it would be, but it may only be part of the story. The other part of the story is here (Alex Tabarok, Marginal Revolution) and here (Catherine Rampell, Economix). From Tabarrok:
Law #1: People will get jobs doing things that computers can’t do.

As Tabarrok points out, a lot of jobs in STEM sectors may eventually be replacable by computers. As Rampell Some Liberal Arts disciplines (and certain disciplines in Business) that emphasize problem solving and people skills may be better-positioned for high value-added jobs 20 years from now than purely quantitative disciplines. I think this partially bodes well for economics majors (except maybe for the people skills part).

Monday, January 16, 2012

Some links on teaching Principles of Economics

We're not out to get our students (Art Carden).
Property rights are probably the most important economic concept ignored by most principles courses. An interesting piece on property rights and karaoke (NPR).
Sometimes economists get principles of economics questions wrong (Tabarrok); sometimes economic researchers claiming that economists get principles of economics questions wrong write the question wrong (Cowen); sometimes there's more than one answer (Decker via Depken). Lesson: we have to be thoughtful about writing the questions we ask students.
Finally, a couple of unrelated random hits: Does the Current Account Still Matter? (Mehrling); some facts about Obama's first-term record - the right and left are both wrong (Sullivan).