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The Oxford Review of Economic Policy has a brand-new special issue on the economics of independence. The entire issue seems to be open-access right now, so check it out. (HT: Doug Irwin)

In Scottish news, polls have turned a bit against independence, and betting markets now price a “Yes” at around 22-24%. I will take another look at how this affected capital markets, and what that implies about the economics of independence, a bit later in the week.

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Michael Salla, Robert O’Harrow Jr, and Steven Rich (The Washington Post) have written an interesting series on asset forfeiture (see the teaser “Civil asset forfeitures more than double under Obama,” by Christopher Ingraham on Wonkblog). The basic presumption of asset forfeiture is simple: you are guilty until proven innocent. If you are the target of “stop and seize,” you bear the burden of proving that your assets were not involved in criminal activity. Even if charges are never filed, you may not get your assets back. And due to the Equitable Sharing Program, state and local authorities have strong financial incentives to take asset forfeiture seriously. What could possibly go wrong?

forfeitures

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What can we learn from capital markets about the likely consequences of Scottish independence? A trio of recent polls has shown the “Yes” side to have pulled roughly even with “No.” With momentum on their side, it’s not unthinkable at all that “Yes” will pull it out, resulting in the first secession from a Western democracy since Iceland withdrew from Danish union in 1944. Most American commentators, from Paul Krugman to Tyler Cowen, oppose Scottish independence and forecast economic disaster for the new country. Are they right?

Let’s look at the behavior of capital markets in Britain since these polls’ release to find out. First, let’s set the stage by looking at how betting markets price the probability of Scottish independence. Unfortunately, there are no nice InTrade-style charts for implicit probabilities anymore, at least not that I can access from the United States. From oddschecker.com, I am able to pull odds from different exchanges from the beginning and end of each day. Looking at the markets with most liquidity, it looks as if the odds for independence moved from about 19.5% Friday night to about 25% Saturday night, after the release of the YouGov and Panelbase polls (the Panelbase poll suggested “No” might still have a small lead). On Monday morning the odds stood at about 23.3%. After the release of the TNS poll Monday evening (confirming the dead heat), the odds moved in to 26.0%.

Next, let’s look at the behavior of capital markets over this period. Here is how the pound has fared against the euro:

euros per pound

Not much of a correlation. To be sure, the pound fell against the euro when trading opened Monday morning, following the shock weekend poll from Yougov and the somewhat-reassuring poll from Panelbase, but the TNS poll released late Monday night appears to have had zero effect on the pound, even though it did have a small effect on the betting markets.

Now, the pound has fared a little worse against the dollar, because the euro has also dropped against the dollar. This may reflect that traders believe Scottish independence raises the probability of British exit from the EU. But this would not be a direct cost of Scottish independence, and it would ultimately be up to English, Welsh, and Northern Irish voters whether they want to withdraw from the EU.

What about the stock market?

dowftse

I’ve got the Dow in there for comparison (in green). So the FTSE fell about 0.3% on opening Monday, then drifted downward throughout the day, finally recovering all that ground except the initial 0.3% drop. On opening Tuesday after the TNS poll, it actually rose. As of this writing is down just about 0.4% from Friday’s close. This looks like a muted response to me.

But what about Scottish-exposed stocks in particular? I took the list of top 25 Scottish companies here and winnowed the list down to those listed as having Scottish ownership and being publicly traded. Nine companies fit that test. I then constructed a weighted average of their share prices at Friday close, Monday open, Monday close, and Tuesday open, the weights being each stock’s market cap according to investing.com. Recall that there were two surprise polls, one over the weekend and one released Monday evening, the former having the greater effect on betting markets.

The Scottish index I created lost 1.7% of its value on opening Monday morning, a noteworthy drop because it happened right away. It’s plausible to attribute this drop to the increased risk of independence. However, today it lost nothing on opening – in fact, it was up 0.1%. Still, the total loss to these nine firms’ market value amounts to about $800 million. The fact that there was no further response of capital markets to the TNS poll, even though betting markets did respond, weakens our confidence somewhat that investors are responding negatively to the prospect of independence, but let us work with the assumption that they are.

What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%. Of course, investors are risk averse, and the very uncertainty of the outcome might be driving a fair proportion of the losses.

A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.

How to sum up? So far (more…)

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Marc blogged the other day about the New York Times editorial board’s endorsement of repealing federal marijuana prohibition, just months after having rejected that step. Now, this isn’t quite the same as endorsing marijuana legalization – just returning it to the states – but it is a significant step nonetheless. Still, they are well behind the rest of the country. An absolute majority of Americans favor legalizing, taxing, and regulating marijuana more or less like alcohol. Liberal Democrats are overwhelmingly in favor.

Fivethirtyeight recently showed how out-of-step the New York Times is by comparing their position to that of representative Americans with a similar demographic profile. Money quote:

[P]eople with this demographic profile are somewhere around 25 or 30 percentage points more supportive of marijuana legalization than the average American. That implies that back in 2000, when only about 30 percent of Americans supported legalization, perhaps 55 or 60 percent of these people did. The margin of error on this estimate is fairly high — about 10 percent — but not enough to call into question that most people like those on the Times’ editorial board have privately supported legalization for a long time. The question is why it took them so long to take such a stance publicly.

The political class everywhere, regardless of left-right ideology, has been vastly more opposed to marijuana legalization than equivalent Americans. Here in New Hampshire, Democratic governor Maggie Hassan has not only opposed and promised to veto recreational marijuana legalization, she has also opposed and threatened to veto marijuana decriminalization and even allowing terminally ill patients to grow their own medical marijuana plants. Her spineless copartisans in the state senate have gone meekly along. And is anyone really surprised that government bootlicker David Brooks opposes legalization? It’s no accident that the only two states to legalize recreational marijuana so far have been states with the popular ballot initiative. It’s also no accident that medical marijuana started in states with the popular ballot initiative. The people have had to go around the controllers and neurotics in office.

Now the Brookings Institution has come out with a study of marijuana legalization in Colorado. Their quick synopsis? (more…)

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Governments behaving badly… We’ve all seen it. Get a bunch of libertarians from around the world together, and each seems to take perverse pride in proving that her own government is the worst of all. How can we quantify governments’ badness?

On the economic side, we might look to the Economic Freedom of the World index. The Economist has come up with a clever new one: the DOG factor (“discount for obnoxious governments”). It’s the deviation of the price-to-earnings ratio in the domestic market from global standard valuations. Some governments score very high indeed on the DOG factor:

Iran, like Russia a target of Western sanctions, trades on a p/e of just 5.6 and has a total stockmarket value of $131 billion; were it to be rated on a par with the average emerging market, its market value would be $292 billion, so its DOG factor is $161 billion or 55%.

Argentina’s government has manipulated its inflation rate, defaulted on its debt back in 2001 and, thanks to the legal battle that ensued, may do so again in a few days’ time. Its stockmarket trades on a price-earnings ratio of 6.1. As a result, its total value is $56 billion, rather than the $115 billion it might have commanded (a DOG factor of 51%). After its hyperinflationary episode last decade, Zimbabwe’s rating has recovered a bit, although it still lags the emerging-market average.

Someone oughta run a correlation between DOG factor and economic freedom score. I bet there’d be a strong one.

Bonus question: How could you calculate DOG factor equivalents for American states?

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Many people are concerned about income and wealth inequality. I am not concerned about economic inequality as such; I care about absolute poverty (how many people live in misery because of wretched physical conditions), and I care about a broad distribution of opportunity (everyone’s having a “fair shot” at economic success), but I don’t see it as a problem if someone earns vastly more money than someone else, just as I don’t see it as a problem that poorer people tend to have more leisure time than richer people. Only those consumed with envy could see economic (or leisure!) inequality simpliciter as a problem, right?

But I actually don’t think people on the left care about economic inequality or leisure inequality or inequality of looks or appealing personalities or anything else of value, in themselves, either. They care about economic inequality because they think it has negative consequences, particularly for political inequality, and because they think it is a symptom of some deeper problem. I disagree on the first count and agree on the second. Let me explain.

Does Inequality Have Bad Consequences?

The fear of the left is that in an unequal U.S., the rich will “buy” politicians to do what they want. As a result, we will get more pollution and more redistribution that flows from the middle class to the rich. The so-called “oligarchy study” (the term “oligarchy” never actually appears in the paper) went viral recently, showing that the preferences of wealthy Americans (and organized interest groups) matter for policy change in the U.S., while, controlling for the preferences of wealthy Americans, the preferences of other Americans make little difference. But wealthy Americans and average Americans actually have similar views on most issues, and where they diverge, the wealthy often have clearly superior views: less likely to loathe immigrants and gays, to fear free trade, to oppose marijuana legalization, and to be narrowly ideological. In addition, the wealthy tend to be more skeptical of taxation and welfare programs than the non-wealthy — your views on whether that difference is problematic may vary according to your views of the welfare state.

Still, let’s assume that the influence of the wealthy on U.S. politics is baleful; does that mean that growing economic inequality would reinforce that baleful influence? It remains unproven whether more inequality will mean that the rich pay more in campaign contributions and get more out in policy terms. The most likely explanation for why the rich are influential is simply that they have similar levels of education and status to politicians and move in the same social circles and care about the same sorts of things. Studies looking at how campaign contributions “buy access” to legislators generally come up with very weak results. To take just one policy example, federal air pollution regulations have always ratcheted up, and air quality in the U.S. is vastly improved relative to 50 years ago, in part due to regulation and in part to technological changes. Rising inequality certainly doesn’t seem to explain these trends.

A bigger problem with the U.S. political economy (more…)

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The New York Times had a wonderful piece earlier this week on the disposal of war surplus to state and local law enforcement agencies under the Department of Defense Excess Property Program (1033 Program). Since 2006, the Department of Defense has sold or given away (at minimum):

  • 432 MRAPs (mine-resistant ambush-protected vehicles)
  • 435 other armored vehicles
  • 44,900 night vision pieces
  • 533 aircraft
  • 93,763 machine guns (these are real machine guns, BTW, not “assault weapons”)

The story has draws on the example of Neenah, Wisconsin, described as “a quiet city of about 25,000 people” that “has not had a homicide in more than five years.” (I have been to Neenah, and I can testify that the word “quiet” should be capitalized). The Neenah PD has recently acquired its own MRAP. Designed for Afghanistan, these wonderful trucks proved a bit too top heavy for the terrain. So the vehicles are now available for local law enforcement for a song (or free). This is not a bad deal. The original price tag varies, but the top end model cost about $750,000 to produce.

MRAP 6x6

A quick web search reveals a few other locations that have secured their own MRAPs, including Nixa, Missouri, Fort Myers, Florida, Klamath County, Oregon, Christian County, Missouri, Boise, Caldwell, Preston, Nampa and Post Falls (all in Idaho). Even Ohio State University Police Department has one.

Why would Neenah need an MRAP? Simple: the possibility of violence. As the Neenah Police Chief explains: “We’re not going to go out there as Officer Friendly with no body armor and just a handgun and say ‘Good enough.’ ” After all, maybe there have been five years without a homicide, but what about next year…? Reason has similar piece on the sheriff of Pulaski County Indiana who has secured his own MRAP for a simple reason: “it’s a lot more intimidating than a Dodge.”

Speaking of Indiana, the New York Times story has a rather striking paragraph that provides another reason to get that MRAP:

“You have a lot of people who are coming out of the military that have the ability and knowledge to build I.E.D.’s and to defeat law enforcement techniques,” Sgt. Dan Downing of the Morgan County Sheriff’s Department told the local Fox affiliate, referring to improvised explosive devices, or homemade bombs.

I will let that one sink in for a moment. The police need MRAPs to protect themselves from veterans.

For a host of reasons, the US murder rate is at a 40-year low. Yet, our law enforcement has never been more militarized thanks to our endless wars abroad and our policy to distribute our surplus tools of war at fire sale prices. With all the surplus yet to be disposed of, this is one trend that is likely to continue for some time.

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