College Textbooks

The simple economic ideas that figure so prominently in today's public policy discussions flow from an abstract academic vision of the marketplace -- a vision that is scarcely recognizable as a portrait of a modern market economy. Surprisingly, political debates seem to turn on a chapter straight out of a college textbook -- and not the liveliest one on campus, either. (page 15)

This comes from Ackerman and Heinzerling's book Priceless.

I wonder how to react to the idea that public policy discussions today should be criticized on the grounds that (1) they come from college textbooks, and (2) they are not lively textbooks?

Sometime long ago and in a far distant place, I was told that newspapers were written at a 6th grade reading level. Would it be fair to conclude that "back then" public policy discussions tended to take place publicly at a 6th grade level? Perhaps there is much progress in observing that today public policy discussion takes place at a college level of understanding.

I guess this also suggests I should consider the possibility that college level analysis has fallen over time to be about at the "back then" 6th grade level. I suspect this possibility has not been realized today, and that our news is still presented at about the 6th grade level. So, maybe it is a good thing that the public policy discussions behind the news are grounded on the level of higher education.

If you are a college student, then perhaps you are comforted, rather than dismayed as these authors seem to be, that you can enter into today's public policy discussion because such discussion relies specifically on concepts, ideas, and theories you confront in your college classrooms.

Economics & Harry Potter

Gloria Helfand:

Still, there is one theme that J. K. Rowling has put big neon arrows and flashing lights around: choice. In the second book of the series, Harry Potter and the Chamber of Secrets, Professor Dumbledore tells Harry that “It is our choices. . . that show what we truly are, far more than our abilities.” This theme gets its explicit repetition in Harry Potter and the Half-Blood Prince, the most recent addition to the series, in a discussion about the meaning of prophecies. There can be no question that we all must face choices – some of which are between bad and worse options – and that how we decide reveals our character.

Well, isn’t this exactly what economics is about? The definition of economics that I give my students is that it’s the study of the allocation of scarce resources. If life didn’t involve tradeoffs, there would be no reason for this list, and the economics profession might be reduced to tallying wealth. Harry’s major choice -- whether and how to pursue the evil Lord Voldemort, at possibly lethal cost to himself – is a little more dramatic (and a lot more fun to read) than my decision whether to write this or work on my fall course syllabus. Still, making choices is the human (economic) condition.

The second part of choices, as Dumbledore notes, is that they reveal who we are. The principles of demand theory, including nonmarket valuation, rely on this principle. How I spend my money, how I allocate time between work and other activities, and an infinite number of sublime to ridiculous choices disclose a lot about me. I may talk a good game about caring about the environment, but I’m much more credible if I put my money, time, or other effort into environmental protection – if I have to give something up in exchange. Harry Potter, from the beginning of the series, could have stayed away from anything having to do with the Dark Lord, but Rowling would have had to find a different character for her series. At the end of the current book (no, I won’t give it away), he yet again faces tradeoffs in pursuit of ridding the world of the bad guy, and he yet again chooses the battle. This is the core of revealed preference analysis.

Kelo & Economic Development

Reposted, fishing for comments:

The recent Supreme Court opinion in Kelo reminds me that there are a host of local government policies aimed at promoting local economic development. Many local governments seek to promote economic development by means that include subsidies and the use of eminent domain for "redevelopment" of specific areas within communities (the specific concern in Kelo). From the economic point of view, policies by local government to promote economic development make sense if there is a source of market failure. By implication, we can also say that if there is no source of market failure, then we have to expect that government policies that intervene in individual choices (even in the name of economic development) will lead to less economic development rather than more. The very presumption of the Kelo opinion that government's use of eminent domain power would serve a public purpose could be questioned if we do not believe there is a source of market failure to remedy.

Do you think there are any sources of market failure that are related to the development of local economies, and that therefore, would provide an economic justification for local governments pursuing the promotion of economic development?

Compact Clause & Tobacco

Have you ever heard of the Compact Clause of the Constitution? Article 1, Section 10 of the Constitution reads:

No State shall, without Consent of Congress . . . enter into any Agreement or Compact with another State . . .

Could this mean the tobacco settlement is unconstitutional? The Competitive Enterprise Institute thinks so.

Ilya Shapiro writes about it:

On August 2, the Competitive Enterprise Institute (CEI), a Washington think tank advocating free markets and limited government, filed a constitutional challenge to the 1998 Master Settlement Agreement (MSA, otherwise known as the Tobacco Settlement). The suit alleges that the agreement between 46 states and the four major tobacco companies is unconstitutional because it violates the Compact Clause of the Constitution: "No State shall, without the Consent of Congress … enter into any Agreement or Compact with another State." (Article I, Section 10). [Full disclosure: I interned at CEI many years ago.]

According to the terms of the Tobacco Settlement -- negotiated in response to snowballing suits seeking to recover for public health costs allegedly related to smoking -- the major tobacco companies would make annual payments to the states in perpetuity, with an estimated cost of $200-250 billion over 25 years. Anybody else that wanted to sell cigarettes -- even a new company that had yet to sell "coffin nails" to anyone or be sued by a single rapacious plaintiffs' lawyer, let alone enter into any settlement -- would be forced either to pay "damages" for others' past "wrongs" or set aside an even larger amount as a sort of collateral against torts that have yet to be committed/invented. Not surprisingly, the small competitors -- about 50 of them so far -- have "agreed" to pay into the extortion scheme.

Thus, Big Tobacco showers the states with money in exchange for protection from competition. It's a win-win, except for retailers, distributors, and small manufacturers -- and smokers. Not to be forgotten, the lawyers negotiating the deal also won a handsome reward of several billion dollars in legal fees for their work on behalf of the public.

"This lucrative backroom deal between state attorneys general and the trial bar has created a new model for targeting other politically incorrect industries and their customers," said Sam Kazman, CEI General Counsel.

CEI filed the suit in federal court in Shreveport, Louisiana, on behalf of a distributor, two small manufacturers, a tobacco store, and an individual smoker against Charles C. Foti, Jr., that state's AG. Its complaint begins with the allegation that the major tobacco companies and the states "became business partners in establishing one of the most effective and destructive cartels in the history of the Nation."

Detailing how the settlement of the state suits morphed into a massive government-enforced tobacco cartel, the complaint concludes that the MSA violated the Compact Clause, which was meant to prevent states from stepping on federal power or bullying other states. In effect, this is an "antitrust" suit against the public acts of states (as opposed to conventional antitrust actions against private entities or behaviors).

That is, by restricting competition and increasing cigarette prices, the states bestowed upon Big Tobacco a sweetheart deal that "transformed the States from adversaries into business partners." The four companies were allowed to maintain their market share and increase revenues to such an extent that, CEI argues, they are on net better off than before having to make the MSA payments. And Congress and the courts were completely cut out of this lucrative deal-making.

Emergent Law

Peter Leeson :

"Building on Rose's model, I've recently written a paper attempting to determine the importance of state-provided contract enforcement for international trade. I find that state enforcement has a small, positive effect on trade--but not the impressive impact suggested by the conventional wisdom that state enforcement is critical for trade to flourish.

The work of several Austrian economists provides a potential explanation for this result. Following Menger, Austrians such as Mises and Hayek view understanding spontaneously emergent institutions one of the critical tasks of economics. Where there are sizable gains from trade, individuals find inventive ways of overcoming obstacles that stand in the way of realizing them. Out of this, in the international arena, emerged private arbitration, private international commercial law, and customs for dealing with disreputable traders. These spontaneously emerged private institutions are ultimately responsible for the boom in international trade--not government."

Law can be an emergent economic activity, and not just the work of legislatures.

Unambitious Government

Russell Roberts:

"There is nothing like a relatively unambitious government to spur economic activity."

Wonderful one-liner, eh?

Thomas Sowell: Random Thoughts

Thomas Sowell:

"As a result of 'evolving standards' and 'nuanced' judicial decisions, we no longer have clear-cut rights. We have a ticket to a crapshoot in a courtroom. That ticket is worth a lot more to those with slick lawyers than to ordinary citizens."

This is one random thought well worth considering.

Human rights v. property rights

Check outWalter E. Williams on property rights:

"Creating false distinctions between human rights and property rights plays into the hands of Democrat and Republican party socialists who seek to control our lives. If we buy into the notion that somehow property rights are less important, or are in conflict with, human or civil rights, we give the socialists a freer hand to attack our property.

As President John Adams (1797-1801) put it, 'Property is surely a right of mankind as real as liberty.' Adding, 'The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.'"

During the era of our country's founding many, perhaps most, believed that liberty and property were equivalent. Professor Williams' commentary helps us understand why this is the case.

Where to leave your discarded books

Ponder this from Tyler Cowen:

"One radical option is to leave the book, well...in a bookstore. Most likely, the book will be sold. If you bring it to the counter they will be puzzled but I suspect will be willing to ring it up and punch in a code.

Of course now the book has a price, which can restrict the chance it is ever read. But the chance of it getting into the right hands -- the high-valuing user -- has gone way up. This is a testament to the role of middlemen in a capitalist economy. The book is probably worth more to the world at full price, in a bookstore, than lying on a bench for free.

So now you know where to leave your discarded books."

Do Constitutions Matter?

Bryan Caplan:

"Many economists hold the view that constitutions don't affect policy. The argument goes roughly like this: 'If most people want to do X, no sentence on a musty piece of parchment is going to stop them.' Even if this argument is correct, however, constitutions might work anyway. How? By changing what people want."

I'm not sure how to react to this. How does it strike you?

For one thing, the "argument" refers to an individual's choice to act by doing X, and I think that a constitution is written with respect to the actions chosen by government.

Iraq War Numbers

Very interesting numbers with respect to Iraq found at Brookings. You can read analysis of the numbers here.

But what is government. . . .

But what is government itself, but the greatest of all reflections on human nature. If men were angels, no government would be necessary. If angels were to govern men, neither external or internal controls on government would be necessary. In forming a government which is to be administered by men over men, the great difficulty lies in this: you must first enable government to control the governed; and in the next place oblige it to control itself.

James Madison, The Federalist No. 51.

Dime's Worth of Difference

In the Washington Post:

"Having skirted budget restraints and approved nearly $300 billion in new spending and tax breaks before leaving town, Republican lawmakers are now determined to claim full credit for the congressional spending. Far from shying away from their accomplishments, lawmakers are embracing the pork, including graffiti eradication in the Bronx, $277 million in road projects for Speaker J. Dennis Hastert (R-Ill.), and a $200,000 deer-avoidance system in New York."

Ever heard the old saying that there is "not a dime's worth of difference" between the Democrats and the Republicans? Could be a lot of truth in that old saying. It seems there is not a "dime's worth of difference" between the Democrats in power and the Republicans in power. Doesn't it seem that when in power each side wants to spend your money and then rush home to tell you how great things are when they spend your money?

It seems there is also not a "dime's worth of difference" between Democrats and Republicans when they are out of power. When out of power, it seems that issues and principles don't matter. The only consistency in view that matters when out of power is: "Those other guys in power have got it all wrong."

Not a dime's worth of difference, eh?

Social Security: Tit-Tat

In the Washington Times:

"'We all know that Nancy Pelosi and her band of obstructionists have done everything in their power to prevent Democrats from joining bipartisan discussions regarding Social Security,' said Rep. Jack Kingston of Georgia, vice chairman of the House Republican Conference.
Democrats have refused to negotiate until Republicans drop their proposal to allow Americans to invest a portion of their Social Security contributions in personal accounts. Democrats have tried to convince the public that this plan would be risky and would harm the Social Security system.
'For 70 years, Social Security has never failed to pay promised benefits, and Democrats will fight to make sure that Republicans do not turn a guaranteed benefit into a guaranteed gamble,' Mrs. Pelosi said. "

Guaranteed benefit? Guaranteed gamble? How about guaranteed burden on the next generation and the generation after that, and the generation . . . .?

Politics & Economics

"In short, it is the perfect political explanation, however little economic sense it makes."

Thomas Sowell, The Economics and Politics of Race

Sounds like an idea with wide application.

How about suggesting some illustrations of this idea? I think the minimum wage fits well.

Moral Norms & Government

ProfessorBainbridge has an interesting essay concerning the relevance of Justice Roberts' religious views:

"Let's start with first principles. It seems clear to me that a judge may consider moral norms in making judicial decisions. As I explained in my article Social Propositions and Common Law Adjudication, however, judges may not look to their own moral values:

Any complex society needs an institution before which claims based on existing societal standards can be heard. In our society, that institution is the courts.20 “If the courts resolved disputes by reasoning from those moral norms and policies they think best, there would be no institution to which a member of the society could go to vindicate a claim of right based on existing standards.” Second, since the judicial system is a peculiarly undemocratic institution, the legitimacy of the adjudicative process requires courts to look to “existing legal and social standards rather than those standards the court thinks best.” Finally, prohibiting the courts from employing their personal standards makes legal reasoning fairer and more easily replicable by the profession. (Page 6)

Instead, judges may consider only those moral norms having substantial support in the relevant community. (See pages 7-10 of my article.) Although my article focused on common law adjudication, I believe the same holds true with respect to constitutional and statutory interpretation. Of course, some would argue that a judge should be an originalist and a strict constructionist with respect to the latter forms of adjudication, which would obviate the relevance of personal or social moral norms. As Justice Scalia one put it:

Before proceeding to discuss the morality of capital punishment, I want to make clear that my views on the subject have nothing to do with how I vote in capital cases that come before the Supreme Court. That statement would not be true if I subscribed to the conventional fallacy that the Constitution is a “living document”—that is, a text that means from age to age whatever the society (or perhaps the Court) thinks it ought to mean.

I've got substantial sympathy for that point of view, of course, but I'm assuming herein that evaluation of moral norms is relevant to at least some aspects of what a Supreme Court justice does."

This seems a very thoughtful essay and well worth reading in its entirety.

One question the essay raised for me is found in the suggestion that ". . .judges may consider only those moral norms having substantial support in the relevant community." Would we want to also say that economists, and other social scientists, should evaluate or judge public policy based upon "moral norms having substantial support in the community?" Is economic efficiency a "moral norm having substantial support in the community?"

Reid & Lautenberg v. Article 2, Section 2

"Senator Harry Reid of Nevada, the Democratic leader, characterized Mr. Bush's move as 'the latest abuse of power by the Bush White House,' while another Democrat, Senator Frank R. Lautenberg of New Jersey, said in a statement that 'even while the president preaches democracy around the world, he bends the rules and circumvents the will of Congress' at home."

Versus the Constitution:

"The President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session." (Article 2, Section 2)

Incentives

Nobel economist EDWARD C. PRESCOTT [subscription required] in today's Wall Street Journal:

Medical metaphors are often used to describe an economy. We commonly hear reports of "healthy" and "strong" economies, or "sickly" and "weak" ones. In the case of Europe, with its multi-symptomatic condition, we even hear of a particular economic illness -- the European Disease. This disease is marked by high tax rates, inflexible labor markets, over-regulation and resurgent protectionism, among other maladies. Prognosis? Not so good, we are told.

However, I am optimistic about Europe. Why? To paraphrase Herbert Stein's famous maxim: The current situation is unsustainable, and what is unsustainable must end. But what, exactly, is unsustainable, and why am I optimistic that Europe's current problems will give way to a new era of growth?

[ . . . ]

Spain offers a good case for European optimism. Like many of its continental neighbors, Spain was afflicted with declining labor force participation through the mid-1990s. Let's pause here to look at some facts. From 1993-96, the average hours worked (per working age person, per week) in Spain was 16.5. This compares with 17.5 hours in France and 19.3 in Germany. Clearly, Spain wasn't working.

Then, in 1998, Spain flattened its tax rate in a manner similar to the U.S. tax reforms of 1986. Coupled with labor market reforms of the previous year, Spain's labor force participation increased about 21% in the period 2000-2003, to 20 hours per week, exceeding that of Germany (18.3) and France (17.8). Correspondingly, this increase in labor participation led to increased tax revenues. (Incidentally, Spain, France and Germany all had slightly higher labor force participation rates than the U.S. in the early 1970s, when European tax rates were more in line with those in the U.S.)

I've made this point about tax rates before on these pages but it bears repeating because it reflects a fundamental economic insight that gets to the heart of policy making: People respond to incentives. You don't make economic policy for nations, you make it for people. And it's the responses of those people, when aggregated, that give us those data that we all love to analyze.

WOW. Well said. This one paragraph summarizes some of the most significant wisdom found through the study of economics. "You make it (economic policy) for people." "People respond to incentives."

So, why did the European labor supply decrease by a third from the early 1970s to the mid-1990s? Because the marginal effective tax rate was increased to 60% from 40%. People chose to work less than before. Consequently, tax revenues fell. You can't raise revenues by taxing people beyond their willingness to pay. And you can't expect an economy to grow when people don't have the incentive to work, or when entrepreneurs lack the incentive to take a chance.

European countries, in other words, were approaching a point of unsustainability. Spain had reached such a point, and even though there is still progress to be made, its subsequent policy correction has worked wonders. Of course, Spain is not alone in its transformation: Britain paved the way with its earlier reforms and has since reaped the rewards from gains in labor supply, the Netherlands has also instituted important labor market reforms that have paid dividends, and some Eastern European countries are benefiting from tax reforms. It's time that the rest of Europe pay close attention to the examples of their perimeter neighbors.

[ . . . ]

Supremes Inspired Tunes

Check out the Interstate Commerce Blues over at Agoraphilia, and the Kelo Song at Ex Parte .

Congressional Spending

"Democrat Jim Clyburn retained another $25 million for his famous 'Bridge to Nowhere,' a project in rural South Carolina that has already sucked up $34 million in federal funds. The California delegation secured $1.4 billion for more than 479 projects, including $2.5 million for freeway landscaping. And ranking Transportation Committee Democrat James Oberstar snatched more than $14 million for Duluth, Minnesota, including $3.2 million for an extension of the longest paved recreational path in the nation.

Next to this highway extravagance, the energy bill seems almost a bargain at an estimated $66 billion or so. Minor highlights here include the repeal of a Depression-era law (Puhca) that will open up electricity sector investment; new reliability standards for the national power grid; more federal authority to settle siting disputes over much-needed natural gas terminals; and an inventory of offshore oil and gas resources that may someday encourage more exploration.

We can also say this for the bill: It doesn't pick energy winners or losers. Everyone who produces so much as a kilowatt hour is a winner in this subsidy-fest of tax credits and new federal mandates. There's $550 million for forest biomass, $100 million for hydroelectric production, and $1.8 billion for 'clean coal.' There are subsidies for wind, solar, nuclear and (despite $60 oil) even for oil and gas.

Most egregious is the gigantic transfer of wealth from car drivers to Midwest corn farmers (and Archer-Daniels-Midland) via a new 7.5-billion-gallon-a-year ethanol mandate, which will raise gas prices by as much as a dime a gallon on the East and West coasts. Oh, and don't forget the $15 billion (a 155% increase) in federal home heating subsidies, $100 million for 'fuel cell' school buses, and $6 million for a government program to encourage people to ride their bikes--presumably along Mr. Oberstar's newly paved trail."

Where, oh where, is our Constitution? Can anyone except a member of Congress, and perhaps a Justice of the United States Supreme Court, find in Article 1, Section 8 the expressed powers for Congress to: build recreational paths, subsidies for biomass, production of hydroelectricity, subsidies for solar, mandates for ethanol use, purchase of school buses, or government bike-riding programs?