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If you knew that a person believed that corporations primarily like to outsource production to poor countries to get lower labor costs, what would you predict about that person’s view on whether the minimum wage has significant disemployment effects?

Just from my observation of the world, I would predict that people believing that low labor costs drive outsourcing also likely believe that the minimum wage has no significant disemployment effects. Yet the first view depends on a position either that labor demand is nearly perfectly inelastic (unresponsive to wage rate), or that labor markets are monopsonistic, while the second view depends on the position that labor demand is highly elastic (responsive to wage rate), and implies that labor markets will be fairly competitive, not monopsonistic (because entry is easy).

This combination of beliefs therefore seems to be an example of what Tyler Cowen calls the fallacy of mood affiliation.

For what it is worth, my view is that labor demand is moderately elastic over a long time frame and that labor markets are competitive, and therefore that permanent increases in the minimum wage that include inflation indexing have nontrivial disemployment effects, while labor costs are similarly a nontrivial but not overwhelming consideration in outsourcing decisions.

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Many scholars (for instance) have noted a trend around the world of greater decentralization, at least on certain dimensions. Many non-federal, unitary states have tried to devolve some spending and decision-making authority on local or regional governments. Virtually every democratic government nowadays at least feigns some interest in decentralization.

Yet what strikes me is how little decentralization there has been, especially in the developing world. Some developing democracies that are sometimes described (or describe themselves) as “federal” or “semi-federal” include Mexico, India, Indonesia, Brazil, Argentina, Venezuela (before it went authoritarian some time in the 2000s), South Africa, Malaysia, Pakistan, Iraq, Nepal, and Nigeria. Yet none of these countries, other than Mexico, affords its constituent state or regional governments autonomy commensurate with that found in federal and semi-federal “Western liberal democracies” like Spain, Canada, the U.S., Switzerland, Belgium, Germany, Austria, Australia, and Italy. For instance, in Brazil, states do not have exclusive powers, and the federal government may overrule any state law with its own legislation. In India, the federal government may suspend state governments from operating at all and impose “President’s Rule.” Of all developing democracies, only India, Mexico, and Brazil routinely allow subcentral governments to raise significant revenue through autonomous taxation policies. (I count 9 Western democracies with such fiscal autonomy.)

Some of these developing countries are both huge and ethnically and regionally diverse, India and Indonesia most notably. One might think that these governments would have even more reason to decentralize than would the governments of comparatively homogeneous Western democracies. Therefore, the relative lack of decentralization in developing countries remains a puzzle.

One explanation might be the smaller talent pool in developing countries. Decentralization might not be feasible because uneducated or politically unsophisticated local officials require close supervision from a small cadre of Western-educated central administrators. While this explanation might have some weight in very poor democracies like Mali (before the recent coup), it likely does not apply to the majority of the cases just mentioned. If the talent pool in developing democracies were desperately shallow, then small developing democracies should have little state capacity plus all the adverse sequelae political scientists typically attribute to state weakness. Yet many small democracies in the developing world have performed fairly well: Costa Rica, Jamaica, Trinidad, Botswana, Mauritius, and Namibia, not to mention Slovenia and the Baltic republics in central and eastern Europe. There is no obvious positive relationship between country size and economic or political performance in the developing world.

Furthermore, many of the cases just mentioned do boast significant decentralization along some dimensions. For instance, India and Indonesia lack a unified internal market, allowing local and state or provincial governments to impose trade barriers on products from other regions. This is an economically perverse form of decentralization and one that has been nearly stamped out in the West, apart from certain discriminatory government procurement regulations. In addition, many developing democracies feature significant decentralization of expenditures: local and regional governments control significant budgets, but those budgets are funded by central grants, and most policy authority lies with the center. This set of policy choices is also likely economically perverse, as “vertical fiscal imbalance,” whereby subcentral governments depend heavily on grants or mandatory revenues from the center, tends to encourage fiscal irresponsibility. In Argentina in the 1980s and 1990s, provincial governments established their own banks, which were forced to lend money to those governments, leading to repeated fiscal crisis.

Another explanation might be that there is something about the Western liberal tradition of political philosophy that encourages decentralization. Many developing democracies fit within the category of “illiberal democracies,” where majorities use their political power to trample the rights of minorities. Sri Lanka might be just such a country, where the Sinhalese majority has repeatedly refused to countenance significant autonomy for the Tamil minority, and the central government fought a brutal civil war against Tamil rebels, complete with vast numbers of civilian killings and other human rights violations.

There may well be something to this explanation, but there are also hazards. As Vito Tanzi noted (PDF), demand for decentralization rises with size of government. A nightwatchman state can afford to be centralized because no one really cares about who controls it. Developing countries have bigger governments than Western democracies, not in the government spending as a share of GDP sense, but in the sense that the distribution of resources in such societies is more elastic with respect to the distribution of political power. So demand for decentralization should be higher there. True, the constraint might instead be supply: the views of political leadership in such societies. But then why the “perverse” decentralization in some countries?

To examine the extent and form of decentralization in developing democracies, I have, with the help of University at Buffalo Ph.D. student Govinda Bhattarai, developed a new dataset of regional self-rule in consolidated democracies worldwide. The coding scheme extends that introduced by Liesbet Hooghe, Gary Marks, and Arjan Schakel for Western democracies and various postsocialist European countries. Without going into details here, I will simply note that we coded the scope of policy powers of subcentral governments, the scope of taxation powers of subcentral governments, the local electoral accountability of subcentral officials, and the ability of the central government to veto subcentral laws.

Using those indicators, I then construct two higher-level, multiplicative indices of economic self-rule and political self-rule. Economic self-rule takes into account political self-rule as well as the tax autonomy of subcentral governments. Economic self-rule ranges from 0 (none) to 48 (maximum). Political self-rule ranges from 0 (none) to 16 (maximum).

The scatter plot below shows regional self-rule on the economic (Y axis) and political (X axis) dimensions in 2006, the latest year for which data on regional self-rule in the Hooghe, Marks, and Schakel dataset are available (our data go to 2010, however). Each observation in this plot is a type of region: either a particular region with its own autonomy statute (like Aaland in Finland or Scotland in the UK), or a type of regional government with the same autonomy arrangement (like states in the U.S. or in India).

economic & political self-rule(You can click the image to get a better view.)

Look at how few (more…)

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us real wages rose during depression

Source: Barry Eichengreen, “The Origins and Nature of the Great Slump Revisited”

So U.S. real wages rose more or less throughout the Great Depression. During the Hoover years, you can write this phenomenon off as sticky wages plus the Federal Reserve’s disastrous policy of deflation, plus some of Hoover’s jawboning of executives to get them to keep wages high. But during FDR’s administration, the federal government actually mandated higher wages several times. Of course, that is the last thing you want to do during a depression, because you will just make unemployment higher and therefore production lower than it could have been. And that’s what happened:

weak recovery

Despite the fact that money supply growth and price inflation were robust after 1933:

money supply grew

inflation rose

So after 1933, the U.S. economy’s woes must have had origins in microeconomic policies, not macroeconomic policies.

By the way, I saw Scott Sumner at a recent conference, and he is writing a book about this. About time someone did!

Update: On Twitter Mike Konczal points me to this paper by Gauti Eggertsson, making the case for the National Industrial Recovery Act on zero-lower-bound grounds. Fair enough – it’s a theoretical paper, and you can make a theoretical case for just about anything. But all of the countries in the figures above were at the zero lower bound at some point. Two things stand out: 1) In general, countries that went off the gold standard first saw more inflation, which was associated with lower real wages, which was associated with better industrial recovery. 2) The U.S. underperformed on industrial recovery and had bigger increases in real wages than everything else despite high inflation after 1933.

On the relationship between real wages and unemployment, Bob Lawson points me to Vedder and Galloway’s Out of Work. See also this negative review of the book by Brad DeLong.

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This week the Congressional Budget Office released The Budget and Economic Outlook: 2014-2024. From the press coverage, one would have guessed the report was either entitled Obamacare: the Job Killer that is Almost as Bad as Benghazi or Obamacare: Ending the “Job Lock” and Opening the Door to Leisure. In reality, the impact of the Affordable Care Act was only a small part of the report—largely restricted to the appendix—and arguably the least troublesome.

Here are a few highlights. I will quote from the CBO report, since most of the media coverage will only address the shiny objects connected to the Affordable Care Act (for an exception, see Ron Fournier’s piece in National Journal).

Economic Growth

  • “[T]he economy will grow at a solid pace in 2014 and for the next few years…Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades. That projected slowdown mainly reflects long-term trends—particularly, slower growth in the labor force because of the aging of the population.” (p. 1)
  • “The unemployment rate is expected to edge down from 5.8 percent in 2017 to 5.5 percent in 2024.” (p. 5)

The Debt

  • “[T]he deficit is projected to decrease again in 2015—to $478 billion, or 2.6 percent of GDP. After that, however, deficits are projected to start rising—both in dollar terms and relative to the size of the economy— because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP.” (p. 1)

The Consequences (p. 18)

  • “The nation’s net interest costs would be very high (after interest rates moved up to more typical levels) and rising.”
  • “National saving would be held down, leading to more borrowing from abroad and less domestic investment, which in turn would decrease income in the United States compared with what it would be otherwise.”
  • “Policymakers’ ability to use tax and spending policies to respond to unexpected challenges—such as economic downturns, natural disasters, or financial crises—would be constrained. As a result, unexpected events could have worse effects on the economy and people’s well-being than they would otherwise.”
  • “The likelihood of a fiscal crisis would be higher. During such a crisis, investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow funds at affordable interest rates.”

Beyond 2024, things only get worse

  • “Although long-term budget projections are highly uncertain, the aging of the population and rising costs for health care would almost certainly push federal spending up significantly relative to GDP after 2024 if current laws remained in effect. Federal revenues also would continue to increase relative to GDP under cur- rent law, reaching significantly higher percentages of GDP than at any time in the nation’s history—but they would not keep pace with outlays. As a result, public debt would reach roughly 110 percent of GDP by 2038, CBO estimates, about equal to the percentage just after World War II. Such an upward path would ultimately be unsustainable.” (pp. 25-26)

Of course,  the core driver in these projections is the aging of the population.  Policymakers have the ability to reform key policies to reduce the long-term impact of the demographic shift, and the earlier these reforms are introduced, the less dramatic they need to be. But given the endless campaign and the struggle over the news cycle, who can even contemplate serious entitlement and tax reform.  It is far easier to focus on the shiny objects than to acknowledge the core message of the CBO’s report.

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In my last two posts, I showed that the U.S. has a large social welfare state by cross-national standards, maybe even the second-largest in the OECD. However, the U.S. welfare state is much less redistributive from rich to poor than most other welfare states.

In this post, I tackle spending on infrastructure (“gross fixed capital formation”) and subsidies. According to the punditocracy, the U.S. always needs to spend more on infrastructure. Conversely, the populist mood in this country stands firmly against subsidies to business, and perhaps rightly so — very few subsidies seem rationally designed to compensate for positive externalities.

But it turns out the U.S. spends more than almost every other OECD country on public investment in fixed capital, and less than every other OECD country on subsidies. Take a look:

u.s. spends a lot on infrastructure

u.s. spends little on subsidies

The first plot shows public investment by country, divided by GDP, in 2012. It includes spending by all levels of government. The U.S. places near the top of the international standings in that year, but this is no fluke: throughout the last three decades, the U.S. has been near the top of international tables in this measure. Maybe everybody needs to spend more on infrastructure, but this certainly doesn’t seem like a uniquely American problem. And maybe you think that a less densely populated country has a higher optimal level of public infrastructure spending, but I’m not so sure: higher infrastructure spending in such a country could subsidize an inefficient distribution of population.

The second plot shows public subsidies by country, divided by GDP, in 2012, again summing up the figures for all levels of government. The U.S. stands right at the bottom, with less than half a percentage point of GDP going to subsidies. Further, state and local governments spend only about 0.1% of GDP on subsidies, so the federal government is the main sinner here. Now, these figures don’t seem to be picking up tax advantages like “tax increment financing” districts popular at the local level. Still, businesses can typically be exempted only from taxes that they otherwise would have paid; expenditure-side subsidies are potentially unlimited.

I should note that federalism doesn’t seem to be the key to U.S. spending patterns here: federal Austria and Switzerland are among the highest subsidy spenders, and are not very high on infrastructure spending.

Bottom line: it’s not clear that, at the margin, the U.S. needs a lot more infrastructure spending, and the subsidy picture certainly complicates any plausible “libertarian populist” movement aimed at big business privileges.

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In my last post, I said “total net social spending” included net public spending and mandatory private social spending. In fact, it includes voluntary private social expenditures as well. The U.S. has by far the highest voluntary social expenditures in the OECD, so if you subtract those out, the U.S. net public and mandatory private social spending figure is no longer second in the OECD (and thus almost certainly the world, as poorer countries have smaller welfare states), only just about average.

But what does voluntary private social spending include? One big component is employer-provided health insurance. It seems to me that should be included in the size of the U.S. welfare state, even if it is not directly provided by the government, because the government subsidizes it (through the tax code), and because that spending is a substitute for government spending in other countries. If we exclude it for the U.S., we are not comparing like with like, since several other countries provide health insurance mainly or exclusively through the state. Put another way, if the U.S. provides so much social welfare privately, the need for the government to provide it is less. The U.S. welfare state is average-sized in spite of the fact that the private welfare system is enormous.

Now, does that mean the U.S. spends vastly more on the poor than most other OECD countries? Not necessarily. The majority of social spending in the U.S. does not go to the poor – but neither does it anywhere else. The elderly soak up a huge portion of social spending in almost all advanced industrial societies. Indeed, one way to measure how redistributive the U.S. welfare state is is to subtract the “post tax and transfer” Gini ratio from the “pre tax and transfer” Gini ratio. Of course, this is a static measure that does not take into account possibilities for mobility from one income level to another, and the extent to which “poverty traps” can contribute to lost mobility. Still, it’s a suggestive measure.

Using data from World Development Indicators Standardized World Income Inequality Database, I find that the tax and transfer system in the U.S. shaves only 0.08 points off the Gini ratio, a standard measure of income inequality (“1″ means most unequal, “0″ perfectly equal). In most other countries, the number is much higher. In Sweden, it is 0.20. In Italy and Germany, is 0.21. Only Switzerland showed (slightly) less progressive redistribution.

So while the U.S. has one of the very largest welfare states in the rich world, it also has one of the least progressive welfare states in the rich world. By the standards of anti-inequality preferences, that’s a terrible record of inefficiency.

Updated with correct source for my data.

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Making Sense of the Numbers

The early figures on the Affordable Care Act are raising some concerns for those who believed that it would address the problem of the uninsured. Christopher Weaver and Anna Wilde Matthews (Wall Street Journal) report:

Early signals suggest the majority of the 2.2 million people who sought to enroll in private insurance through new marketplaces through Dec. 28 were previously covered elsewhere, raising questions about how swiftly this part of the health overhaul will be able to make a significant dent in the number of uninsured.

A McKinsey & Co survey cited in the piece suggests that only 11 percent of those who purchased coverage under the Affordable Care Act between November and January were previously uninsured.  The numbers are somewhat better from other sources, but in each case a majority of those who purchased insurance were previously insured.

Granted, the first few months of the Affordable Care Act were particularly chaotic, and many of those who managed to navigate their way through the website suffered sticker shock (McKinsey found that affordability was cited by 52 percent of those who shopped for a plan but decided not to purchase one). But the numbers seem peculiar nonetheless. (more…)

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The LSE’s EUROPP blog has published my critique of Dani Rodrik’s The Globalization Paradox. It’s an expanded version of this blog post on Pileus from a few days ago.

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Dani Rodrik, the political scientist’s favorite economist, argues for a limit to globalization in his recent book Globalization’s Paradox. The LSE EUROPP blog has a nice little summary of the book’s argument:

  1. Markets require a wide range of non-market institutions (of regulation, stabilisation, and legitimation) in order to work well and remain socially sustainable.
  2. These institutions do not take unique forms, in the sense that ultimate goals such as efficiency or stability can be achieved under a variety of designs and blueprints.
  3. Different societies, organised around their own states, have patently different needs and preferences regarding the shape that market-supporting institutions can take.
  4. A world that is sufficiently responsive to democratic preferences will therefore be one of institutional diversity and heterogeneity rather than institutional harmonisation and convergence.
  5. Since institutional diversity inhibits the global integration of markets by raising transaction costs across jurisdictional boundaries, a world that is sufficiently responsive to democratic preferences will also be one that falls short of full globalisation.

The idea is that it is desirable to have different countries have different regulatory schemes, but full globalization demands complete harmonization of regulation in order to minimize transaction costs. Exporters and investors want to face the same regulations abroad as they do at home. Some of the premises of the argument are incorrect, but I actually agree with the conclusion for different reasons. First, the problems with the premises.

Premise #1 is disputable to some extent. It’s stated broadly enough that these “institutions” could be social or governmental, and the governmental institutions could be nothing more than enforcing appropriate rules of appropriation and exchange. Yet I suppose Rodrik means something more by the statement, as illustrated by his example of financial regulation. The sparer those institutions within which markets need to be embedded, the more harmonization is possible and desirable even if the rest of the argument is right.

Premise #3 is deeply problematic. It’s just not appropriate to speak of societies having “preferences,” and it’s even more naive to think of democracy as somehow translating those preferences into law. If the only reason for retaining national economic sovereignty is that the latter might permit different “societies” to enact their “preferences” into law, then the case is very weak.

My argument for an outer bound to globalization would be more contingent. Taking everything into account, the scales seem to tip against harmonization when: 1) different national approaches can give us better information about what works, rather than enshrining a subpar approach into law, 2) regulatory arbitrage allows better rules to develop, ultimately yielding harmonization but not through a centralized process, 3) smaller polities are less likely to be influenced by “insider” interest groups than some multilateral institution tasked with harmonizing regulations, or 4) citizens perceive globalization as a threat to sovereignty that they value, and therefore respond to harmonization attempts with a stronger backlash against globalization more broadly (Rodrik does address this last consideration in his book). Sometimes multilateral harmonization is justified and sometimes not; it depends on the balance of considerations. For instance, harmonizing customs rules, as was agreed recently by the WTO trade ministers in Bali, seems harmless.

Ultimately, I think Rodrik is pushing on a string. There is little risk that harmonization will go “too far,” given the extremely decentralized nature of global economic governance. And I disagree with Rodrik that globalization has gone about as far as it needs to go, and now requires defense from its own advocates. For instance, the West can do much more to repeal agricultural trade barriers that kill poor people around the world.

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Ezra Klein (Wonkblog) has a brief interview with Georgetown’s David Super on how poorly programs for the poor have functioned (and how good HealthCare.gov appears by comparison).  The alternatives discussed include outsourcing to private contractors (bad) and implicitly providing more resources (good).

One alternative that is not discussed:  providing benefits through a fractional negative income tax (NIT). If one assumes that the government has some responsibility for providing for the poor, the NIT has a number of advantages. It minimizes administrative costs and complexity, government paternalism, and the disincentives to work. Milton Friedman—credited with first bringing the NIT into the policy debates—does an excellent job of explaining the basic features of the proposal in a 1968 episode of Firing Line.

http://www.youtube.com/watch?v=xtpgkX588nM

For those interested in placing Friedman’s fractional negative income tax proposal in the larger context of social policy, a useful resource is a recent intellectual biography of Milton Friedman by William Ruger. Those unacquainted with the negative income tax—and some of the difficulties that are intrinsic in the proposal—might enjoy the overview by Jodie Allen at the Concise Encyclopedia of Economics.

Given that President Obama is emphasizing the issue of income inequality, both parties seem convinced that we need significant tax reform, and there is a fair amount of experience with the Earned Income Tax Credit, perhaps there will be a window of opportunity to revisit the NIT.

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As we all know, Colorado’s legalization of recreational marijuana went into effect the other day, and Washington will soon follow. I would spend some time discussing the merits of legalization, but I largely agree with Grover’s post on Green Wednesday.  As one might expect, it didn’t take long for the op-eds to offer their opposition to legalization.

David Brooks (NYT) weighs in on the issue. He remembers his days smoking weed as an adolescent and assures us that he is no prude (“I don’t have any problem with somebody who gets high from time to time, but I guess, on the whole, I think being stoned is not a particularly uplifting form of pleasure and should be discouraged more than encouraged.”) The real concern is the impact of marijuana on the adolescent mind and the impact of legalization on marijuana use. Ruth Marcus (in WaPo)  focuses on this issue, arguing that “our children will not be better off with another legal mind-altering substance.” If early marijuana use has negative impacts on the adolescent brain (Marcus cites research that “long-term users saw an average decline of eight IQ points”) this should be a source of concern. Of course, Colorado does not legalize the use of marijuana by people under age 21—a point that Marcus acknowledges—but this is beside the point. Alcohol is prohibited for those under 21, and yet illegal drinking is widespread.  The core issue for Marcus: “although alcohol seems to be the teen drug of choice among the adolescents I know, the more widely available marijuana becomes, the more minors will use it.”

Brooks arrives at the same conclusion:

We now have a couple states — Colorado and Washington — that have gone into the business of effectively encouraging drug use. By making weed legal, they are creating a situation in which the price will drop substantially. One RAND study suggests that prices could plummet by up to 90 percent, before taxes and such. As prices drop and legal fears go away, usage is bound to increase. This is simple economics, and it is confirmed by much research. Colorado and Washington, in other words, are producing more users.

It is simple economics: legalization should result in a reduction in prices. A reduction in prices should lead adolescents who drink alcohol to consumer marijuana instead. The core question: is this necessarily a bad thing? (more…)

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It appears that President Obama’s address on inequality was the beginning of a larger move to the left and an embrace of economic populism. As Edward-Issac Dovere  (Politico) explains:

[Obama is] connecting to progressive populism with an aggressive, spending-oriented, activist government approach to the economy personified by Elizabeth Warren and Bill de Blasio. Obama’s already backed raising the minimum wage, the start of what White House officials say will be a 2014 domestic agenda — including his State of the Union address and budget — that centers around income inequality and what the government is doing to increase economic mobility.

And

Obama needs his base invested to help him recover from his low poll numbers and give his party a platform as Democrats try to make the House competitive and hold onto to their majority in the Senate. And those in the coalition that won Obama two elections — young people, African-Americans, Latinos, single women and immigrants — are precisely the ones hit hardest by the doldrum economy.

Will this strategy succeed? The answer would seem to hinge on three things.

  1. Success in shifting the focus from the sluggish economy (e.g., the “jobs deficit,” problems of long-term unemployment, dramatic reductions in the labor force participation rate) to inequality in income distributions and the claim that these inequalities (rather than economic policy or the intrinsic problems of recovering from a financial crisis) have impeded recovery.
  2. Success in convincing voters that the correct policy response to this situation is an expansion of social policy expenditures (e.g., increases in Social Security) and a higher minimum wage
  3. Success in convincing voters that they should, in essence, vote themselves a raise in the 2014 midterm elections since there are limits to what can be achieved through executive action.

I am skeptical that this strategy will succeed for a host of reasons (e.g., the contours of public opinion, the likelihood that ongoing problems with Obamacare implementation will dominate the news, the President’s lack of follow through on priorities announced in the State of the Union). But given the poor economic performance since the financial collapse there is likely a growing pool of desperate  voters open to these claims. They may  apply a sufficiently high discount rate to the future that the long-term fiscal consequences of expanded social policy expenditures will not matter much.

For those who are interested in reading more, see Alex Pareene, “Why Elizabeth Warren Baffles Pundits” (Salon), Frank James, “Is Economic Populism a Problem or a Solution for Democrats?” (NPR) and Third Way’s John Cowan and Jim Kessler’s op-ed (WSJ), “Economic Populism is Dead”

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Last week, President Obama gave a speech on economic mobility and argued that addressing economic inequality was “the defining challenge of our time.” He stated:

But we know that people’s frustrations run deeper than these most recent political battles.  Their frustration is rooted in their own daily battles — to make ends meet, to pay for college, buy a home, save for retirement.  It’s rooted in the nagging sense that no matter how hard they work, the deck is stacked against them.  And it’s rooted in the fear that their kids won’t be better off than they were.  They may not follow the constant back-and-forth in Washington or all the policy details, but they experience in a very personal way the relentless, decades-long trend that I want to spend some time talking about today.  And that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain — that if you work hard, you have a chance to get ahead.

President Obama asks (and answers) an important question: “if, in fact, the majority of Americans agree that our number-one priority is to restore opportunity and broad-based growth for all Americans, the question is why has Washington consistently failed to act?  And I think a big reason is the myths that have developed around the issue of inequality.” According to the President, the myths include: (1) “the myth that this is a problem restricted to a small share of predominantly minority poor,” (2) “the myth that growing the economy and reducing inequality are necessarily in conflict,” and (3) “the belief that the government cannot do anything about reducing inequality.” Even if these are correctly seen as myths (the address provides some qualifications) the problem may be found in the premise. (more…)

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Twenty years after its establishment, the World Trade Organization finally reached its first global trade deal last night at the meeting of the world’s trade ministers in Bali. The successful agreement foiled expectations that this meeting, like all others of the Doha Round, would end in failure and acrimony. Media outlets have been reporting the Peterson Institute’s estimate of $1 trillion in higher global output as a result of the deal, but what’s most interesting about the deal is that it happened only because the member states decided to focus on a narrow slice of the issues under discussion in the Doha Round. The deal focuses mostly on streamlining customs procedures to facilitate timely cross-border transportation, along with measures to eliminate tariff and quota barriers against exports from “least developed countries” to richer countries, to reduce agricultural export subsidies (here the deal merely makes a “strong political statement” and doesn’t require specific changes in law), and to permit developing countries’ governments to stockpile food.

Why did it happen? Ten days ago, after talks in Geneva, WTO head Roberto Azevedo warned that global trade talks would collapse if ministers did not narrow down the scope of their deliberations to issues on which consensus was achievable. Global trade talks have been bogged down over the last 20 years over severe distributional issues: developing-country governments want sharp cuts in rich-world agricultural subsidies, tariffs, and quotas, while rich-country governments want their poorer counterparts to cut trade barriers on services, beef up intellectual-property enforcement, and liberalize foreign investment. None of those big issues were solved in Geneva and Bali. A narrow deal on customs procedures happened because the distributional and enforcement issues here are far less severe. Few governments have any interest in holding up traffic at the border longer than necessary. Simplifying customs procedures is more like a coordination game than a Prisoner’s Dilemma: everyone benefits if forms are standardized and simplified. Rich-country governments also promised poor-country governments help with hiring customs officials to help speed up processes.

The conventional wisdom in international relations is that a broad scope of issues helps international organizations solve distributional problems, all else equal, because broad scope makes it easier for governments to trade off gains to one side on one dimension with gains to the other on another dimension. But all else was not equal here: some issues faced much lower distributional conflict than others, and on those it was relatively easy for governments to reach agreement. They chose to go for a small deal rather than a big one because, frankly, the WTO needed a win. Another collapse of talks would have called into question whether multilateral trade liberalization is even possible.

This deal does not end the Doha Round. Talks will continue on the “big issues” mentioned above. This is fortunate, since the Bali deal does little to reduce the extent to which U.S. and European agricultural policies kill poor people. While the deal helps with market access for least developed countries, essentially all rich countries have already implemented duty-free, quota-free access for these countries’ exports, and least developed countries contain merely 12% of the world’s population and less than half of those living in extreme poverty. There need to be binding legal limits, actionable before the Dispute Settlement Body, on agricultural subsidies, quotas, and tariffs in rich countries.

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Does a civil war in Mozambique significantly affect my interests? I say no. Most of my students seem to think yes. On my intro IR final essay exam, I asked a question about what the theory of hegemonic stability would predict about future environmental and human rights politics. I wanted to see whether students could differentiate between the public-goods characteristics of those two sets of issues. The theory of hegemonic stability says that the existence of a global hegemon is a necessary condition for the provision of global public goods.

To review, a public good is a good that is non-excludable for all those who enjoy it. In other words, you can’t exclude a non-contributor (“free rider” in the jargon) from enjoying the benefits of the good. (There’s also a non-rivalrousness condition, but it is irrelevant to the “problem” of public goods.) Because it is non-excludable, people have an incentive to free ride, and the good won’t generally be provided unless individuals can be somehow coerced or otherwise incentivized to contribute. Since the world is an anarchy, there is no power that can coerce sovereign governments to contribute to global public goods. But if there is one very large, powerful state in the world, it may derive disproportionate benefits from the public good, making it willing to contribute something (probably still less than optimal) toward its provision.

So are there any global public goods? I think so. Preventing the ozone hole is a pretty clear example. CFC emissions depleted the earth’s ozone layer, resulting in more harmful ultraviolet radiation on the earth’s surface. Everyone in the world derived significant benefit from banning CFC emissions, but individual countries had no incentive to enact bans on their own, so the U.S. government successfully led the way toward global cooperation in banning CFCs.

But what about human rights? If a government is repressing its subjects — killing them extrajudicially, torturing them, “disappearing” them without trial — are subjects of other governments harmed as well? Possibly. Repression might create refugee flows across borders, or raise the risk of a civil war that could threaten neighboring states. More instability might reduce economic output, marginally negatively affecting trade relations and prosperity in other countries. But at most, human rights protection is a regional public good, not a global one. Moreover, the “externalities” (spillovers) are small relative to the direct, private benefits of human rights protection. The people who lose the most from repression, by far, are those actually being repressed.

Since human rights protection is not a global public good, the existence of a hegemon should make no difference as to whether the good will be provided. Currently, the U.S. government does take an interest in protecting human rights abroad, via the “responsibility to protect” doctrine. (Cynics may say the U.S. takes more of an interest in protecting human rights abroad than it does protecting them at home.) Would China do the same if it were hegemonic? Doubtful, to say the least. Moreover, while the U.S. still enjoys military hegemony around the globe, it is not even close to being an economic or demographic hegemon, so its military hegemony is unlikely to explain the government’s interest in promoting human rights abroad.

The broader lesson: the mere fact that something is a good, even a normatively desirable good, does not make it a public good, one subject to market failure.

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The debate over pre-PPACA (Obamacare) nongroup health insurance has heated up again recently, particularly on the issue of rescissions (cancellations of policies). John Goodman claims that before the PPACA, rescissions almost never happened except in cases of fraud.

Nevertheless, one problem with the nongroup market in many states was denial of applications for coverage from those who had prior health problems. Denial of coverage happened frequently even in states without onerous community rating provisions that gave health insurers a clear incentive to deny coverage to high risks. Why did health insurers choose to deny coverage altogether to these applicants rather than charge them a higher rate or offer more restricted coverage?

In some cases, government regulation was to blame. The “managed care” revolution of the 1990s introduced certain innovations designed to control health care costs, such as “elimination riders,” which would remove coverage from pre-existing conditions, and requirements to obtain referrals from primary-care physicians for access to specialist care. Managed care apparently worked to control health care costs, up to about 1-1.5% of U.S. GDP had it been allowed to take its long-run course. But it was unpopular, as constraints always are, and many states passed laws banning elimination riders and mandating direct specialist access.

Even without government regulation, however, social pressure caused the disappearance of some of these practices. On this point, there are two fascinating, complementary pieces of research: “The Death of Managed Care: A Regulatory Autopsy” by Mark Hall of Wake Forest University and “Risk Pooling and Regulation: Policy and Reality in Today’s Individual Health Insurance Market” by Mark Pauly of the Wharton School at the University of Pennsylvania and Bradley Herring of Emory University.

Hall investigates (more…)

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A Living Death

The Economist has a painful piece about mandatory life sentences in the United States, much of which is drawn from a new report by the ACLU entitled “A Living Death.” A few interesting points:

  • At least 3,278 people are serving life sentences without parole for non-violent crimes.
  • “Around 79% of them were convicted of drug crimes. These include: having an unweighably small amount of cocaine in a shirt pocket, selling $10-worth of crack to a police informant and mailing small amounts of LSD to fellow Grateful Dead fans. Property crimes that earned offenders a permanent home in prison include shoplifting three belts, breaking into an empty liquor store and possessing stolen wrenches.
  • One-fifth of those non-violent offenders with mandatory life sentences without parole were given this penalty for a first offense.

The brief story is full of interesting and disturbing facts about the racial biases in sentencing and the overall costs. There is much, much, more on the ACLU website for the report. All of this should prove more than a bit disturbing for those who care about civil liberties, the failed war on drugs, and the growth of the surveillance state.

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Nick Gillespie notes in a recent post:

[I]f working on Reason Saves Cleveland taught me one thing, it’s that there’s no simple solution to urban decline. Some of it is simply historical – the Northeast is not going to dominate American business and culture that way it did 100 years ago and cities such as Cleveland or Buffalo or Detroit will never regain their earlier populations or the density at which they lived…

But it’s also clear that private and public sector boosters are always more interested in laying big bets on giant development deals that won’t transform a city or region even if they happen to work out perfectly. What makes and keeps places livable and attractive are the smaller-ticket items, such as quality of basic services such as roads, law enforcement, business climate, schools, taxes, and regulations. These aren’t sexy items but they are the things that actually keep cities thriving.

I think Nick’s right that policy fixes will not be enough to restore places like Buffalo to past glories, though New York’s high-cost regulatory regime does harm upstate New York. International economic factors have made most of the U.S. Rust Belt uncompetitive: their legacy industries are in long-term decline.

This observation might seem to pose a problem for economic theory. The theory of comparative advantage shows that every economy benefits from free trade with the rest of the world, a conclusion that “new trade theory” has not overturned. But what about America’s former industrial heartlands? Surely they have lost out to competition from Japan and China (and Tennessee).

But in fact, Buffalo has benefited from comparative advantage and trade with the world. If Buffalo enacted trade barriers to Japanese and Chinese goods, Buffalo’s people would be worse off. Buffalo’s industrial decline happened not because Buffalo firms could no longer sell to Buffalo consumers, but because Buffalo firms could no longer sell to American consumers. The Rust Belt used to have a captive consumer audience; their potential Asian competitors were shut out of a relatively sheltered U.S. market (in part not because of trade barriers or even high shipping costs, but because in global context in the 1950s, Buffalo’s economy was capital-intensive and its labor force highly skilled). In that environment, Buffalo firms could compete. So yes, Buffalo might well be better off if the U.S. shut out foreign trade in automobiles, cereal, and other goods still manufactured in the area. In the same way, the U.S. might be better off if all of the Americas, say, shut out non-U.S. imports of semiconductors and wheat, but that does not mean the U.S. would be better off shutting out those imports on its own. (Arguably, preferential trade agreements like NAFTA and CAFTA are precisely aimed at giving U.S.-made goods an advantage over the Japanese and Europeans in nearby countries.) In the end, then, there seems to be no problem for the theory of comparative advantage. The theory does not say that the best of all possible worlds for every economy is a situation in which every other economy is free-trading. The terms of trade still matter.

But there remains a subtler problem for comparative advantage in the experiences of Buffalo, Detroit, Cleveland, and Pittsburgh. Why have these cities seen net out-migration as a response to changing economic fortunes? The theory of comparative advantage suggests that in response to growing trade, people will retool and start to specialize in new lines of business. Moving away just isn’t part of the model. So why has the Buffalo metropolitan area lost people in every decade since the 1960s?

To answer this question, we need to look to transaction cost economics. A transaction cost is the cost associated with a particular exchange, the toll you have to pay just to be able to make a trade, in addition to the price you pay for the good or service itself.

Trade in goods and services, movement of capital, and movement of labor (migration) are all substitutes, in that they have essentially the same distributional and aggregate consequences, in the absence of transaction costs. But each of these types of transactions does face some costs. Trade in goods and services faces shipping costs, but there are also problems with trading goods when contracts are unenforceable or there are monopoly markets. In these cases, you might be better off investing rather than trading. For instance, Nike knows something special about designing and marketing footwear. Why don’t they just sell their good ideas to startup manufacturers in Vietnam? Because it’s difficult to enforce that kind of contract in ideas: what ideas exactly would the startup be buying, how could it evaluate their worth without examining them before buying, and if they examine them before buying, what’s to stop them from using the ideas without paying? Because of these problems, Nike chooses instead to direct-invest in Vietnam, building its own factories.

Direct investment faces transaction costs too: risks of expropriation, difficulties in managing across continents, etc. So sometimes firms trade rather than invest.

And workforces migrate. Why? Because transaction costs in trade and investment limit the extent to which those mechanisms of globalization can raise workers’ incomes. In the 19th century, European workers moved en masse to the New World because globalization wasn’t raising their wages fast enough. Shipping costs were high, though falling, and multinational investment was rare outside a few industries like railroads, mines, and large-scale agriculture concerns. Moreover, total factor productivity was lower in many European countries because of their dysfunctional political systems. It’s no accident that so many Italians, Germans, Irish, and Poles fled their homelands in the latter half of the 19th century, while comparatively few French, Swiss, Dutch, and even British (considering their common language with their former colonies) did so.

So why have workers fled Buffalo? The introduction of air conditioning has made southern climates more pleasant, to be sure, but Sioux Falls, South Dakota is colder than Buffalo and has actually attracted people. Buffalo has a comparative advantage now in relatively low-tech, labor-intensive manufacturing, by developed-world standards, rather like, say, Tennessee. But Tennessee attracts foreign direct investment, while upstate New York does not, even though upstate New York has had a workforce already trained in industries like auto parts manufacturing. Here we can look for policy explanations: politicians impose transaction costs that prevent workers in upstate New York from exploiting their comparative advantage. Favorable conditions for collective bargaining and expensive business regulations may not hamstring the financial economy of Manhattan, but they do harm upstate New York. Tennessee and South Dakota lack those regulatory obstacles.

So there we have it: in the absence of New York’s heavy regulatory burden, globalization would still have caused upstate New York incomes to decline, but net outmigration probably would have been significantly less.

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Update: added missing caption to figure

Next year, the New Hampshire House will take up a bill to abolish the death penalty. Several libertarian legislators have signed on as co-sponsors, and observers think the bill has a good chance.

What should libertarians think about the death penalty? In general, hardcore civil libertarians have opposed it, but there does not seem to be anything in the moral principles libertarians have adopted that straightforwardly generate an a priori skepticism of capital punishment. The case for or against capital punishment depends on empirical research in a way that the case, say, for or against certain gun laws does not. (Banning handguns would be wrong even if it reduced the violent crime rate, I would argue.)

Some libertarians say that the state can never be trusted with the death penalty. But this too is an empirical claim. What is the rate of killing of innocents when the government has a death penalty of a certain kind? We also need to think about what rate would be unacceptable. (Every criminal justice system will punish some innocents, because no criminal justice system is perfect.) That latter threshold presumably depends on what the deterrent effect of capital punishment is. If capital punishment deters a significant number of murders, presumably an extremely rare execution of an innocent — while horrible and thoroughly regrettable — does not make the system unacceptable.

So does capital punishment deter murders? Apparently not. The literature on capital punishment in the U.S. has shown mixed results, with some models showing a positive deterrent effect (lives saved) and others showing a negative “deterrent” effect (more murders). The recent research by Durlauf, Fu, and Navarro (here and here) helps us adjudicate among these results.

The most plausible set of models consists of those that assume that a higher probability of execution affects murder rate via a logistic function (which reduces the influence outliers). Here’s how they summarize their results in the Journal of Quantitative Criminology for various sets of models (marginal effects reported for the mean 1996 death penalty state):

capital punishment deterrent effects
Fig 2: Positive deterrent effect of executions (net lives saved)

The “linear, state coefficients” models are the least plausible: these models assume the deterrent effect of the death penalty (that is, the marginal effect of executions on the decision to commit homicide) varies by state. As they point out, that is a bit like assuming that the treatment effect of a drug is different in Texas than in other states. In general, linear models are less plausible than logistic models, which assume a functional form more appropriate to the data.

All of the logistic models show a net lives lost effect from capital punishment. Varying the other model details seem not to make a big difference to the results. However, the authors also calculate the posterior probability of the model’s being true given its assumptions and the data, and model 16 above comes out best. This model yields one of the highest “negative deterrent” effects of capital punishment.

In summary, the evidence leads me to believe that capital punishment does not, on net, save lives. It may even cost lives through a kind of “brutalization” process. This information is highly relevant to the normative policy implications.

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The other day I referenced Tom Watson’s piece in Salon, rejecting any libertarian involvement in the Stop Watching Us demonstration (as you might recall, libertarians were the ones who use a “few positive civil liberties positions as a predator uses candy with a child”).

Watson’s piece generated a useful response  in Salon from David Segal: “Liberals Should Unite with Libertarians (sometimes).”

A few quotes:

While the benefits of this sort of cooperation are concrete, Watson never convincingly describes the potential harm. Yes, when those on the left and right meet, perhaps some impressionable young progressives will become more libertarian in their leanings — but it’s important that burgeoning libertarians be made to understand that not all Democrats stand with President Obama, Dianne Feinstein, Steny Hoyer, Nancy Pelosi and other party leaders as shills for the state’s surveillance apparatus, and perhaps that (and a few friends they make while marching with lefties this weekend) will encourage them to learn more about, and eventually embrace, progressive economic principles – post-Keynesians, please. …

We cannot cover up harms perpetrated by our government just because pointing them out might make some people more inclined to distrust the state.  If we hope to maintain enough credibility with voters to one day win progressive majorities at the ballot box then we must not shy away from naming state overreach and corruption where it is transparently manifest.

Certainly, as Segal points out, left-libertarians alliances have borne fruit in the past and there remain many things that the left and libertarians can agree on–most notably opposition to growth of the security-surveillance state, the targeted execution of U.S. citizens abroad, indefinite detentions, and the absurdities of the War on Drugs–and there remains much work to do. While Segal hopes that a few libertarians might learn more above progressivism, it may also be the case that a few progressives (Watson included) will learn more about classical liberalism in the process.

What’s the harm?

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Debating Natalism

Bryan Caplan has responded to my post opposing natalism, the view that we should try to create many more human beings because doing so will make us better off. This is a brief rejoinder to his post on the most important issues outstanding (Bryan’s quotations are in blockquotes).

In fact, there’s a good reason to think that innovation will rise at more than a proportional rate [to population]: Population increases not only the supply of innovation (more people to create ideas) but the demand for innovation (more consumers around to pay for ideas).

This is just restating the division-of-labor argument, though. A more extended market allows more specialization. One man’s demand is another man’s supply. But a market of 7 billion allows quite a lot of specialization, especially if it’s actually fully integrated. And the next billion will increase specialization less than the previous billion. We don’t know where the “social marginal benefit” and “social marginal cost” curves cross, but given the large human population, there are reasons at least not to be confident that they have not yet.

Environmental economics teaches us far cheaper and more humane alternatives [to limiting population]: taxes and tradeable permits. Questioning a person’s existence because he drives a car is severe overkill.

The problem is that the optimal tax rate in future might actually make it very difficult for some people to live good lives. Even now we are nowhere near the optimal tax along several dimensions.

Some people don’t like being crowded. But most seem to love it. Real estate prices are much higher in densely-populated areas, and the reason is simple: People prefer (all the benefits of population + all the drawbacks of population) to splendid isolation. If Jason were right, real estate would actually be cheaper in big cities. It’s not.

Capital prefers big cities for production, but there’s evidence that households don’t. The places with highest quality of life should have the highest property values relative to wages. And we actually find that non-urban areas have a higher property value-to-wage ratio than urban areas. To quote Chen and Rosenthal (2008: 523), “[T]hose locations most preferred by households often are non-metropolitan areas and cities in warm, coastal locations, including Santa Cruz, Honolulu, and San Francisco… Those areas least preferred by households tend to be old, industrial cities, especially in the rust belt.” Even within metro areas, suburbs tend to have higher property values than central cities (with the exceptions of places like Manhattan, Boston, and San Francisco). For instance, in southern N.H., the suburbs have higher property values than Manchester or Nashua. In western N.Y., the suburbs have higher property values than Buffalo or Rochester.

[I]n a world of largely closed borders, there’s an obvious benefit of large polities: They create big free-trade and free-migration zones, with all the attendant wonders.

Persuading governments to open to goods and investment may be much easier than persuading lots of people to have lots more children. It’s a matter of perspective, I suppose, but I don’t see the world of today as having “largely closed borders.” To immigrants, yes, but not to goods or investment — and the latter substitute significantly for the former.

But mankind has gotten much healthier during the population explosion of the last two centuries, and there’s a simple explanation: Larger populations lead to more innovation, including more innovation in medicine and sanitation.

Is population growth the main reason for the innovations of the last two centuries? I would say it’s more an effect than a cause. Liberalization of the economy seems far more important for innovation; nonliberalized but big economies like China and India have fostered very little innovation.

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Against Natalism

There seems to be very little disagreement among market-oriented economists that the optimal number of people on the planet is much larger than the number of people currently alive (see here, here, and here for examples). Here are some reasons for skepticism about that claim.

  • The main advantage of more people is a deepening of the market and the division of labor. More people means more ideas and more specialization. But the law of diminishing marginal productivity suggests that each additional unit of labor and of human capital is of less value. Furthermore, in a world of 7 billion people we are going to get roughly as many outlier geniuses as we do in a world of 9, 10, or 15 billion.
  • Along with diminishing marginal benefits of people, there are rising marginal costs. The human footprint on the natural environment increases with population, and intrudes ever more into ever scarcer (and more socially valuable) undisturbed habitats. Some free-market types like Ron Bailey suggest that this is not the case by pointing to the possibility of peak farmland in the near future. But peak farmland is only achievable (if it is) through ever more intensive applications of synthetic fertilizer and pesticide. In one sense this capital-intensive agriculture may be “sustainable,” in the sense that human ingenuity will always find new fertilizers and new pesticides to keep agricultural productivity growing, but the negative externalities of these methods are considerable. The economic costs alone of invasive species are immense: think about the costs associated with the chestnut blight, Dutch elm disease, hemlock woolly adelgid, and emerald ash borer in North America alone. They run into the billions. A lot of people look around and say, “Well, I see a lot of green, so the environment must be doing OK.” But 91% of all land in the United States consists of human-disturbed habitats. Disturbed habitats are not necessarily bad for biodiversity, but undisturbed habitats are also important — and the fewer there are, the more valuable each remaining one is. More people means more disturbance, more invasions, more “dead zones,” and the like. And yes, the costs are not just economic, but aesthetic. I have no shame in admitting that I aesthetically value the environment, that other people do as well, and that those values should matter in any schedule of “social welfare.” Is a world without butterflies a world worth living in?
  • People don’t like being crowded. Part of the reason why people move to suburbs and exurbs is not just high crime and costs in central cities, but distance from other people. Where do people go to “get away”? Generally rural and wilderness areas. The U.S. still has a lot of open space and could perhaps tolerate 50% more population without feeling intolerably dense, but even in this country, much or most of the wilderness is found in areas with little water or harsh climates.
  • More people in a country mean more agency problems with the government. The people find it more difficult to constrain their rulers when their rulers don’t pay attention to individual voices, or even small clusters of people. As a country of over 300 million, the U.S. would face severe agency problems were it not for the federal system — and even so, agency problems are significant. In essence, the rulers are less constrained by the people. Higher populations around the world will mean more prevalent problems with mass democracy and mass dictatorship.
  • More people will mean more infectious disease. It is a basic principle of ecology that a higher population of a species encourages greater parasitism on that species. As human populations have increased, so have human diseases. Epidemics of influenza have become more frequent. These viral infections are difficult to prevent and treat. Of course, as medical technology proceeds, humans will fight better against infectious diseases of all kinds. But organisms adapt, and medical technologies will of necessity focus on life-threatening diseases rather than chronic and periodic diseases that are not life-threatening. But even the common cold significantly decreases human well-being. In a future world much more densely populated, we could expect human beings to spend much of their lives ill with minor diseases.

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Here are quarterly data on “usual weekly earnings” in current dollars from the Bureau of Labor Statistics. The first graph shows the first (lowest) decile of wage earners. The second shows the ninth (why not the tenth? BLS does not make that an option). These data should be relevant to the debate over whether most unemployment we’re seeing in the U.S. is structural or cyclical.

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LEU0252911500_82930_1378389304448

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I teach my undergraduates that trade has no long-run effect on aggregate employment. I teach it because it’s right, and very few economists would disagree. Tyler Cowen’s recent postings on MR about the negative employment effects of trade have the potential to mislead. To the extent that trade and technology correlate with persistent disemployment in local areas, this is a reason to think that there are structural inefficiencies in the labor market. If these structural rigidities exist, then it can be hard for people who lose jobs to get new ones. Anything that disrupts existing employment patterns — trade, technology, macroeconomic changes like price shocks — will then associate with employment declines.

What are these structural inefficiencies? For market monetarists, the “zero lower bound” is a favorite. But we’re now five years out from the NGDP shock that plausibly caused the big increase in U.S. unemployment. The rise in the minimum wage, the extensions of unemployment insurance, the expansion of welfare programs like food stamps, and perhaps most importantly, housing lock-in due to the collapse of the real-estate bubble are all plausible candidates. But these structural rigidities deserve the real blame for disemployment, not trade and technology. Blaming trade and technology is a bit like blaming the weather. Labor markets will always be disrupted by something or other. Policy makers cannot insulate an economy from shocks. What they can do is gum up the works so that the economy cannot respond nimbly to these shocks.

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The Coase Theorem, which tells us that the social optimum may be reached by exchange no matter how property rights are assigned if transaction costs are zero (and not if transaction costs are high enough), has relevance to the problem of zoning.

In much of the U.S., zoning is excessively strict, pricing moderate-income households into bad dwellings or out of the local market altogether. Yet zoning has defenders in the logic of externalities. More development makes people worse off in some ways: more traffic, etc. (Contrary to popular belief, zoning does not prevent a factory from opening up next door to you and polluting your airspace. The common law of nuisance torts prevents that. Zoning instead centrally plans the residential and commercial uses of particular pieces of land throughout a jurisdiction. Developers can appeal a prohibited use to a “board of zoning adjustment.” But such boards often deny requests.)

One simple reform to local zoning laws in the spirit of Coase would be (more…)

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A Grand Bargain?

Tuesday, President Obama proposed a “grand bargain” as part of his jobs tour (a tour that marks the third anniversary of Vice President Biden’s “Recovery Summer” tour). The grand bargain is relatively simple: corporate tax cuts (to 28 percent), including a one-time lower tax on profits earned overseas that would arguably entice firms to repatriate these funds and provide a temporary spike in revenues. These revenues, in turn, would be used to promote additional stimulus projects (a White House fact sheet can be found here). As President Obama explained (White House transcript):

But if we’re going to give businesses a better deal, then we’re also going to have to give workers a better deal, too.  (Applause.) I want to use some of the money that we save by closing these loopholes to create more good construction jobs with infrastructure initiatives that I already talked about. We can build a broader network of high-tech manufacturing hubs that leaders from both parties can support. We can help our community colleges arm our workers with the skills that a global economy demands. All these things would benefit the middle class right now and benefit our economy in the years to come.

Oddly enough, the New York Times was unimpressed: “only the packaging was new. The president essentially cobbled together two existing initiatives that have been stalled in Congress: corporate tax changes and his plan to create jobs through education, training, and public works projects.”

(more…)

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I have just posted a couple of my working papers to SSRN for those who are interested. They are as follows:

  1. Public Policy and Quality of Life: An Empirical Analysis of Interstate Migration, 2000-2012
    Abstract:
    Individuals and households choose their political jurisdiction of residence on the basis of expected income differentials and jurisdiction-specific characteristics covered by the general term “amenities.” In addition to fixed characteristics like climate and terrain, amenities may include public policies, as in the well-known Tiebout model of migration. Do Americans reveal preferences for certain public policies by tending to migrate toward jurisdictions that offer them? This article tests whether state government involvement in fiscal policy, business regulation, and civil and personal liberties more often reflects an amenity or a disamenity for Americans willing to move. As identification strategies, the article estimates spatial, matched-neighbors, and dyadic models of net interstate migration for all 50 states, covering the years 2000-2012. The evidence suggests that cost of living, which is in turn strongly correlated with land-use regulation, strongly deters in-migration, while both fiscal and regulatory components of “economic freedom” attract new residents. There is less robust evidence that “personal freedom” attracts residents.
  2. Civil Libertarianism-Communitarianism: A State Policy Ideology Dimension
    Abstract:
    This paper investigates the existence of a second dimension of state policy ideology orthogonal to the traditional left-right dimension: civil libertarianism-communitarianism. It argues that voter attitudes toward nonviolent acts that are sometimes crimes, particularly weapons and drugs offenses, are in part distinct from their liberal or conservative ideologies, and cause systematic variation in states’ policies toward these acts. The hypotheses are tested with a structural equation model of state policies that combines “confirmatory factor analysis” with linear regression. The existence of a second dimension of state policy essentially uncorrelated with left-right ideology and loading onto gun control, marijuana, and other criminal justice policies is confirmed. Moreover, this dimension of policy ideology relates in the expected fashion to urbanization and the strength of ideological libertarianism in the state electorate. The results suggest that the libertarian-communitarian divide represents an enduring dimension of policy-making in the United States.

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Factor price equalization due to trade and investment flows across economies would substantially reduce economic reasons for immigration to rich countries. (Trade and investment flows will not eliminate economic reasons for migration because if polities differ in total factor productivity due to political institutions, there can still be an advantage to migrating to a more efficient economy in a fully globalized world.) Therefore, if you are an American who is deeply concerned about immigration to the U.S. for cultural or political reasons, one way to encourage less immigration is to press for full trade and investment liberalization in this country and around the world.

Now, does opposition to immigration correlate positively or negatively with support for free trade and “outsourcing” in voters’ attitudes? In my experience, negatively.

Chalk this up to one more way in which politics is about symbolism rather than substance, due to public ignorance.

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In microeconomics, income and substitution effects are tricky things that can lead astray those who have sipped but little of the Pierian spring of economics. Imagine a new technology that is more effective, at lower cost, than an older technology that does some of the same things. You might expect that use of the old technology would fall dramatically, as users switch from the old technology to the new. That is the “substitution effect” of the new technology, and it’s quite intuitive even to non-experts in economics. But then there’s also an income effect. The new technology costs less “buck” for a given “bang.” If users just want a fixed amount of “bang,” therefore, they will have some income left over. How will they spend it? They might actually spend some of that on the old technology, provided the old technology has some other uses to which the new technology cannot be put. This is the “income effect.” A priori, it’s unknown whether income or substitution effects will dominate; empirical analysis is required.

Economists apply income and substitution effects analysis to the effects of income taxes, for instance. Raising income taxes might seem to cause a reduction in work effort, necessarily. Work pays less, so people switch into leisure. That’s the substitution effect, but there’s also an income effect. If people just want to make sure they have X amount of income, then a tax increase will actually make them work more, so that they can reach that income. As I understand the economic consensus, income taxes, on the margin, have a negative but small effect on work effort in the U.S. and other advanced industrialized societies.

Drones and tasers are fairly new coercive technologies for the military and the police, respectively. Advocates for each technology claim that they will actually reduce the number of unintentional killings by these actors. Drones allow for better targeting of the bad guys, reducing the risk of killing innocents. Tasers allow police to use nonlethal, incapacitating force in situations where otherwise they might have had to use deadly force in the past.

But this analysis focuses only on the substitution effects. What about the income effects? These new coercive technologies are “cheap,” both in the narrow, financial sense and in their logistical and political demands. Shooting someone might require some kind of investigation; tasering someone rarely does. We should accordingly expect much more use of coercive force by militaries that have drones and by police forces that have tasers. They will be tempted to use these technologies, not just as direct substitutes for the old technologies of killing, but as substitutes for far less aggressive techniques. The drone assassination becomes a substitute for arrest or capture; the tasering becomes a substitute for the billy club, muscle power, or even a verbal command.

Indeed, independent estimates suggest hundreds of civilians have been killed by drone strikes in Pakistan, and one senior analyst claims that, on a per engagement basis, drone strikes have been far more likely to kill civilians than fighter jet strikes, due in part to lower training standards for drone pilots.

Meanwhile, Amnesty International has found more than 350 deaths due to police use of tasers, and news stories about police use of tasers to subdue already compliant civilians are routine. There is no evidence that America’s sky-high police shooting rate has declined due to substitution to tasers.

In summary, while drone and taser technologies could in principle be better for civilians by encouraging switching from more dangerous technologies, the evidence suggests that income effects have dominated substitution effects, and they encourage more, not less exercise of coercive power on the whole.

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I have great respect and (in many cases) affection for my friends at Bleeding Hearts Libertarians. But I am not a bleeding heart libertarian, and from the outset I have resisted its siren song, mostly over its endorsement of “social justice” as a moral and/or political ideal. Unlike Hayek, I do not think the concept is incoherent. But I think Hayek has a point, and my resistance to the concept I think tracks at least some of Hayek’s motivation. But that resistance is normative, rather than conceptual. Recent exchanges on BHL have helped me clarify my thinking about the point that concerns me.

Kevin Vallier posted this week on the topic, responding to challenges from David Friedman as to the cogency of the concept. The discussion that follows Kevin’s post is excellent, and I am highly sympathetic to many of those resisting Kevin’s analysis. However, I would mount an objection slightly different than those on offer there.

Start with a point of agreement. Kevin says,

I take it that the term “social justice” can be used to cover individual rights-violations. For instance, if John rapes Reba, he has committed a grave injustice, one that could be called a social injustice. However, this is not the conceptual home of the concept of social injustice.

He is surely right about this. Individual rights-violations are, by their nature, unjust. Since they are transactions between two individuals, they are also social, and we can, if we like, uselessly append “social” to our description of actions as unjust. If that is all “social injustice” means, there would be no quarrel here. As Kevin suggests, we need to look elsewhere for its “conceptual home.”

Kevin thinks that “conceptual home” is in the class of emergent properties. Here is his central claim:

Social injustice is an emergent property of certain kinds of social, moral and political practices. Let’s illustrate with the familiar example of institutional racism. I take it that an institution is racist insofar as it reliably outputs states of affairs where a racial group fails to receive its due based solely on the racial properties of its members. Thus, even if no one in the institution is racist, they participate in practices that result, say, in blacks having fewer opportunities than whites simply because they are black. In other words, the institutional rules operate such that unequal outcomes are caused primarily by racial differences, even if no one person is acting in a racist fashion. Institutional racism is a paradigmatic case of social injustice. It is an emergent property of a social institution that commits an injustice without any individual acting in an unjust fashion.

Emergent properties are an important class of properties, but Kevin’s proposal is unusual in deploying the concept in this way. Why? He is proposing that a normative property — social injustice — is emergent from non-normative properties (perhaps the distribution of “opportunities,” however those are measured). And this is curious. The typical deployment of the notion of emergent properties would, I think, involve the emergence of non-normative (let’s call them “natural”) properties from other natural properties. Many of the spontaneous orders we see in both natural and social science are of this sort. The structure of crystals is an emergent property in the sense that crystals have that structure because of other physical properties they have. Language-use is a property that humans have in virtue of various neurological and other biological properties we have. And so on. Nothing to see here. Emergence of normative properties from other normative properties is also, I’d think, unproblematic. That would be, for example, the liberal analysis of slavery. We see the large scale pattern of injustice as caused by an assortment of unjust individual attitudes, beliefs, and courses of conduct. Again, nothing to see here.

But the proposal that normative properties might emerge somehow from natural properties oughtn’t to be dismissed simply because it is unusual. If you work much with normative concepts, you become accustomed to the idea that things work differently when you are contending with reasons, norms, and the like rather than causes. If the world is a causal order, and it has normative properties, then somehow we have to end up with normative properties emerging from natural ones. The form of emergence that moral and other philosophers typically deploy is supervenience. Normative properties like goodness, rightness, and so on supervene on natural properties, in the sense (some sense; different theories give different accounts of this relation) that the normative properties occur somehow because the natural properties occur. If you are a hedonist, for example, you think that badness supervenes on pain, goodness on pleasure. Something (an act, a state of affairs) has the property of badness precisely because it also has the property of being painful.

And this gets us to what is interesting. Remember that, if the concept of social justice is going to be at all interesting, it cannot simply be redescribing the sort of injustice that occurs when individuals violate the rights of others. What does the social injustice supervene on? The crucial point is: whatever the answer to that question, it is not a property of individuals.

Is that a problem? I’m not sure. I am inclined to think that the essence of individualism at the heart of liberalism is a kind of moral individualism — the idea, roughly, that all sources of value, obligations, and so on are individuals. Does Kevin believe that? Here’s what he says:

I can’t speak for my co-bloggers, but from my vantage point libertarians all too often ignore social injustices because of their sometimes flat footed (dare I say “cartoon”?) moral individualism. I’m a moral individualist in the sense that I think injustices can only be done to individuals, families or to voluntary associations. In a real sense, I don’t think injustices can be committed against “Americans” or “blacks” understood as groups defined independently of their members. So traditional libertarians are right that emphasize that the idea of social justice can sometimes be deployed in inappropriately collectivist ways.

But social injustices can be committed independently of human design. That’s a significant claim that departs from many threads of libertarian thought popular today. And my view on the matter is one of the reasons I joined the blog.

How does the moral individualism Kevin endorses differ from “cartoon” moral individualism? I’m not sure.  Is it an aberration that in a previous paragraph he spoke of “a racial group failing to receive its due”? I think it is not an aberration, but a natural slide invited and made possible by adversion to social justice.

I believe (and I think Kevin believes) that groups are per se not due anything. There are certainly moral and political positions (positions worth engaging) that disagree. But these are certainly not within either the classical liberal or libertarian tradition, and they require a rejection of the moral individualism that I think is worth endorsing, and to which Kevin is paying lip service. And the issue here isn’t the defensibility of such a claim, but whether or not those committed to libertarian ideals and principles should embrace or reject the use of the concept of social justice.

Is this then just an unfortunate slip? The problem is, without the thought that the normative property (the social injustice) supervenes on facts about groups, rather than individuals, there is no injustice here to be found. And that’s just where the BHL’ers would like to be able to find injustice. It’s tempting to revert to the idea that the individuals in the groups in question suffer, say, from a deprivation of opportunities. But either those deprivations are by individuals, to individuals, in a way that violates the rights of the injured parties, or those are not. If they are, then we have plain old injustice, without a need to appeal to “social justice.” And if they aren’t, then it’s hard to see where the moral complaint is, nor what individuals are “committing” the social injustice. Here the view Kevin is proposing is trying to have it both ways. Skeptics about social justice think that is endemic to the concept.

It’s worth noting that in Rawls’ hands the problem has to be located in a different place. I can’t see that Rawls ever locates the injustice of social injustice in properties of groups. (Though groups figure into the specification of the remedy, in the form of the Difference Principle, I take this to be a feature of the solution to the problem, not part of the formulation of the normatively problematic state of affairs — the social injustice — itself.) In that sense, Rawls’ moral individualism is intact. To get to social injustice, as I understand him Rawls has to build the social properties at issue into the obligations of justice we have as individuals. That is, part of what it is for us to treat each other justly, as individuals, is on his view to establish and sustain social institutions with the properties called for by principles of justice. That way of conceiving of social justice has its own problems, not for this post (which is already too long as it is). Is it compatible with thinking that social injustice is an emergent property (to return to Kevin’s basic proposal). Perhaps. But if so the emergence is a 5th wheel: all the work in generating the social injustice is done by individuals failing, in effect, to act justly in establishing institutional arrangements that satisfy the principles of justice. I am skeptical that we do have obligations of justice of the sort that this interpretation of Rawls requires. One reason for doing so is that (like Nozick) I suspect that these obligations of justice are incompatible with obligations of justice I am much more confident we have toward each other (such as obligations generated by desert). That’s why I think there is something deeply problematic about the Rawlsian conception of social justice. Those reservations are not alleviated by recourse to thinking that social justice (or injustice) is somehow emergent.

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Bryan Caplan proclaims himself disappointed with his students’ answers to this exam question:

In the modern U.S., what is the most efficient way for the federal government to spend an extra billion dollars? What is the maximally utilitarian way for the federal government to spend this sum? (In both cases, assume that tax cuts are not an option). Use everything you’ve learned to craft a thoughtful answer, and be specific.

Judging by his summation of the responses he got, I would have been very disappointed too. Here’s how I would approach the question:

  1. Addressing the efficiency part of the question likely requires looking at the most underaddressed collective-goods problems in the U.S. today, that is, situations in which we are falling well below the Pareto frontier. Perhaps invasive species eradication?
  2. Addressing the utilitarian part of the question also requires making interpersonal comparisons of utility. I’m not too surprised many GMU students reject the possibility of such comparisons. Although I’m not a utilitarian, I don’t think interpersonal comparisons of utility are impossible. Perhaps funding an endowment, the annual interest from which will fund a very long-run basic income experiment in randomly selected locations?

How would you answer the question, Pileus readers?

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The news has been ripe with administration scandals as of late and will likely be for some time (Memo to BHO: There may be no better way to keep scandals in the news than to use the Justice Department to go after the Associated Press). But soon attention will turn to the issue of fiscal sustainability (or at least one hopes).

I have been updating some charts for a second edition of a book I wrote a while back. One of my favorite charts presents inflation-adjusted spending per capita. I focused on domestic spending in this chart not because I discount the importance of defense spending, but because it was in support of an argument I was making. To give you a flavor of the numbers, consider the following (all figures are in 2005 dollars):

  • Starting at the New Deal, the peak level of domestic spending before US entry into WWII was $865 per capita (1940).
  • Let us leap forward to the 1960s. The highest level of domestic spending per capita under LBJ was $2,265 (1968).
  • Peak domestic spending during the Reagan presidency was $4,950 (1987).  That is 218 percent of the Great Society levels (Don’t fight the urge to cheer “LBJ, All the Way”).
  • President Clinton assured us that we were witnessing the end of Big Government. While federal spending as a percentage of GDP fell to 18.6 percent (2000), per capita domestic spending stood at $6,206.
  • George W. Bush increased that figure to a peak of $7,215 (2007). And Barack Obama made history in 2010, when domestic spending per capita hit $8,631 (it stood at $8,141 in 2012).

Real Spending

A couple of thoughts: First, while many may associate “big government” and FDR,   “that man” (as Grover often calls him) was a piker. In inflation adjusted terms, the Reagan Revolution entailed spending 5.72 times that sum. In 2010, the federal government was spending almost 10 times that amount. Second, these numbers grossly understate overall domestic spending. State and local governments expenditures are 11.3 percent of GDP—a larger share of GDP than the federal government spent in any year during the domestic phase of the New Deal (the peak was 10.3 percent in 1939). If we combine federal domestic, state and local spending for 2012, it stands at $13,034 per capita. Third, the big driver is the combination of demographic trends and mandatory spending on entitlements programs.

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In Freedom in the 50 States, we present some statistical results on the association between the three dimensions of freedom — fiscal, regulatory, and personal — and “net interstate migration,” that is, the number of movers into a state from other states minus the number of movers from a state to other states, divided by initial population. We found that all three dimensions are positively associated with net in-migration, usually statistically significantly so. Moreover, the substantive importance of the associations is large. A half-point increase in each of the three dimensions, measured in 2001, is associated with between two and five percentage points more in-migration from 2000 to 2011, as a percentage of 2000 population.

The results seem to imply that Americans value freedom and are willing to vote with their feet for it. Of course, some freedoms are not very plausibly related to migration. Tobacco, alcohol, and gambling laws can be evaded through travel or the black market. It seems unlikely that very many people at all will move from New York simply because of the high cigarette taxes. There are cheaper alternatives. And some freedoms with high symbolic importance, like eminent domain reform or legalization of sodomy (prior to 2003), are unlikely to drive anyone to move, simply because so few people are likely to suffer from their denial. Sodomy laws were almost never enforced, and eminent domain for private gain is rather rare even where totally unregulated.

But some other freedoms are plausibly related to migration. People definitely consider tax burden in their choice of a new home. Business regulation can dampen job opportunities, and people tend to move where the jobs are. Medical cannabis users move where their medicine is legal; gun enthusiasts move where their lifestyle is respected; same-sex couples move where they have legal rights; home-schooling parents move where they can educate with less state control.

In this blog post, I explore some other ways of testing whether the relationship between freedom and migration is causal. The first technique is something I call “matched-neighbors analysis.” The independent variables here, including freedom, represent the value of the variable for the given state minus the average value for its neighbors (technically, the weighted-average value, where the weights are the neighboring states’ populations — I’ve also tried using a pure average, with nearly identical results). This procedure is called “spatial differencing.” So the notion here is that states that are freer than their neighbors will be more likely to see net in-migration. Let’s see if that’s true.

First, some specs: regressions include all 50 states (unlike the results with just the Lower 48 included in the F50S study), all independent variables are standardized to mean zero and standard deviation one (so that the coefficient estimates represent the effect of a standard-deviation change in each variable), and the dependent variable, net migration, is measured over 2000-2012 instead of just 2000-2011 as in the original study. Here are the results: (more…)

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The Economist provides a concise discussion of the debates surrounding the impact of debt on economic growth. The focus is on the work of Carmen Reinhart and Kenneth Rogoff, drawing on some of the research they conducted for their fine book This Time is Different.  The Reinhart/Rogoff paper (link here) had a simple takeaway point: debt seems to have little impact until it reaches 90 percent of GDP, at which point there appears to be a sharp reduction in the rate of growth.  As one might guess, this conclusion attracted a good deal of attention given the implications for fiscal policy decisions and the stakes in stabilizing debt (e.g., Paul Ryan cited it when framing his case for the GOP budget). Critiques have engaged issues ranging from coding errors (acknowledged by the authors) to the direction of causality.

The debate is by no means over and it may prove of some interest as the budget battles heat up and policymakers turn their attention to the vexing issue of entitlement reform. For a recent installment in the discussion over the growth-debt relationship, see Martin Wolf’s column (“Austerity loses an article of faith”) in the Financial Times.

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In his 1982 book, The Rise and Decline of Nations, economist Mancur Olson argued that over time, stable societies accumulate “distributive coalitions,” narrow special-interest organizations that complexify social life and burden the economy with overregulation and opaque forms of wealth redistribution. The notion that distributive coalitions are more often bad than good for economic performance, at least when they are not sufficiently “encompassing” to internalize the costs of inefficient redistribution, is pretty well accepted, but Olson’s thesis that political stability and the passage of time are the most important determinants of the number and power of distributive coalitions has been more controversial. One of the chapters of his book is an empirical test of the hypothesis on the 50 states. Olson finds that states settled earlier have higher rates of unionization and lower growth rates (in the 1960s and 1970s), except the former Confederate states, which “benefit” from the disruptive legacies of the Civil War and Reconstruction.

I am skeptical of Olson’s explanation for the growth of distributive coalitions, but his research does contain a kernel of truth. States that industrialized (note) early often show up on the bottom of economic freedom indices and usually have lower-than-average growth rates even today. Why is that?

To answer the question, we have look back at the social context of 19th century industrialization. The U.S. started out as an overwhelmingly rural, farming country. Industrialization populated the cities. Industrialization advanced first in those parts of the country that were unfit for export agriculture, benefited from high tariff walls on manufactures, and had a policy of free labor: southern New England, New York, and New Jersey. However, resource discoveries in the West also brought urban growth to California.

In 1900, the most urbanized states, by far, were Rhode Island (88.3%) and Massachusetts (86.0%). Then came New York (72.9%), New Jersey (70.6%), and Connecticut (59.9%). Pennsylvania (54.7%), Illinois (54.3%), and California (52.3%) were not far behind Connecticut. All of these states, with the possible exception of Pennsylvania, are now recognized as “deep-blue,” solidly Democratic states. Most of these states were relatively free for industry in the early 20th century, but they also boasted the strongest labor unions and most severe class conflict. These highly urban states became “proletarianized,” leading today to a strong concentration of Democratic votes in their metropolitan centers, according to Jonathan Rodden and other scholars.

As late as 1957, New Jersey was an example of a low-tax business haven. State and local taxes from all sources as a percentage of personal income stood at just 6.3% in New Jersey that year. Delaware had the lowest tax collections in the country, at 4.6% of income. States at the high end included Vermont (9.1%), which pioneered the state income tax, North (9.7%) and South Dakota (9.0%), and Oregon (9.0%). These states remained rural for a long time in part because prairie populism and Yankee progressivism yielded fiscal and regulatory policies that deterred investment. The South’s repression of blacks through Jim Crow kept their institutions “extractive,” to use Acemoglu and Robinson’s term, and their comparative development level low.

Nowadays, urbanization does not tend to produce proletarianization. Not many Americans are employed in manufacturing any more, nor are many private-sector workers covered by collective bargaining agreements. Thus, economic freedom has lost its self-undermining character. In the 1800s and early 1900s, economic freedom fostered industrialization, which brought on proletarianization, which led to a pro-regulatory public ideology, which then led to reversals in economic freedom. Now, late industrializers are not necessarily becoming less economically free. Indeed, there is a slight, positive correlation between present-day state urbanization rate and the Ruger-Sorens measure of economic freedom, controlling for left-right ideology.

States like California and New York are living off the accumulated capital of past economic freedom. Now that the political tide has turned decisively against economic freedom in those states, they are shedding people and jobs and growing more slowly than the rest of the country. Places like the Dakotas, Carolinas, Oklahoma, and Texas, which have reversed their anti-market policies of the past, represent America’s dynamic economic future.

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From Todd Crowell in New Geography:

Hay fever is thought to have a measurable impact on Japan’s economy, both in a negative and a positive way. The Dai-Ichi Life Insurance Research Institute estimates that the economy lost about $3 billion due to absenteeism in the memorable hay fever year of 2005. On the other hand, Dai-Ichi Life also estimates that Japanese spend more than $6 billion a year on hay fever prevention products, such as eye drops and face masks.

Maybe the Japanese government should store up irritating pollen and blow it around year round!

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The Washington Post reports on some of the details of the Obama administration’s budget proposal, which is to be released next Wednesday. There are several important proposals (the largest of which have appeared before in the negotiations with the Speaker). Although the devil is in the details, a few salient points:

  • $200 billion cut from defense and domestic budgets
  • $400 billion cut from Medicare and other health programs via negotiation over pharmaceuticals and means testing
  • $230 billion (combined cuts and revenues) in Social Security via changes in the formula for calculating cost of living adjustments (from CPI-W to chained CPI)
  • $200 billion from farm subsidies and federal retirement benefits
  • Elimination of a loophole that allows people to simultaneously collect unemployment and disability payments.

All of this (and more) in exchange for $580 billion in new tax revenues largely through ending various tax expenditures. As the Washington Post notes: “The budget is more conservative than Obama’s earlier proposals, which called for $1.6 trillion in new taxes and fewer cuts to health and domestic spending programs.”

If one were serious about achieving long-term fiscal stability, this would appear to be a proposal worth serious consideration. Of course, there will be predictable challenges from the Left and the Right.

  • On the Left, entitlement reform is simply off the table. Senator Bernie Sanders (I-VT) is quoted as proclaiming: “Millions of working people, seniors, disabled veterans, those who have lost a loved one in combat, and women will be extremely disappointed if President Obama caves into the long-standing Republican effort to cut Social Security.” The same might be said of Medicare. And one can expect the claims that one should not pursue austerity when economic recovery has proven so elusive.
  • On the Right, many in the House GOP will scoff at any more taxation, even if it is accompanied by major concessions on entitlements.  After all, that $580 billion will be stripped from the corporate welfare larded on the oil and gas industry and tax expenditures that currently place no cap on the size of retirement funds (the administration wants to cap tax subsidized retirement accounts at $3 million).

Presidents’ budgets rarely survive the congressional budget process, so the document to be released on Wednesday might be little more that a symbolic gesture that will allow the administration to signal its commitment to fiscal restraint under the assumption that it will be declared DOA before the ink is dry.  But what if the President is serious?

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My Twitter feed has been filled with Americans and others expressing outrage about a Saudi court’s sentencing a man to be paralyzed from the waist down. He had stabbed a man in the back, paralyzing him.

I’m not going to defend or oppose the sentence, but I am going to defend a principle here: the violence inherent in the justice system should be obvious rather than hidden.

A couple of years ago, Peter Moskos suggested bringing back flogging as an option for prisoners: a year off your sentence for every stroke of the lash. He wrote eloquently of the horrors of the carceral state. And, so long as judges don’t simply respond by increasing sentence duration, it’s hard to see how the option to choose the lash would make prisoners worse off. As I wrote at the time:

I’m pulled to agree with Moskos. But I worry. I worry that the best evidence seems to suggest that prison deters crime mainly through incapacitation – criminals cannot commit crimes except against other criminals while behind bars. There’s good evidence for deterrent effects through things like California’s three strikes legislation, but incapacitation matters a lot. Longer term crime rates could go down with a switch from prisons to flogging if those committing crimes were better able to maintain a connection to the community and if prisons encourage recidivism. But rates would almost have to increase in the short term: those viewing flogging as much cheaper than a jail term would expect a reduction in the effective expected punishment for a criminal act. I’d hope that Moskos’s prescription would maintain the use of prisons as preventative detention for the really scary crazy dangerous cases.

A decade ago I would have worried that reducing the price of punishment experienced by the state would increase the total amount of punishment. If it’s expensive to keep a prisoner for a year, the state might be reluctant to put marginal offenders in jail. That’s not proven much of a constraint, so I worry rather less about that now.

But I do worry that the mob used to enjoy the spectacle of a public hanging.

When I read about cases like John Horner, (likely) entrapped by the DEA and facing a 25 year mandatory sentence for having sold his leftover prescription pain medicine to another man who had made him believe that he was in desperate pain, I wonder whether it’s the Saudis or the Americans who are really out of line. If you had two young daughters, and were facing 25 years delivered by the American justice system for doing no harm to anyone, wouldn’t you prefer surgical paralysation? I would.

Sometimes I wonder whether the focus on injustices committed abroad are a way of avoiding thinking of the ones at home.

In other news, we now have decent evidence that “tag and release” is more effective in preventing recidivism than incarceration. Here’s the abstract from the newly published paper by Di Tella and Schargrodsky in the Journal of Political Economy:

We study criminal recidivism in Argentina by focusing on the rearrest rates of two groups: individuals released from prison and individuals released from electronic monitoring. Detainees are randomly assigned to judges, and ideological differences across judges translate into large differences in the allocation of electronic monitoring to an otherwise similar population. Using these peculiarities of the Argentine setting, we argue that there is a large, negative causal effect on criminal recidivism of treating individuals with electronic monitoring relative to prison.

Lengthy carceral sentences for drug crimes are arguably behind much American inner-city disfunction. When a reasonable proportion of men of marriageable age are in prison, really bad things start happening to family formation.

Moskos is looking more right all the time.

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Roger Koppl argues this week at ThinkMarkets that “Income inequality matters.” He thinks it matters so much that he says it twice. He believes “Austrian,” pro-market, economic liberals should be speaking up more on this “central issue.” I think Koppl could not be more wrong. The issue deserves all the inattention we can muster for it.

The problem I think is not Koppl’s motives. He rightly says that we should “watch out for ways the state can be used to create unjust privileges for some at the expense of others.” He is certainly right about that. He argues that unjust state policies may be skewing market results in such a way as to increase inequality. He may be right about that. But he is wrong in suggesting that we ought therefore to be paying attention to income inequality. We ought therefore to be paying attention to those policies. Whether they produce greater inequality is neither here nor there.

Koppl gives four examples: (i) policies that privatize profits and socialize losses, (ii) bad regulation, (iii) collapse of the rule of law, and (iv) public schools. I can certainly join Koppl in a hearty wish that we not only attend to these unwarranted policies, programs, and tendencies, but that we do so with a degree of urgency prompted, in part, by their effects on the poorest and most vulnerable among us. But talking about inequality is precisely a distraction from doing so.

In a great paper of a few years ago, Harry Frankfurt argued that “Egalitarianism is harmful because it tends to distract those who are beguiled by it from their real interests.”* Frankfurt thought that focusing on equality was actually pernicious because it distracted us from attention to real harms, of which inequality is at most an indicator. And he was right. It may well be that, for example, the evisceration of the rule of law results in greater income inequality. But it also might not. Whether or not it does so, however, it is unjust, and it deserves our attention. Similarly for the increase in moral hazard and regulation, to say nothing of the deplorable system of public education. All of these need attention, and one prime reason they do so is because of their effects on those least capable of circumventing their evils. If we care about the poor, what we ought to care about is bad policy, not indicators that may or may not have anything to do with policies that are making people worse off. As long as we are worrying about income inequality, we are worrying about the wrong thing.

* In “The Moral Irrelevance of Equality,” Public Affairs Quarterly, April 2000.

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As we approach midnight February 28 (tick..tick…tick…) and March 1st arrives, the nation appears to be headed toward a cataclysm. There is an ever-growing number of stories informing us how bad things could get.

The sequestration will force a sharp drop in the economy. It will kill the surging stock market. It will delay tax refunds. It will prevent entrepreneurs from starting new small businesses. It will compromise meat inspection. It will hamper airport safety and Homeland Security more generally. It will prevent assistance for Hurricane Sandy victims.  It will disproportionately harm women, and poor women in particular. Mother Jones expands on this claim to note that it will simply “screw the poor” (e.g., by undermining education, Title I finding, rural rental assistance, the processing of Social Security disability claims, unemployment benefits, veterans services, nutritional assistance, special education…you get the idea).

The Washington Post has provided a user-friendly guide to the White House data on how sequestration will effect each state . Of course, the categories have been nicely selected to construct a politically useful alternative universe (i.e., one where government is seemingly restricted to supporting teachers and schools, Head Start, job-search assistance, child care, vaccines for children, preventing violence against women, etc., etc).  Core message: what government does is universally good and necessary. There is no room for cuts.

Things seem quite dire, until one recalls that the $85 billion will not be sucked out of the economy as the clock turns to 12:00:01 on March 1 and, more than likely, there will be some agreement in the waning moments of February or the first few days of March to avoid this self-inflicted sequestration.

But even if there isn’t, one might question whether $85 billion is all that significant when the President’s budget request for 2013 is $3.803 trillion. Subtract that $85 billion, and the budget would fall to $3.745 trillion.  Placing things in historical context, that would be the largest budget since…(insert drum roll here)… 2012.

Placing things in a broader historical context, the budget (in nominal terms) would be over 160 percent of what it was a decade earlier, around 135 percent if we adjust for inflation.

The most striking thing to contemplate: If this is the political firestorm that arises out of a $85 billion reduction in discretionary spending out of a $3.8 trillion budget, imagine what will occur when focus turns—as it must—to the issue of entitlements.

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