Saturday, July 21, 2012

There Is No Technocracy, a.k.a The Fed Is Still Political

. Saturday, July 21, 2012

Not that they've taken any notice at all, but for a long time now I've been yelling at economists who have been disappointed in the Fed's relative complacency that they are not evil or stupid or timid or felons. Rather, they are constrained politically. Pretty highly constrained, in fact. So I was happy -- well, not happy exactly, but satisfied -- to see this story in the NY Times:

House Republicans pressed the Federal Reserve chairman, Ben S. Bernanke, on Wednesday to forswear additional actions to stimulate growth, warning that the results would be counterproductive. ... 
Democrats made no similar effort to convince Mr. Bernanke that he should take additional action. They congratulated the Fed chairman in the manner of people confident that they are speaking with an ally.
The GOP says no more monetary stimulus. The Democrats think the Fed is doing just fine. Their bosses don't want them to do any moreFinancial markets and economic conditions have both stabilized. Is it any wonder the Fed is sitting on its hands? Isn't this exactly what we'd expect if we believed that the Fed was responding to their political incentives?

Friday, July 20, 2012

Toddler Steps Towards An Ontology of Building Things

. Friday, July 20, 2012

I've been involved in comments to the previous post. In response to one I wrote this, in the form of a one-act play, but it got long so I thought I'd bring it up top. The point of the exercise, for me, is not to illustrate that the movement left is dumb or mendacious -- at least any more dumb or mendacious than the movement right -- but that this particular form of argument really doesn't hold up well to scrutiny. There are very good arguments for making the tax code more progressive -- and indeed I support doing so -- but this isn't one of them. For these purposes the "Rich People" are the top 10% of income earners, who take home roughly 43% of national income and pay roughly 70% of federal income taxes. I don't agree with all of the Rich Peoples' arguments, but this, I think, is their best shot. It's what liberals, egalitarians, and progressives have to be able to overcome to win the day.

Obama: You rich people didn't build public goods -- like roads and bridges -- that you use for your businesses.

Rich People: Maybe not 100% of it, but we contributed way more than anybody else did, so saying that we didn't build it is leaving a pretty wrong impression.

Obama: Nevertheless, no man is an island so therefore you are going to have to pay more.

Rich People: Wait a second, if no man is an island why are we the only ones who have to pay more?

Obama: Because you didn't build the roads.

Rich People: Yes, but we paid vastly more towards the construction of those roads than any other group did... only 10% of us paid more than 70% of the total federal income tax, much of which goes to *non* public goods like means-tested transfers anyway, and we only earned 43% of the money! So yeah: you could pretty much say we built the roads. 70+% of them, anyway.

People Who Don't Like Rich People: A-ha! Most of the roads were there before you got rich, so NO YOU DIDN'T.

Rich People: Are you serious? Fine, then the previous rich people paid the most for building the yesterday's roads, we're paying the most for building the today's roads, and other rich people will pay the most for building tomorrow's roads. Anyway, why do you all think that we got rich because we drove on the same roads as you? Why aren't you rich then? Seems like you've maybe omitted some important variables from your analysis.

Obama: You're right: the teachers. What about the teachers? You did go to school when you were a kid, right?

Rich People: Um, everyone got to go to public school. Not everyone is rich. Still not getting there. Anyway, we didn't go to public schools. We went to private schools, so our parents paid a bunch of money for a "public good" that we never even used. Do we get a refund?

Obama: No. Okay, what about the internet? "Government research created the internet so that all the companies could make money off the internet."

Rich People: You MUST be joking. Government research created a pre-internet communication system with no commercial applications. Several decades later innovators in the private sector figured out ways to put to it productive use and make money off of it. Oh, and the infrastructure used to send that communication via cable? Built by private companies -- mostly phone companies. Oh, as before, anyone that wishes to can use the internet. It's not gonna make you rich, tho.

Obama: Okay fine, Mr. Know-It-All. How did you get rich?

Rich People: It was a combination of factors, including good ideas, hard work, and luck.

People Who Don't Like Rich People: Ah-ha! You admit that you got lucky.

Rich People: Partially, yes.

People Who Don't Like Rich People: We should tax your luck. This is about fairness. You didn't do anything to get lucky.

Rich People: Define fair. It wasn't *all* luck, as President Obama often says, and we already pay a significantly higher percentage of tax than income we take. 75% more, in fact, and that doesn't include estate taxes, corporate taxes, property taxes, etc. So again... define fair.

People Who Don't Like Rich People: No.

RIch People: How about this: if we're all in this together, and we all benefit from public goods, then how about we all increase our income taxes by, say, 3%. Across the board.

Everyone: HELL NO!

Rich People: Why not? Wouldn't that be fair? Wouldn't that be coming together for the good of the nation? It's a pretty good deal for you, because I'm going to be paying in an extra $30,000/year, while those of you in the bottom 50% are only going to be tossing in several hundred. Think of all those extra public goods we could enjoy together!

Everyone: N TO THE IZZO! Are you crazy? That makes no sense. Haven't you heard of diminishing marginal utility? Your marginal dollar is worth less to you than my marginal dollar is worth to me.

Rich People: Yes I have heard of the concept, although I'm not sure how I feel about you defining my marginal utility curve for me. After all, I haven't gotten my private jet yet, and that sounds pretty freaking rad. But let's set that aside for now, along with the point that the law of diminishing marginal utility -- which isn't an empirical law at all -- refers to the consumption of one particular commodity, not the accumulation of money which may be spread over many different commodities. I mean, it's true in the limit, certainly, but I'm not in the limit. If I were, I wouldn't have all this new income; I would be on vacation, or retired. If we accept the principle anyway, at least as you seem to be defining it, it seems that we should redistribute until everyone's marginal utility for dollars is equivalent. So you're telling me that you want everyone to have a perfectly equal income?

Everyone: No! What are you, some kind of socialist?

Obama: I'm DEFINITELY not a socialist.

Rich People: Okay... so on what basis do you want me to pay more again?

People Who Don't Like Rich People: It is only fair.

Rich People: DEFINE "FAIR".

People Who Don't Like Rich People: No.

Rich People: So let me get this straight: because, like everyone else, I used a public good (which I paid for far more than anyone else by any measure), I now have to pay more (again) because under your definition of "build" the money I paid in taxes does not count towards the construction of infrastructure, but the money you did not pay somehow does?

Everyone: YES.

Rich People: This is wrong. To the extent that anyone can be said as having "built" public goods, I did. To the extent that anyone is continuing to build public goods, I am. To the extent that anyone is receiving private goods distributed the government, I'm paying for them. If you want me to pay even more, well that's what we have elections for. But don't sit there and tell me that *I* am leeching off of *you*. That's bullshit and it hurts my feelings and is, as it happens, empirically false.

People Who Don't Like Rich People: You can't use empirics to prove or disprove a normative concept like fairness.

Rich People: a) I'm not; I'm using empirics to disprove the allegation that I have not contributed to the provision of public goods, but nevertheless have enjoyed the benefits from them. I am using empirics to rebut the insinuation that *I* have been free-riding off of *you*. b) Define "fairness".

People Who Don't Like Rich People: No.

Rich People: Please?

People Who Don't Like Rich People: Fine. Okay. It's like... "justice". I think Rawls said that, so the matter must be settled since everyone likes Rawls.

Rich People: It isn't, actually, but let's go with it. If I ask you what "fairness" is and you reply "justice" and reference Rawls, I'll go and read Rawls and discover that he said something a bit different: "justice as fairness" not "fairness as justice". So we still need a definition of "fairness". One such definition of "fair", used often in the common tongue as well as more technical fields like probability and statistics, is equivalence. As in, a fair die has an equal probability of landing on 1, 2, 3, 4, 5, or 6 when rolled; a fair coin has an equal probability of landing on heads or tails when flipped. Applied to this conversation, such a definition would imply that you are saying that it is unjust that I have contributed an unequal percentage of my income so that others may benefit from my provision of public goods. If that's the case then I agree, but it's no biggie; I'm doing alright.

People Who Don't Like Rich People: No, that's not what we mean at all. Nor Rawls. He wanted redistribution and the provision of a basic minimum standard of living. And he also said that if I didn't want to live in a place with income inequality, then it was unjust for me to live there. So give me your money.

Rich People: Yes, but we've already established that we're redistributing from me to you. You're saying that we need to redistribute more, and I'm disagreeing. Rawls can't settle that one. He didn't say what the top marginal tax rate should be. I can make a strong argument that the conditions Rawls set for a just -- and thus fair -- society are being met: "equality of fair opportunity", by the very public goods you are saying that benefit all of us equally; "the difference principle", by the progressive taxation that provides for those public goods, as well as a system of means-tested transfers, to mitigate the luck factors that you're concerned with. And I'd also note that by the end of his career Rawls was becoming increasingly worried about the potential for moral hazard that systems of transfers could facilitate. As for the veil of ignorance, we're clearly not in "overlapping consensus" territory here.

Obama: Look everybody. We need to put this partisan bickering behind us and come together as a country to solve the problems we all face.

Rich People: Sounds great. What do you have in mind?

Obama: Your taxes go up. Nobody else's does. Some peoples' go down.

Rich People: How is that coming together?

People Who Don't Like Rich People: Just shut up! This is why business should NOT be allowed to interfere in politics.

Rich People: Wait, what? What about deliberative democracy? What about an open and inclusive public sphere? What about the marketplace of ideas? Okay, so if business is not allowed to interfere in politics, does that mean that, like, politics isn't allowed to interfere in business?

Everyone: Of course politics is allowed to interfere in business, silly. How else would we get you to pay for public goods?

Rich People: Well, as long we're all going to act in our own self-interest while pretending to embrace high ideals I guess I'm voting for Romney.

People Who Don't Like Rich People: Elitist asshole!

Rich People: Whatever. I'm eating a Douche Burger for dinner tonight. It wouldn't be half the fun if it only cost $665. See: the marginal buck actually can make a big difference, even if you're rich. You guys can eat cake, for all I care.

Academic Who Comes in Late: Hey guys, you do know that -- since they are rival in consumption and are also excludable -- roads and bridges and the internet are technically not public goods, right?

Everyone: Did that weird-looking thing over there just make some kind of noise?

Academic Who Comes in Late: Forget it.

News Media: BREAKING! Tom Cruise and Katie Holmes are getting DIVORCED! And coming up next: Lots of people go see mediocre superhero movie. Stay tuned for more.

Baby Steps Towards An Ontology of Building Things


If the people who pay a disproportionate share of the public funds used to create public goods did not, in fact, have anything at all to do with the construction of said public goods, then who did exactly? The Public Goods Fairy?

This may come across as snark, but I mean it to be a real question so I'll phrase it another way.

If the question is "Have the rich paid their fair share into the common kitty?" and the only true empirical answer is "Actually, more than their share when you compare percentage of national income earned to percentage of national taxes paid", then it what sense can it be a true statement "they didn't build that"? I guess in the strictest, most literal sense... most of them weren't actually out laying the concrete.

Short of that, though, if words are to have meanings then this would seem to be an indefensible statement.

Global Finance and Comparative Advantage in Trade


I've blogged repeatedly* that if we are to understand recent developments in the US and global economies pertaining to inequality, stagnation, regulatory capture, and electoral influence we need to do two things at least:

1. Embed the financial system within the broader US economy.

2. Embed the US economy within the broader global economy.

If we do these two things we will likely conclude, as I did in one recent post, that:

The cumulative effect of [opening of capital accounts and trade developments via GATT/WTO] both forced encouraged the US to pursue its comparative advantage in high-skilled service labor (e.g. finance) and increased the market into which the US could sell its comparative advantage. The result is thus entirely predictable: finance becomes a bigger size of the US's economy, while comparatively disadvantaged sectors shrank.
Some people, e.g. a commenter on that post, seem to have difficulty grasping this point. But Emmanuel recently noted something interesting:
the WTO has for the most part ruled in favour of the United States in its case against China over discrimination against international payment card transaction firms in the RMB-denominated arena
I.e., US financial firms -- in this case credit card companies -- want access to the Chinese market. The Chinese blocked them. The US government took China to the WTO and won. This is precisely the behavior we would expect if the US was trying to open up a market for its comparatively-advantaged sector, while China was trying to close off that market to protect its comparatively-disadvantaged sector.

I'm not genius for making this case... it's the simplest materialist explanation of trade politics that we know. But sometimes the simple theories work quite well.

*I am sure there are dozens more posts in a similar vein to the one linked above. Searching the blog for relevant terms should turn them up.

Thursday, July 19, 2012

Poetry, Prose, Propaganda, Policy, & Paradigms: Drezner vs. Drezner (And Me)

. Thursday, July 19, 2012

A few weeks ago Dan Drezner called me "curiously lazy" for writing that we shouldn't pay much attention to what presidential candidates say about foreign policy during campaigns, especially when they say things like this:
At some point Romney will be asked direct questions about foreign policy. When he [is] asked those questions he will say things like "I will get tough with China to make sure they play by the rules and stop stealing American jobs" and "I will not let terrorists kill American citizens, and I will do whatever is necessary to keep Americans safe" and "I will keep America strong by not cutting our military budget" and "Screw Russia".
While Drezner acknowledged in that post that campaign rhetoric is just campaign rhetoric, he suggested that Romney still needed to talk more about foreign policy in order to "demonstrat[e] leadership" over his campaign, whatever that means. Now Drezner says:
So, does it matter for policy? Well.... no. 
Mario Cuomo once said "You campaign in poetry. You govern in prose." Now, Mario Cuomo was clearly the world's worst poetry connoisseur. Still, to update his observation for our current needs, we can say, "You campaign as a mercantilist; you govern as a free-trader." The reason that Romney has seemed so discombobulated by the Bain attacks is that he's been China-bashing since Day One ofhis campaign, so it's tough to then flip-flop pivot to a free trade stance. ... 
As stomach-churning as I find this kind of ad, I must reluctantly agree with Yglesias and Brooks that it doesn't matter all that much for governing. ... 
I don't think the mercantilist campaign rhetoric will amount to much.
Right. So: Romney's gonna say nationalist stuff, he's gonna say mercantilist stuff, and you shouldn't pay attention to any of it because it won't have an effect on policy or the election. Same for Obama. This is pretty much exactly what I said in my "lazy" post, which concluded thusly:
This is not meant to say that Romney's foreign policy decisions will not be important. They will be. It's just that we won't learn much about what they will be from any campaign statements.
Drezner is so chagrined by all this foreign policy talk (which he asked for) that he anticipates the next few months of the campaign will be "nauseating". Perhaps. If so, and assuming he's not a masochist, he might be well-served to take my initial advice: just don't pay attention to it. It's not lazy; it might even be wise.

(The only other similarity between our two posts? Drezner refers to "campaign bluster" where I write "campaign blather". I also refer to "bloviating". I prefer my choice of 'b'-words, but I suppose that's a matter of preference.)

(One last little thing: Drezner argued, contra me in my "lazy" post, that Romney -- being a smart guy -- surely knows the difference between neoconservatism and realpolitik. I know of no reason to believe this is true. Certainly Romney himself has given us no reason to believe this is true. James Joyner sees Romney's foreign policy as "realist". Jacob Heilbrunn sees it as neoconservative. Romney talks about a "new American Century" -- neocon -- but thinks we'll bring that about by balancing against the rise of China and Russia (!) -- realist. Mostly he seems to think that the U.S. should be strong, which is congruent with both neoconservatism and realpolitik. So you tell me.)

Monday, July 16, 2012

Romney! Obama! Same Effing Difference (?)

. Monday, July 16, 2012

Foreword: I have promised a fair few posts on other topics, but I caught the bug for this one and felt like getting it out first. More stuff on finance and politics TK, when I can find the time.

In 2000, in a fit of pique, I briefly became politically active. Disgusted by the cynical triangulations of the Clinton administration, and turned off by Dubya's anti-intellectual populism (and young enough to believe that both were something other than typical), I marched in a few rallies in support of opening up American politics to alternative parties. One of them became a touch violent -- and I was nearly pepper-sprayed by the police, and was nearly impaled by them as well... unfortunately for this story I narrowly escaped all harm -- and it was a great deal of fun.

One of the chants of the day was "Bush! Gore! Same fucking difference!" This was put only slightly less crassly by Ralph Nader, then Green Party candidate for president, as "The only difference between Republicans and Democrats is the speed with which they get on their knees when corporations come calling." Even in my piquedness I cringed at that one, although not as much as I did when my fellow protestors, in violation of multiple laws and menacing in numbers, began bellowing "This is what democracy looks like! That is what a police state looks like!" while gesturing to the men and women in blue who were doing nothing even remotely police-state-ish, but who did intend to maintain rule of law in protection of the actual majority of the population, which we did not represent. The cops did just that, with very little excessive force and that little bit in direct response to intentionally provoked duress. My fellow members of the mob had little sense of irony, apparently. They seldom do. It was more than just a bit off-putting.

(That reminds me to again refer to Milos Forman's surprisingly good essay on how people who lazily make reference to authoritarianism without real knowledge of what actual authoritarian regimes do and have done do a disservice not only to their own reputations but also to wider cultural memory.)

That was when I was a lowly journalism student at a community college. I had never heard of Duverger's law. I had never heard of the median voter theorem even, much less directional models or any further complication. Because things didn't make a ton of sense to me, in my ignorance and at that moment, I thought very much that the forces at work in politics must be sinister. Adbusters made quite a lot of sense, at the time. The WTO was sort of threatening, really, what with its internationalism and its governments and their suits. Who was controlling all of this? Weren't corporations going to profit from all of this? And wasn't that ipso facto a terrible outcome? I'd never heard of comparative advantage, all I know was that people -- people who looked like me -- were pissed right off. Plus we had cool people on our side. Fugazi sang (see above) "Never mind what they're selling... it's what you're buying." All politics is local, man. It starts at home. Far out.

When I was a child I spake as a child, I understood as a child, I reasoned as a child. When I became a man I put away childish things. I'll still consider myself part of the "left", but it's a "left" that mostly only exists in my mind. It's a "left" that believes that the redeemable parts of Marx reveal him as one of the first public choice thinkers; so he's of the "right" too, in his way, in my mind. It's a left that believes that had Marx witnessed the 20th century -- not even the bits of it done in his name -- his writings might have taken a different tone. It's a left that is dedicated to the idea that the best hope for an internationalist emancipatory movement is found in secular capital social democracy. I.e., it's a left that thinks that the Gotha program had something like the right idea after all. It's certainly not a left that is embodied in any actually-existing internationalist political movement of which I'm aware. So I'm not so politically active these days. I'm content to sort of shrug, think that the American "right" and "left" both embody a certain bastardized bit of truth, and take the long view that things in 21st century America are probably gonna end up far better than they generally have in the course of human history.

But. But! What about that "Same fucking difference!"? Well we hear every election that "this election is the most important election since" like 1932, or 1864, or 1776, or something. Every go round we hear it and we're hearing it again. But if Nader was right in 2000, if the only real choice we have is marginal rather than categorical, then we could either agree with my younger self that things are pretty sinister at the moment, or we could take the more restrained view that politics stays fairly close to the median as a matter of necessity. So which is it? Is there a difference between Romney and Obama worth getting up for? Is this election a clash of the mediocre, or will it decide the eternal course of the Republic?

Steven Landsburg provides one answer. He notes that Ezra Klein has published the following picture, purportedly showing the vast differences between the platforms of Obama and Romney on the issue of income taxation:

Leave aside for now the tacky Excel-template graphic... this message has been approved by Krugman and many others across the web. And it looks like a pretty big difference! Except:
What we actually have is an election in which both candidates are proposing massive redistributions from the top downward, one slightly less so than the other. You’d never know this from looking at Klein’s chart because it illustrates changes in rates, whereas what actually matters is the rates themselves. It makes no sense to ask whether any particular group ought to be paying more or less without reference to how much they’re already paying.

Indeed, this is a classic example of what I once called the “Grandfather Fallacy” — by focusing on changes instead of absolutes, Klein’s chart conceals any existing inequities and hence treats them as “grandfathered in”.
Maybe you could quibble with Landburg's use of the word "massive", but he does a quick-and-dirty correction of Klein's graph by plugging in the relevant pre-existing points, and comes up with this (tacky Stata-template) graphic:

Pretty big difference! In the story the graphs are telling, I mean. Not so much in the candidates' plans. Which will be subject to further moderation in both cases, meaning that they are highly likely to move closer together rather than further apart.

Now there's no reason to not consider both changes and levels. I get that both can be meaningful, especially symbolically. But while symbols are important the baseline reality is, unquestionably, even more important. Symbolism is often ephemera, and even if ephemera is often the stuff of politics those of who us who have put childish things behind us might wish to do better. The baseline reality suggests that there really isn't a qualitative difference between the two candidates, at least as it pertains to income taxation. And now that the GOP has made it a huge part of their platform to defend socialized health care at all costs, and that Romney is in favor of keeping the majority of PPACA intact too, I'm not super-clear on how they qualitatively differ on health care reform either. Maybe they'd differ greatly on foreign policy (paging Drezner!), but I can't for the life of me discern what Obama's foreign policy actually is -- "pivot to Asia" and "use drones to blow up whomever we damn well please" notwithstanding -- and Romney stubbornly refuses to even broach the subject*.

The point is that these differences are marginal, not fundamental. The argument is whether that is a good thing or not. And I really don't know... I think the fundamental conservative point -- that stability is ceteris paribus preferable to instability -- is not appreciated nearly enough by the left. At the same time I believe that the fundamental liberal point -- that we can always do better than we have done, and really should try to -- is not appreciated nearly enough by the right.

So score another one for the structuralists I guess. And score one more for the proximity models I guess. And give one more to the marginalists. And get cynical if that's your bag, or sit back and let it all wash all over you and think about how much worse it used to be. But please let's keep the argument running a bit longer. I'm not finished with it just yet.

*The lack of actual foreign policies from either the right or left is a topic for another day. My current thinking is that a) the right adopted the Manichean/Messianic view of the neocons -- most of whom were not Republicans in any other sense -- because it fit in with their Manichean view of foreign policy since World War II; b) Democrats found it tough to oppose because many of the neocons came from their ranks, and also because it was politically popular and because they had no other frame to adopt. Now that the neocons are out of sorts, no one has anything. I think HR Clinton's State -- via Slaughter -- is grasping towards something, but they aren't there yet and Obama hasn't latched onto it.

Friday, July 13, 2012

What We Have Here Is a Failure to Regulate

. Friday, July 13, 2012

If you follow the same blogs as me you will have noticed an ongoing debate about workplace regulation. I'm not going to link to all the posts -- which by now number in the dozens -- but the key players have been the Bleeding Heart Libertarians, Crooked Timber, Marginal Revolution, Matt Yglesias, and Modeled Behavior. Two of those blogs are written by economists, one libertarian and the other... well I'm not quite sure how to categorize Modeled Behavior; one blog that is decidedly of the academic left, although from various factions of it; one blog of the academic non-economist right; while Yglesias seems to take his positions somewhat a la carte these days.

Perhaps predictably, given the roster, these groups are talking about different things. Moreover, they are talking about different things in different ways. As it happens I've spent a decent amount of time reading, thinking, and writing about regulation so maybe I can help clarify.

When economists think about regulation, they are coming from at least one of two schools of thought: those emphasizing the welfare-enhancing potential of regulation, and those emphasizing the welfare-destroying potential of regulation. Let's call the first school the "Utilitarians". Let's call the second second school "Public Choice". The first tradition has its roots in Smith, Hume, and (JS) Mill, but really takes off with Vilfredo Pareto, Arthur Pigou, and other 20th century economists. The second tradition gets a lot from Rousseau and Marx, but in its contemporary form has been best expressed by folks like Stigler and Peltzman.

The Utilitarians believe that regulation can be used to enhance social welfare by correcting market externalities. This is a situation in which the cost of a market actor's actions are not borne by her, but are passed on to someone else. (Alex Tabarrok made reference to this idea specifically at one point.) In this case, society has moved off of the Pareto frontier; total utility is below potential. Regulation is a tool by which we can move the equilibrium back up to its optimum.

A classic example concerns a firm that pollutes a river as a byproduct of its manufacturing; those who live downstream are the ones who suffer the most from the pollution, but they receive no profit from the production. Arthur Pigou suggested one mechanism for dealing with this -- taxing it at a sufficiently high rate as to bring private and social costs back in line, and redistributing the proceeds -- but regulating (i.e. limiting or outright prohibiting) the activity will often serve the same purpose.

The Public Choicers acknowledge that in this specific set of cases regulation can be welfare enhancing for society as a whole. But they posit another set of cases in which it will not be. That is because regulations, being restrictions, have a tendency to reward market incumbents and punish new entrants. The net result is an uncompetitive market prone to inefficiencies and other bad things.

Suppose the firm in the previous example acquires a market advantage by polluting. Once it has driven all of its competitors out of business, it then acquiesces to regulation restricting its activities. But all other firms must also adhere to this regulation. Because the incumbent firm is already capturing economies of scale and has a dominant market share, it will be very difficult for new entrants to be successful. The dominant firm may even initiate the regulation to prevent, e.g., a new firm from coming in, moving further upstream, and polluting there. The resulting lack of competition is also Pareto suboptimal. So the Public Choicers argue that eliminating the regulation -- and with it the concomitant barriers to entry -- can actually enhance aggregate societal welfare by fostering new competition, thus moving society back up towards the Pareto optimum*.

Both of these stories can be true in certain cases. It seems to me that Matt Yglesias and the Marginal Revolutionaries have been trying to tease out which is more true in the real world, in which cases, and whether the best thing to do is to increase regulation or decrease it. To do this they do the only thing they can do: refer to stylized models, simple intellectual exercises (would you trade being searched for contraband in exchange for an extra dollar an hour?), and what empirical evidence exists.

When the academic left thinks about regulation they are not thinking about to reach Pareto frontiers. They are not using stylized models**, as they reject the core assumptions of those models***. They are skeptical of econometric studies which, as Henry Farrell rightly notes, are susceptible to selection bias and questionable causality. In general, they have little use for the positive theories of regulation. What they care about are normative properties of outcomes as they exist in the actual world.

Instead of thinking about how to maximize Pareto optimality, the left is thinking about how power inequalities condition outcomes. There are two ways to translate this back into the economists' language: the first is to say "I care every bit as much about where along the Pareto frontier we fall as the fact that we're on it... the distribution of the pie is as important as the size of it"; the second is to say "I don't give a good goddamn if we're on the Pareto fronter at all... I want to improve the lot of labor, and particularly the poorest and weakest among the laborers".

Both of these reject the positive political theories of the economists. Or, actually, they (implicitly) accept them as intermediate steps in a necessary chain, but not as the culmination. If what matters to you is where along the Pareto frontier the actual distribution of utility between capital and labor lies, then you (implicitly) accept the positive Utilitarian theory of regulation as being welfare-enhancing in aggregate; you just think there's one more step to be taken which can be justified on normative grounds. If what matters to you is to improve the lot of labor full stop, then you accept the positive Public Choice account of regulation as being inherently redistributionary, adding a normative preference for redistributing from capital to labor.

So now we have four end points:

1. Utilitarians: The point of regulation should be to maximize social utility, so the biggest concern is reaching the Pareto frontier. This means regulating in the case of market failure but not otherwise, and the instances of actual market failure -- defined as deviation from the Pareto frontier -- are pretty rare. (The Bleeding Heart Libertarians' position)

2. Public Choice: Most of the time regulation will maximize private utility, not social utility; at minimum that will often be an unintended consequence. So the biggest concern is to limit regulation in order to reach the Pareto fronter. (The Marginal Revolutionaries's position)

3. Social Democracy: The point of regulation should be to maximize social utility as a preliminary step towards shifting the ex post distribution of aggregate utility along the Pareto frontier more towards labor. (The Matt Yglesias position)

4. Marxist/Post-Marxist: The point of regulation should be to maximize the well-being of labor, not capital, so who cares where the Pareto frontier is, even assuming I believe such a thing exists? (The Crooked Timber position, at least among some of them)

Despite what those involved in this argument might have you believe, these are all coherent theoretical positions. But as each of them have noted of the others at one point or another, they have all been somewhat detached from empirical reality. For example, are workplace regulations trying to correct a market externality? This question has been danced around but not really answered. For positions #1-3 the answer to this matters quite a lot. For position #4 not so much. Nor do any of them really get at the implications of power, although the CTers have come closest. Power matters quite a lot for #4 and somewhat for #2, but not at all for #1 and only a bit (and in different ways) for #3. 

There is a lot more to be said on these points, but this is long enough so I'll have to save it for another post. 

*This doesn't actually deal with the pollution problem of course.

**I'm not actually sure about this. I believe they have some model(s) in mind -- they must -- but they haven't clearly articulated what it is. In response to a Twitter query, Henry Farrell listed as some influences Jack Knight (a Tar Heel), Sam Bowles, and "no-bullshit Marxism which happens to work". Fair enough, although I'd prefer a clearer exposition on what that looks like in reference to this discussion. Chris Bertram, one of Farrell's co-bloggers at CT, has previously espoused (at least elements of) bullshit Marxism which does not happen to work, so perhaps that's his model. I imagine the left are coming at this from a variety of perspectives, which is fine.

***At least they think they do. In some cases I think they believe these assumptions are more severe than they actually are, so they're really rejecting a straw man. E.g., Farrell's repeated reference to "perfect competition", but labor models have moved well beyond perfect competition without markedly changing many of the relevant results. (Both Alex Tabarrok and Tyler Cowen have noted this, too, I believe.) Anyway, at least some of the left's interlocutors seems to be working from the even simpler, and even more unrealistic, model of monopsony. This obviously requires major assumptions too. At times the way they describe labor markets is in quasi-feudal terms; I doubt even Marx would have truck with that.

Wednesday, July 11, 2012

Wisdom From Milos Forman on Political Regimes

. Wednesday, July 11, 2012

I've always been a casual fan of Milos Forman's films, and I had a vague sense of his personal history. I knew that he grew up in occupied Czechoslovakia and fled after the Prague Spring was crushed by Soviet tanks. (I didn't know until today that, per Wikipedia, his father died at Buchenwald and his mother at Auschwitz.) I've recently become more interested in his early work, particularly the comedies he made in the 1960s as part of the Czech New Wave, which I'd not seen before. So he was already on my mind when I saw that he'd published an op-ed in the NY Times. I was first surprised that he'd written such a thing. I was then surprised by how good it was.

Forman makes one simple political point, one simple literary point, and one simple musical point. The simplicity of each does not detract from their potency.

The political point is that people who actually lived under actual totalitarian Marxist regimes find it absurd when those terms are used to describe the social democracy lite initiatives proposed by Obama. That's because what defined life under state communism was not the particular policies those regimes enacted, but the capricious and unquestionable exercises of power those regimes expressed.

Forman tells one story in which a man who helps a poor, haggard stranger out of a storm is sent to a work camp. Why? Because the stranger had complained about the ruling regime, the Good Samaritan had not cast him out for it, and the stranger was actually an undercover agent working to entrap the unsuspecting. This type of thing, while anecdotal, is significant. It illustrates that the political regime was seeking to use the good works of its own citizens against them. It was trying to bastardize feelings of community and philanthropy. It was trying to abolish all civic virtues and replace them with unquestioning adherence to the state, and denunciation of all else. It was, above all else, designed to instill fear and trepidation. And the communist Czech government was one of the kinder, gentler Soviet bloc regimes!

This is related to the literary point. When Forman was asked to direct the film adaptation of One Flew Over the Cuckoo's Nest some of his friends advised against it, saying that tinkering with a beloved American cultural artifact was a risky business for a recent immigrant. Forman responded that for him, and others like him, One Flew was a global cultural artifact which portrayed the arbitrariness of power corrupted. Just because Kesey wrote it in one context does not mean it was no applicable to others. Forman though he was the perfect man for the job.

The musical point follows from this passage:

I’m not sure Americans today appreciate quite how predatory socialism was. It was not — as Mr. Obama’s detractors suggest — merely a government so centralized and bloated that it hobbled private enterprise: it was a spoils system that killed off everything, all in the name of “social justice.”
Forman's argument here is twofold: first, that state socialism (in its pernicious form) is not recognizable a set of particular policies, but is rather a method of control; second is that achieving perfect social justice is impossible, and the process of striving for it is corrupting. Instead, we should work towards social harmony, wherein different instruments are allowed to be played so long as they stay within common rhythm.

It's a bit trite, but as simple analogies go it's not so horrible. It recalls JS Mill's admonition for a marketplace of ideas, the republican virtues of a government of rules rather than men, and the enlightenment principle of decentralized authority. These are the principles that were cast aside in the socialist regimes of the 20th century. These principles are not under serious threat from Obama, or any recent American politician.

Thursday, July 5, 2012

Money in American Politics

. Thursday, July 5, 2012

In my previous post I chided Krugman and Wells for concluding that something is rotten in America without being able to articulate what that is. In comments it was brought up that the role of money in American politics is surely part of it*. In a sense this is ipso facto true if your starting assumption is that commerce and politics should somehow not be intertwined. But the question, as I understand it, is "What is wrong now?" not "What is wrong in general?" That is, is money in American politics a bigger problem now than before? Often people assume that this must be the case, especially post-Citizens United (even though most of what is wrong now happened before that decision)**.

I'm not very old but I've heard this claim made repeatedly, in good times and bad, ever since I became politically aware. Even a quick glance through the historical record indicates that these concerns seem to be universal to time and place. That alone makes me suspect that it is not a good answer to Krugman and Wells' question, which seems to be much more about this particular moment in the American political economy. But maybe things have been getting progressively worse over the past quarter century or so. I'm willing to be persuaded of that, but when taking a comparative and temporal perspective I would like the following to be the starting points:

1. The Founding Fathers of the country were generally the richest people in society, and America's original charters both recognize and institutionalize this fact. The War of Independence was fought, largely, for reasons of commerce. Nostalgia for the past is inevitable, but it is often not accurate. (Note that I suspect this applies even more to the political right than left.) The point is simply that, like poverty, money in politics has always been with us.

2. The two great progressive eras in recent American history were initiated by Roosevelts and Kennedys... not exactly plebes, and they had no qualms with injecting money into American politics and for their own personal benefit too. I.e., the link between money and important outcomes is ambiguous.

3. There is almost surely less money in American politics as a percentage of GDP, or at least no more, than there was 100 years ago (caveat: this is pre-Citizens United).

4. There is almost surely less corruption in American politics, or at least no more, than there has been throughout its history including periods of populist reform. It is not true that there is more corruption in the US than in other advanced democracies, many of which have different electoral systems and/or campaign finance laws (ibid). At least some (imperfect) studies show that corruption is not related to campaign spending restrictions. Even the concept of corruption via economic interests expressed politically is relatively recent

5. The literature shows, over and over, that campaign contributions flow to winners. The literature does not show, very often or consistently, that this money actually affects the election itself. There are plausible causal mechanisms on both sides. Also note that some findings show that limiting campaign contributions benefits incumbents, who already have name recognition and institutionalized support. Recent experimental evidence from Germany supports these findings. From the perspective of making American politics more dynamic and responsive to the citizenry, this is not a point in favor of limiting campaign contributions.

6. At least in the short run, the interests of capital and labor are often aligned in an open economy. A recent example of this involves the American auto industry in 2008-9, where corporate and union interests coalesced in favor of a bailout. Recent trade politics between China and the US also reflects this dynamic. To the extent that we view money in politics as pernicious because it exacerbates class tensions, we may need to reconceptualize the contours of the political space.

7. The US is not an outlier (even among advanced democracies) in terms of broad-based trends in growth, unemployment, inequality, pressures on the federal budget, increased polarization, the growth of finance, public sector bailouts of firms, or other metrics. This should cause us to look to global dynamics -- which will affect all countries -- rather than just local dynamics -- which are idiosyncratic -- for explanation. Not many people do that.

8. When duly elected officials lower taxes on wealthy people, that is not corruption. More generally, when some outcome happens that you don't like that doesn't mean that the system is screwed. Unless you are the median voter***, and none of the loudest reformers on the right or left are anywhere close to her, you will disappointed by a large percentage of policies enacted in a democratic society. That doesn't mean something is wrong... that means something is right. Internalize this point, please.

In summary, what I think we're really concerned about is how interests are aggregated into policy. Money is one channel by which influence might spread, but it's not the only one. In general when we talk about "things going wrong" I think we mean that some groups have captured the state and are securing rents from it. There are plenty of examples of this in American politics, but I don't think we are in a unique historical moment where these problems are so much worse than they have been historically. I'm open to counter-argument here, but it must be rigorous. No more of this "well look at how much they spent on the last election! Obviously things are messed up". No. It isn't obvious. 

If we're to accurately diagnose what's wrong and figure out how to fix it we must define our terms carefully, examine the present era in light of previous eras and comparative contexts, and understand that people are not evil or corrupt just because they may have different preferences from us over things like the optimal top marginal income tax bracket. 

*Other common suggestions, not completely unrelated, are inequality and the power of finance in the political system. They are worthy of their own posts, which I hope to give them in the coming days.

**Leaving aside that the ACLU supports Citizens United on grounds of principle.

***"Median voter" here can be thought of as short-hand or a first approximation of the general dynamic of minimum winning coalitions, not as an iron-clad law of democratic politics.

Wednesday, July 4, 2012

Who, Exactly, Is Getting Away With What, Exactly? And Why?

. Wednesday, July 4, 2012

In an recent article in the NY Review of Books, Paul Krugman and Robin Wells review three recent books that attempt to diagnose just how American political economy got so screwed up after 2008*. Noam Scheiber blames Obama's choices of economic advisors, and in particular the reliance on acolytes of the Rubin-Summers faction of Clinton administration vets who have a predilection towards getting into bed with Wall Street. Next comes Thomas Frank, demonstrating yet again that he understands nothing about American politics or political history (and in particular the politics and political history of the American right wing). Frank claims to have observed "something unique in the history of American social movements: a mass conversion to free-market theory as a response to hard times" that is buttressed by hermitically-sealed stupidity. If this is indeed a first then what exactly was "morning in America" all about? And how to explain the rise of right-wing parties throughout the industrialized (and industrializing) world since 2008, much less the landslide victory of Obama in the 2008 election? Thomas Edsal's thesis -- which Krugman and Wells reject as incorrect on its face -- is that America does not have enough resources to accommodate conflicting social goals, which has led to in uptick in partisanship.

So we have three theories: Scheiber's leadership failure cum rent-capture critique, Frank's vast right-wing conspiracy cum ignorance critique, and Edsall's scarcity leads to nasty politics critique. While showing signs of sympathy for all three, particularly the first two, Krugman and Wells end up with their own conclusion:

But ultimately the deep problem isn’t about personalities or individual leadership, it’s about the nation as a whole. Something has gone very wrong with America, not just its economy, but its ability to function as a democratic nation. And it’s hard to see when or how that wrongness will get fixed.
Let's leave (mostly) aside that this political narrative is opposite in emphasis of the tale Krugman was telling a year ago (cf) -- then it was about personalities and leadership -- and note the defeated tone. While some of Krugman's friends believe that the only way the wrongness will get fixed is through the destruction of the Republican Party (eg), that isn't going to happen so there must be some other way out of the malaise. The problem is that Krugman and Wells seem to have few answers on that score. I believe that is because they don't have a clear conception of politics.

Each of these three concluding sentences contains a distinct phrase of dissatisfaction. The first asserts that there is a "deep problem" in American politics; the second identifies that problem as the lack of an "ability to function"; the third summarizes these first two components as culminating in "wrongness". These are vague, even non-descript, but let's try to parse each of them.

Given the context of this essay within their other writings, the "deep problem" would seem to be persistently high unemployment and growing inequality. How do I know that Krugman and Wells think this is the problem? Mostly from the context of their other writings, but in this essay the refer to parallels between today and the 1930s, a period of high unemployment that followed a rise in inequality and significant financial crisis. The cause of these problems would seemingly be both ideational -- capture of elites in government (Congress, the Fed) and the commentariat, as well as much of the public, by right-wing laissez-faire orthodoxy -- and material -- capture of the government  (the Obama administration, the Fed) by Wall Street. Both of these phenomena have been discussed in the political economy literature, of which Krugman and Wells are completely unfamiliar**.  

The next sentence indicates that this problem is not limited to economic outcomes: there is also a political problem, the "(in)ability to function as a democratic nation". It is not at all clear what he means by this. I think he means that democratic nations are supposed to always and everywhere and at all times generate egalitarian outcomes, and pursue policies that maximize some deduced social welfare function that just so happens to map onto Krugman's ideological preferences more or less perfectly. Other than vague intimations that bankers control the country through their puppets in the Obama administration, it's not clear why Krugman thinks that the U.S. doesn't function as a democracy. Because it hasn't generated a particular set of outcomes in a given time and place? What a priori reason do we have to think that this should happen? Why should we think that the U.S.'s version of democracy is somehow superior to other democracies that have similarly depressed economies, e.g. Europe?

The fact is that "democracy" is a catch-all word that describes a host of political institutions which are similar only in that they aggregate the preferences of their citizens through some type of electoral process which is guided (and constrained) by previously established law. "Democracy" is decidedly not
a description of a set of particular outcomes favored by the technocratic center-left, a group of which Krugman is a member. It is even less a description of a political system dedicated to pursuing an Old Keynesian version of technocracy. Given that, it is not completely clear to me that the U.S. has lost its ability to function; conflicting interests, partisanship, gamesmanship, interest group lobbying, rent capture, and vituperative campaigns are all par for this course, not evidence that things have gone horribly awry.

Which leads us to the very end. This "wrongness" -- essentially the existence of distributive interest group politics -- is only a "wrongness" if you expect particular (and exceptional) moments of national unity (such as the bipartisan passage of the Social Security Act that Krugman and Wells reference at the top of the piece) to be the norm. But they are not the norm, and we should not expect them to be. Democratic politics is generally messy, generally contentious, and generally fought along lines demarcated by interests and ideology. Any particular individual -- and in fact all particular individuals -- will be upset with roughly 50% of the political decisions made. This is just how it works. There is no sense in bemoaning this, as it is a fact of life. It is not a "coup", it is not a systemic collapse of everything we hold dear.

It's not clear to me why the NY Review of Books would ask non-political economists to write about political economy. Had they not they not done so, they might have been able to publish an article with a better ending then "We don't like this but we don't know how to fix it."

*By "screwed up" the authors seem to all mean something along the lines of "President Obama only getting to fulfill most of his campaign promises". These being provision of universal health care, no tax increases on those making under $250k/year, an aggressively militaristic anti-terrorism policy, re-regulation of the financial sector at both the domestic and international levels, the repeal of DADT, and increased investment in green technologies. Or by "screwed up" maybe they mean the continuing existence of an opposition party, or the fact that Obama was always insufficiently left. Anyway, Krugman and Wells just take it for granted that something is screwed up, and the impression they leave of the books they review is that the other authors do the same thing. I haven't read any of those books so I can't be sure whether that's a fair characterization or not.

**I can be quite sure of this, having read them both extensively over the years. The closest thing to a political economist to whom Krugman gives credence is Larry Bartels, an American politics scholar who has studied some politics of inequality.  

Tuesday, July 3, 2012

Campaign Blather

. Tuesday, July 3, 2012

Dan Drezner offers some unsolicited advice to Mitt Romney. Well he calls it advice, but it amounts to a request: "Please tell us what you think about foreign policy before the election [so that we can pick it apart]". Romney may choose to acquiesce or not -- hint: at some point he will -- but I'm here to tell you not to pay any attention to it.

Why? Well, why not? We know that foreign policy plays a very small part in electoral outcomes in most cases so almost all campaign rhetoric is bloviating. Moreover, foreign policy decision-making is inherently more prone to post-election recalculation than other policy areas if only because there is so much information that is not known to the candidate until after the election. This is doubly true for candidates who have never held national office: both Clinton and Dubya made notable departures from their campaign rhetoric once they actually held office*; neither was punished at the polls for it.

At some point Romney will be asked direct questions about foreign policy. When he asked those questions he will say things like "I will get tough with China to make sure they play by the rules and stop stealing American jobs" and "I will not let terrorists kill American citizens, and I will do whatever is necessary to keep Americans safe" and "I will keep America strong by not cutting our military budget" and "Screw Russia". He will not say whether he favors neoconservatism or realpolitik because he does not know what those things are. Neither does any of the people who will be asking him questions (unless Fareed Zakaria gets a crack, which he won't), nor will 99.9% of the people who will hear his answers.

His actual foreign policy will be run by the bureaucracy, which will be highly constrained by structural factors, and will be reactive to events yet to occur.

This is not meant to say that Romney's foreign policy decisions will not be important. They will be. It's just that we won't learn much about what they will be from any campaign statements.

*Obama, on the other hand, seems to have no foreign policy at all besides "kill people with drones" and "try to not be as embarrassing as the last guy". This was basically his campaign strategy as well.

Monday, July 2, 2012

A Trade Story IPE Folks Should Love

. Monday, July 2, 2012

This NY Times article is over a month old now, but I'm highlighting it anyway because it is illustrative of trade politics dynamics that we often emphasize in IPE. It would make a good case study for an introductory class. Here's the issue:

The United States on Thursday announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China.
Here's the ostensible policy process:
The American decision was made by civil servants in a quasi-judicial process that is heavily insulated by law from political interference and does not represent a deliberate attempt by the Obama administration to confront China on trade policy. But that distinction has been largely lost in China, where the solar panel issue has been one of many causes embraced online by the country’s vociferous ultranationalists, who put heavy pressure on Chinese officials to respond forcefully to perceived snubs to China.
Here's the materialist policy process:
SolarWorld Industries America, which led the coalition of manufacturers that filed the solar dumping case, welcomed the department’s ruling. The decision “is a very positive step in the process. It’s also in line with what we expected,” said Ben Santarris, a company spokesman. “We consider this a bellwether case. It underscores the importance of manufacturing to the U.S. economy.”
Here's the opposing domestic force:
Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. The new tariffs are likely to mean a substantial increase in the price of solar panels here.
Here's the opposing foreign force:
“This is really a surprise,” he said in a telephone interview. “It’s really dangerous.” Mr. Li said that Chinese companies would “certainly” retaliate by filing a trade case at China’s commerce ministry accusing big American chemical companies of dumping polysilicon, the main ingredient in solar panels, on the Chinese market.
Here's the supporting ideational force:
“China’s method is straightforward: it sets forth industry-specific Five-Year Plans and then uses all forms of national and local subsidies and other governmental support to quickly transfer jobs, supply chains, intellectual property and wealth, to the permanent detriment of U.S. and global manufacturers,” he said. “China’s ability to ramp up and overwhelm an industry is unique and particularly devastating with new and emerging technologies, where global competitors may be less established and can be knocked out more easily and quickly.”
Here's the opposing ideational force:
Chinese officials have been indignant at American criticism of their solar power industry, pointing out that the United States has urged China for years to embrace renewable energy as a way to reduce air pollution, combat climate change and limit the need for oil imports from politically volatile countries in the Mideast.
There's more good stuff at the link, including a bit of historical context. Pedagogically speaking, it would be nice if this ends up being settled at the WTO. Then we could bring in all of interests, ideas, and institutions into one nice, compact little story.

International Political Economy at the University of North Carolina: July 2012




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