What We Have Here Is a Failure to Regulate

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.

Money in American Politics

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.

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

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.  

Does Political Science Deserve Public Funds?

If you pay any attention at all to the political science blogosphere you know that the House of Representatives recently decided to prohibit the National Science Foundation from directing $14mn roughly -- 0.2% of its budget -- to political science research. This has caused much consternation among (some) political scientists, as well as indignant blog posts from political scientists and e-mails from APSA asking us to fill in form letters and send them to our Congresspeople.

What it has not done, generally, is come up with any sort of explanation for this event that is informed by political science, nor any sort of strategy for mobilization that would ensure outcomes that benefit the discipline.

This I find ironic. Faced with an banal existential threat to its existence, political science has responded by a) acting as if social science methods do not exist, and b) acting as if it knows nothing at all about political mobilization, organization, competition, institutions, or much of anything else relevant to altering outcomes in the political sphere. The response from academics has been to whine, get defensive, and generally miss the point (which is almost surely not about whether political science is cool or interesting or even important).

In fact it's worse than simple ineptitude: rather than unifying around some strategy that will secure existing funding, the discipline has turned on itself*.

In a sense I think this goes back to broader schisms in the discipline**. Particularly in IR the past decade-plus has seen a lot of internecine battles over what is best practice for academics. Everything from "what we should study" to "how we should study it" has been debated, quite vituperatively, in journals, blogs, conference panels, graduate student seminars, letters to editors, and bitch-sessions at the tavern. The period from Perestroika to TRIPs has moved us a bit from knee-jerk anti-positivism towards "let a thousand flowers bloom", but there is another problem: the NSF.

Actual funding from the NSF is pretty paltry; getting those funds neither makes nor break political science as a discipline, and almost any NSF-funded project could be funded in other ways***. But getting an NSF grant is prestigious: it improves your application and tenure packets; it can lead to a reduction in teaching load thus increasing research output; it can help you get a full professorship or endowed chair; it boosts your status. Right now the NSF does not fund all types of political science research equally. It privileges certain types of projects, and in particular those smell that smell especially "science-y": studies that build and/or analyze large data sets. As it happens most of my research uses this kind of data set, and I certainly wish there were more of them in the world, but not everybody in political science does. In fact, most of us don't.

According to the most recent TRIPs, a majority of IR scholars consider themselves to be something other than positivists (Q. 26) and only 15% of us employ quantitative methodologies as our primary research method (Q. 28), although another 22% sometimes use them as secondary methods (Q. 29). Obviously international relations is not all of political science, and I'm sure that a greater proportion of Americanists use stats. But (I would expect) fewer comparativists do, and almost no political theorists do. To the extent that NSF funding is biased in favor of quant studies, it is biased against the majority of the discipline. Given that hiring and promotion decisions (and general prestige) are influenced by ability to attract grants from places like the NSF, this is no small thing.

This is probably why Jacqueline Stevens wants to see funding either abolished or distributed via a lottery system which would not privilege some types of work over others ex ante. To me that makes little sense, but I can see why some would prefer either outcome to the status quo ante.

Regardless of where you come down on this -- and I don't really care that much either way -- it's hard not to notice that political science has not covered itself in glory. It seemingly has no theory of politics that can help folks understand why this is happening or how to change it. Its best response to this challenge is classic rent-seeking -- we deserve this money because we do cool stuff -- but without any ability to effectively seek rents. That, in and of itself, might be reason enough to discontinue funding.

*Links to much other discussion can be found at that one. I'm too lazy right now to hyperlink them all myself.

**I'm not the first to point this out. Henry Farrell did as well, in one of the dozens of posts political scientists have dedicated to this bill.

***Phil Arena has one such proposal here, although I'm not too sure how serious he is about it. I find the fact that political scientists are not willing to fund their own research through their professional associations to be another indication that it probably doesn't deserve all that much funding. Some of his commenters suggest that public funding of political science is necessary because it generates public goods which will not be realized without government intervention. To that I say a) show me the evidence****, and b) public goods can be supplied without government intervention, particularly if there are motivated groups who can easily identify the location of those goods and organize to capture them. APSA is already organized, and presumably in a better position to find these public goods than Congress or even the NSF.

****Or even the logic. Most political science research, including NSF-funded research, is published by journals with subscription feeds that are prohibitively for individuals or even most libraries. Therefore the work is most definitely not "non-excludable"... it is excluded! So it is not a public good. But even if it were it would only be a public good in the most facile sense of "the creation and dissemination of knowledge is good" which merely begs the question: maybe, but wouldn't that money be better used in ways that spread knowledge in different ways? E.g., funding public libraries, giving laptops to low-income people, etc.