Wednesday, August 31, 2005

The Data of Development

Professor Boettke discusses the approaches economists have taken to understanding the process of economic development. He concludes with:
". . . The eradication of poverty will not come from international aid agencies and the decisions by western leaders on how best to redistribute wealth world-wide, but through the entrepreneurial spirit of Africans themselves. Given the freedom to realize the gains from trade, individuals will strive to improve their lot in life and the lives of their children, etc.

From Smith to Schumpeter we basically understood this. We lost sight of this for a long time. We are gaining that understanding again ---- though the Joseph Stiglitz's, Paul Krugman's and Jeffrey Sachs's of the world resist mightily the lesson that we must retire Keynesian analytics and Keynesian command and control policies. Thankful we had brave and serious scholars such as Mises, Hayek and in this field especially P. T. Bauer to resist and uphold an alternative conception of economic science and policy. William Easterly's new book, The White Man's Burden: Why the West's Big Plans to Save the Rest Fail to Do Good is a worthy successor to Bauer and its publication should be greatly anticipated by economists. Easterly's The Elusive Quest for Growth focused on the simple point that incentives matter. In The White Man's Burden we see plenty of perverse incentives at work, but we also read extensively about lack of accountability and feedback mechanisms that undermine the workability of big plans. Assessing economic systems doesn't need aggregate statistics, but instead detailed examination of the institutional environment and economic structures in operation and how they impact the ability of individuals to realize the gains from specialization and exchange."
I too like Easterly's The Elusive Quest for Growth. I would also suggest Mancur Olson's Power and Prosperity .

One of the important things I learned from Olson's book was the distinction between self-enforcing exchanges and "socially-contrived exchanges." The idea is that markets are pervasive. We see market exchange everywhere in the world today, even in countries we call developing or less developed. The difference between developing and developed is not that one economy lacks markets. The difference is that in the developing economies most market activity involves self-enforcing exchanges. In these exchanges the individuals involved do not have to rely on government to help enforce the property rights that are exchanged. But, self-enforcing exchanges are contemporaneous in the sense that neither party to the exchange has to wait for some period of time to enjoy the benefits of the exchange. Olson suggests that economic prosperity comes (and I think Easterly does as well) when individuals see incentives to save and invest. But, this requires waiting and a passage of time. In countries with "bad" governments, such incentives are weak or nonexistent because there is always the risk the government will intervene to take the returns to the individual from the personal sacrifice of saving and investment.

Olson asks why some economies with markets are economically prosperous while others aren't. The answer he finds is that there are two necessary conditions for economic prosperity: (1) strong protection for private property and enforcement of contracts, and (2) the lack of predation, or rent seeking, of any kind. Good government, then, might be defined in terms of the extent to which government protects private property, enforces contracts, and minimizes rent seeking. In the less developed economies of the world, it seems that government is pretty much the opposite of this vision of good government.

The Emerging Independent Majority

The other day I noted Arnold Kling's discussion of the Long Tail of Politics. Today, Uriah Kriegel suggests there is an emerging independent majority:
"Big picture strategists in both the Democratic and Republican parties like to speculate on the "emerging [insert favorite party] majority." Yet the only trend in evidence is an emerging independent majority. A 2001 University of Michigan study claims that the number of self-described independents rose in the second half of the 20th century from 28% to 37% of the electorate.

[. . . .]

How to explain this trend is not a matter that can be easily settled, but a good starting-point explanation is that a certain kind of political center has consolidated that is economically conservative and socially tolerant, if not liberal.

As the lower-middle class of American society becomes economically literate, and the upper middle class is increasingly savvy, they become more market-friendly. With a better grasp of the mechanisms by which markets generate and then disseminate wealth, the power of economic populism is on the decrease. To be sure, a trend such as this cannot be linear and necessarily experiences periods of ups and downs. But there is an inevitability to it that the far Left cannot acknowledge.

Correlatively, the far Right has its own limitation. As Americans of all walks of life are exposed to more and more variegated ways of doing things, through globalizing media and the expansion of multiculturalism (and multiethnicity), fear of the unknown gives way to readier acceptance of a spectrum of personal moralities. Tolerance and inclusion are on the rise, instinctual inward-looking and -shrinking in decline.

Here too, the trend does not progress linearly but has some wobbliness to it. Yet the trend is undeniable. To give just one example, in 1977, 34% of American thought homosexuality "acceptable"; today, the figure stands at 51%.

Because of the primary system, the emerging independent majority was bound to remain below the radar. But 2008 may be the year of the centrist. This new centrist front is a reaction to the emerging independent majority. Interestingly, it reflects the core of libertarian thought, embracing the Right's economic freedoms with the Left's social freedoms to create a unified platform highlighting individual responsibility and correlative opportunity, and opposing top-down intervention in one's economic affairs as well as the imposition of a particular personal mores by self-appointed moral authorities."
Could this possibly be the case? Is there an emerging median voter that "reflects the core of libertarian thought?"

Economists v. Planners

William Bogart:
"For me, the fundamental aspect of Christianity is humility. I think that economists have rediscovered humility, despite our reputation as social science imperialists. This humility comes in the recognition that people are truly individuals with their own goals, not homogeneous social units. In my area of study, I see a strong contrast between the work of urban planners and urban economists. Planners tend to view people as passive inhabitants of the built environment, while economists see them as active participants in shaping the environment. Because our understanding is limited (resources are scarce, or else we're not talking about economics), people will surprise us with what they choose to do. Planners find this to be evidence of the imperfection of the people; economists find this to be evidence of the imperfection of their analysis."
I think this suggestion about the difference between planners and economists is very interesting. I think Bogart is probably right on this. What do you think?

Monday, August 29, 2005

More On Hawaii's Gasoline Price Ceiling

Jim Lindgren started an interesting discussion of Hawaii's wholesale gasoline price ceiling. He suggests:
"This is a nice test of economic theory, though if refineries are working at nearly full capacity, the economic effects may not be as large in the short run as simple price theory (in the absence of transaction costs) would suggest."
But, perhaps the discussion that was prompted by his posts suggests it is not clear which economic model is going to be tested by the upcoming experience. What do you expect the results of the price ceiling to be?

Saturday, August 27, 2005

The Long Tail Of Politics

Arnold Kling :
. . .the Long Tail in politics is larger than the "head," which in this case consists of the two major parties.

The Long Tail is not the political center. It is not a third party waiting to form. It is not a coalition. It is not a "silent majority" of either the right or left. It is simply every variety of political belief that does not fit within the two major parties.

If we had a parliamentary system with proportional representation, the Long Tail would consist of many splinter parties, including some parties that are ethnocentric, a variety of Greens, a variety of libertarians, single-issue activists, and parties which are outside of today's classifications. The Long Tail is a motley assortment of political misfits, wing nuts, and sober independents.

The key point is that the size of the Long Tail, and its rapid growth, represents the most significant political phenomenon of our time. What you will start to notice is the tendency for politics to reflect tension between the Long Tail and the major political parties.

[. . . .]

My sense is that the Long Tail is losing its patience with coalition and compromise. We are tired of fiscal irresponsibility. We are tired of religious issues being debated in the political arena. We are tired of trying to reconcile socialism and paternalism with libertarianism. We are tired of being stuck with the same set of entrenched political oligarchs election after election.
Maybe it is time for me to join the Long Tail.

What do you think of Professor Kling's Long Tail?

Thursday, August 25, 2005

Age & Social Security

Robert Samuelson makes an important observation:
"Economist Robert Fogel, winner of the Nobel Prize, recently told students at Cornell University that 'half of you [may] live to celebrate your 100th birthday.' Fogel's prediction goes well beyond standard projections, which envision today's college students living into their late seventies. But Fogel, who has studied centuries of change in human well-being, said that conventional forecasts are usually too cautious. 'In the late 1920s,' he recalled, 'the chief actuary of the Metropolitan Life Insurance Co. put a cap of 65 on life expectancy.'

Fogel's forecast reminds us that sooner or later Americans will have to work longer and retire later. It will become economically, politically and morally intolerable for government (aka taxpayers) to support people for a third or even half of their adult lives. Our present Social Security 'debate' ought to start this inevitable transformation. But it isn't. We are in deep denial about the obvious."

Wholesale Gasoline Price Ceiling

From the online pages of the Wall Street Journal [subscription required]:
Hawaii's legislature first authorized the cap on wholesale gasoline prices in 2002, and amended it last year, in an effort to control what have long been higher prices than those on the mainland U.S. The state plans to set a weekly cap that is pegged to an index made up of average wholesale prices in California, the East Coast and the Gulf Coast. Yesterday, its Public Utilities Commission imposed its first such price ceilings, which take effect Sept. 1.

Because of the state's relative isolation, Hawaiians have long paid more for basic commodities such as milk and bread. The average for regular unleaded gasoline in Hawaii currently is $2.84, according to the automobile association AAA; nationwide, the average price is $2.61, according to the Department of Energy.

The move lacked the backing of Gov. Linda Lingle, who has tried to repeal the cap. She does not support artificial price controls, according to spokesman Russell Pang. "It's not the right solution to what the legislature is trying to accomplish, which is lower gas prices," he said.

Indeed, some critics said the cap may cause pump prices to rise, since it affects wholesale prices but not retail prices, and refiners and marketers have long warned that caps could spur shortages and long gas lines. "Any steps to interfere with market forces have undesirable consequences," said Chevron Corp. CEO David O'Reilly in 2002.

Fereidun Fesharaki, an energy expert at the East-West Center in Hawaii, said the index used by the state's PUC is likely to push up gasoline prices that in some cases are cheaper than on the mainland. "I think it's a really stupid idea," he said, adding that the move will create "a negative business environment" that could discourage the state's two refiners, Chevron and Tesoro Corp., from making additional large investments. "One of them may close down," he said.

In a statement, Chevron said, "We continue to believe that this law is flawed and not in the best interest of the state." Tesoro said its Hawaii operation believes any cap "will only serve to distort market forces and will result in long-term negative impacts to the citizens and the economy of Hawaii."

But State Sen. Ron Menor, a leading advocate of the measure, said the cap is designed for a market in which oil companies and gasoline marketers are free to charge what they want. "Consumers have been price gouged for a very long time," said Sen. Menor, chairman of the commerce, consumer protection and housing committee.

Sen. Menor argued that regulating gas prices is no different than regulating the price of electricity, saying that with only two refiners, Hawaii "is not really a free market." He also dismissed concerns about gas lines or pressure on refiners and marketers as "scare tactics." Both of Hawaii's refiners have considerable investment in the state, he said, and "I doubt they would abandon it."
Let me suggest some questions to ponder:

1. The Hawaii legislature wants to relate wholesale gasoline prices in Hawaii to such prices in California, and in the East Coast and Gulf Coast regions. Is there any economic reason we would expect that Hawaii's prices should be similar to prices in these regions of the country?

2. So, the price ceiling is being imposed on what the owners of gasoline stations pay to the person/company who supplies them with the gasoline they sell to consumers. If you use a demand and supply model for 2 markets, one for the wholesale market and one for the retail market, what economic effects of imposing a price ceiling in the wholesale market would you predict?

3. State Senator Menor says that the price ceiling in question is no different than regulating the price of electricity. He notes that he doesn't think there is a free market in Hawaii because there are only 2 gasoline refiners in Hawaii. Assuming Senator Menor is correct regarding the number of refiners, would you agree that the price ceiling in question is no different from regulating the price of electricity? Are the effects of a price ceiling different for a competitive market and a monopoly market?

4. Does anyone know if gasoline can be shippped to Hawaii, or if the only way to have gasoline in Hawaii is to refine the gasoline in Hawaii?

Wednesday, August 24, 2005

Simon Says

Don Boudreaux has a few comments on Julian Simon:
". . . Without hesitation Julian replied 'Smart has never impressed me. Smart is directionless.'

This quotation is verbatim.

Lots of people are smart, but lots of smart people are fools. Julian Simon, while undoubtedly very smart, possessed a much rarer and more valuable trait: wisdom."

Monday, August 22, 2005

Paying For Scenic Vistas

Pete Groothuis comments on landscapes and beautiful mountain vistas:
Driving up the new section of US 421 into Boone NC, I was awed by the beautiful mountain vistas: the landscape rose and fell then blended into the horizon. Yet property owners wanted to install billboards to provide me with information on the availability of hotels, food, and shopping ahead: all-important information and useful to me. They were also sure the warranty-deeds protected these rights. Seeing these views I wanted to share them with my friend, so I called on my cell phone. Good, I got a reception because a cell tower was just off to the right in the distance.

The debate on land use in the mountains has been raging for years. For example, should the county develop zoning ordinances? Should the county limit the number of abandon cars? Should have the state designate US 421 as a scenic byway? Should we limit the number of cell towers? All of these are important questions that need to be answered. To help answer these questions I propose to administer a contingent valuation study to access the public-good economic value of scenic views. I also will ask questions to get an understanding of the perceived property rights and how locally undesirable land uses affect the scenic values.
Consider the idea of scenic views being a public good. I suppose we might well model scenic views as a public good because it does seem that consumption of the scenic view of a beautiful landscape has the consumption attributes of nonrivalry and nonexcludability.

What I find interesting is to consider John's reference to land ownership, property rights, and zoning. Who owns the scenic vista? I think the best answer is: No one owns the scenic vista. Numerous people own the land as property, and the various privately owned parcels are perhaps like pieces of a puzzle that fit together into a beautiful scenic vista. Protecting the scenic vista may well mean people enjoy their drives along the highway a great deal more than they otherwise would. Perhaps this shared enjoyment while driving the highway is like a public good.

Let's imagine that John's contingent valuation research leads to an estimate that the benefits of the scenic public good are quite large, and large enough for economists to offer the advice that it would be inefficient to cause the demise of the scenic vista. Suppose also that the appropriate number of public officials decide they should act to prevent the demise of the scenic vista. What should be done to protect the scenic vista?

One of the public policies often suggested, and it appears in John's list of questions, is to create an appropriate zoning ordinance. This would seem to be a pretty inexpensive way for government to protect the scenic landscape, of course. But, some have suggested that zoning ordinances that regulate the use of privately owned land must involve a taking, and if so, then according to the Fifth Amendment to our Constitution, such a taking must be accompanied by "just compensation." Is this is correct, then, it is clear, that a scenic vista zoning ordinance could be quite an expensive policy for government to adopt. Of course, we all know that other people say "this is not so, there is no taking."

I think I have a way to show that zoning ordinances to protect scenic vistas must involve a taking of private property for public use. At least, I'm convinced it does.

Government regulation to protect someone from harm caused to their person or property by the actions of another person is legitimate and appropriate. Actually, I think the very bottom line purpose of government is to protect people from harm caused by others. Therefore, regulation to prevent me, from harming the person or property or others, cannot involve a taking. This is the case because I never have the right (and neither do you or anyone else) to harm the person or property of another.

Now assume that I am one of those property owners who has a parcel of land that is one piece in the puzzle that creates a scenic vista. I want to cut down most of MY trees, build a 6 story condo complex, and put up numerous billboards so I can sell advertising services. Do I harm anyone by thereby destroying my piece of the scenic puzzle? Even if the scenic vista provides a public good, I say the answer is NO. The answer could only be yes, if someone owned the scenic vista. But no one owns the scenic vista. Many own the pieces of land that create the scenic vista, but no one owns the scenic vista.

It seems to me that if government now creates a zoning ordinance to stop my planned development, then government has taken something away from me that I own. This seems, indeed, to be a taking of private property for public use, where the public use is to create the public good scenic vista.

I suppose someone might reply that I don't have it quite right because before I develop MY property, there are people who are enjoying the scenic vista. When I destroy my part of the scenic vista these people will be worse off, and therefore I will be harming them. Government's scenic zoning ordinance will be created precisely to keep me from harming those people. Well, perhaps one could look at it that way, but I think there is a better, more accurate way to look at the situation.

If indeed, those driving the highway and viewing the scenic wonderland owned that scenic vista, then my development would harm them. They do not own the scenic vista, and therefore, the people in question cannot really be harmed by my actions. But consider that my piece in the scenic vista puzzle, while being owned in private and therefore being a private good, could perhaps be characterized as generating a positive externality. Those people driving along the highway are happier because of my actions not to develop my private property to date. What does our economic model of positive externality suggest is the appropriate policy response? It is to subsidize the economic choices that lead to the positive externality. In the case at hand, I suggest that means that instead of government imposing a zoning restriction on MY USE of MY LAND, government should, from the economic efficiency point of view, be paying me money to maintain my piece of the scenic vista puzzle.

Suppose we follow John's lead and model the scenic vista as a public good. It seems to me then that all these separate land parcels that are privately owned would be inputs into the production function of the scenic vista (public) good. Our public good model would then suggest we may expect that private actions will fail to provide the scenic vista public good, and therefore, that we might want to offer the advice that government should provide the public good. But, the question would then be how should government obtain the inputs which are owned by private individuals? The answer seems obvious to me, i.e., it should purchase those inputs.

One other thought is suggested from teaching public sector economics, and it comes by way of the "benefit principle." The idea is that for efficiency people should pay for the benefits they enjoy (at the relevant margin of course). If those people are driving along the highway, John included, and enjoying the benefits provided because of land owned by others, then it seems to me economics clearly suggests, in principle, that those people should be paying for benefits received.

Each of the conceptual views I see as ways to think about the scenic vistas in question lead to the same conclusion. If government is going to protect the scenic vista, then it is going to have to pay sufficient money to the private land owners to encourage them not to develop their separate scenic vista puzzle pieces.

Each of those private land owners own the inputs into the production of the public good scenic vistas, the rest of us don't. Can we simply go to government and get it to use its coercive power to force those private land owners to continue to give us the scenic vistas we enjoy? In one way the answer to this question is yes, and in another way it is no. The Fifth Amendment allows government to take private property for public use. I think that means in the case of scenic vistas that government could take private property because it makes sense to equate the public good of a scenic vista with the term "public use." That part of the answer to the question then is yes. But the Fifth Amendment also says that such private property can only be taken with the payment to the owner of "just compensation." I don't think government, according to the Fifth Amendment, can be allowed to take the inputs into the production of a scenic vista without paying to obtain, or purchase, or lease, those inputs. This part of the answer then, should be no, not without just compensation paid. As Justice Holmes once wrote in a famous takings case, just because something benefits many in the community, it doesn't mean government can provide the thing without following the constitutional way of doing so (my paraphrasing of course).

So, I do think government can, constitutionally, create a scenic vista zoning ordinance to protect existing scenic vistas that are created out of the puzzle pieces of private land ownership. But, such zoning ordinances also seem to me to clearly involve a taking of private property for public use. It seems to me that any public policy to protect scenic vistas must involve paying money, both from the perspective of economic efficiency analysis as well as based upon the words written in our Constitution.

Of course there is one final caveat to offer. As a practical matter, our Constitution means what the Supreme Court says it means. Unfortunately, in my opinion, the Supreme Court has often misread our Constitution when it comes to takings and the Fifth Amendment, and the recent Kelo opinion is only the most recent instance of this.

Senate to Hold Gas Prices Hearing

On September 8 the Senate will discuss the recent increases in the price of gas. This I believe is cause for concern, especially with politicians spewing things like,

Clearly, we need to have the very best advice and counsel on what actions can be taken to help lower the cost of gasoline.

- New Mexico Sen. Jeff Bingaman, the panel's senior Democrat

Lower the cost of gas? I think this Senator needs to go back and visit his econ 101 notes. The only way government can lower the cost of gas (save a price ceiling) is by supplying more oil, or somehow reducing the demand. We know the price ceiling idea is out of the question, it will only exasperate the problem by causing a shortage.

So what to do? How about nothing? People will alter their spending patterns as the price of gas rises and occupies more of individuals' budgets. Perhaps they will start to carpool with neighbors, maybe ride bike, trade that SUV in on a hybrid car, move closer to work, spend less on that pesky cell phone bill, or buy more ground beef and less filet mignon. Just let the spontaneous order of the market work its magic and people will make decisions on their own and in their own self interests while finding solutions to deal with their changing gas budget constraints.

Monday, August 15, 2005

Liberty & "Imposed" Risk

Ackerman & Heinzerling write in Priceless :
"Most people view risks imposed by others, without an individual's consent, as more troubling and more worthy of government intervention than risks that an individual knowingly accepts. On that basis, the highest priority among our three examples is to reduce drinking water contamination, a hazard to which no one has consented. The acceptance of a risky occupation such as construction is at best quasi-voluntary -- it involves somewhat more individual discretion than the 'choice' of public drinking water supplied, but many people go to work under great economic pressure, with little information about occupational hazards. In contrast, the choice of risky recreational pursuits such as skiing is entirely discretionary; obviously safer alternatives are readily available. Safety regulation is thus more urgent on construction sites than on ski slopes, despite the equality of the probability of harm. . . ." (70-71)

I think this is worth some discussion. I think I may agree that risks imposed by others is more worthy of government involvement than other types of risks. It seems correct based upon the normative view of individual liberty and the role of government as the protective state. The issue seems directly related to harm to the person or property of others. On the normative perspective of individual liberty, a person can do as they want AS LONG AS THEY DO NOT HARM THE PERSON OR PROPERTY OF ANOTHER. One question here would be whether "imposed risk" was a harm. That is, if a person or person's property is not harmed or damaged by the actions of another, e.g. driving while drunk, even though the risk of the action causing harm has increased, has there been a harm? Is it not sufficient to make harm to others illegal, and impose both compensation for damage done as well as criminal penalties? Unless the increased risks gets realized in an event that actually causes harm, then the actions that increase the odds of the harmful event do not seem to be harmful to others. Based upon the perspective of individual liberty, what seems to be the appropriate analysis?

Now there is a second question that strikes me which is related to the authors' attention to "public drinking water supplied." The specific illustration they are discussing involves arsenic in drinking water. If I understand their discussion, they are using arsenic in drinking water to represent a pollution problem that should be regulated by government to protect "the public" from harm, and I think the illustration is meant to offer a means of criticizing the economic approach to pollution which relies on the market failure of externality and which, in a sense, seeks to balance benefits and costs at the margin. But, notice that the illustration is PUBLIC drinking water supplied. In other words, the drinking water with arsenic in it is supplied by a government, and therefore, we are not talking about an externality market failure. Government owns the drinking water it is supplying (or selling) to people in the community.

On the individual liberty normative perspective, how should we view this illustration of arsenic in "public drinking water supplied?" One possibility is to consider that government may be acting in a way that harms the person or property of others. Selling drinking water with more arsenic than less may well increase the risk of health damage to people in the community. When a person is actually harmed by drinking the government supplied water, then the government could be sued for damages, and perhaps we could even hold those in government criminally responsible for the harm caused.

A second possibility would be to see the situation much as the workplace safety issue the author's discuss. Only in this case, we are talking about consumers of a product. The consumers are not forced to consume the publicly supplied drinking water. If the government does not lie about the level of arsenic in its water, the consumer accepts the risk implied by arsenic in the water. Further, we know there are many substitutes for the publicly supplied drinking water that are being supplied in a market context, and this seems to make the idea of an imposed risk in this case even less plausible. What do you think?

Saturday, August 13, 2005

James Buchanan & Liberty

Peter Boettke offers a nice tribute to James Buchanan that is well worth your time:
But this image of man as active chooser also requires that individuals willingly embrace the challenge of constructing their life and accept the responsibility for the consequences of their decisions. Liberty and responsibility are concepts at the core of Buchanan's reflections on the human predictament and thus in the proper domain of economic and political analysis. The political economist inspired by Buchanan's argument would whole heartedly agree because they find it unobjectionable that individuals want to be free to make their own choices. Autonomy is valued and cherished by individuals across the political spectrum even if they don't recognize the full impact of the concept in their political and economic philosophy.

But Buchanan has more recently argued that we may be losing this sense of ourselves in the modern age. Autonomy is losing its appeal. The learned helplessness we have acquired by living in a political culture of preferential treatment and protection from ourselves may have left the modern mind incable of accepting the responsibilities of freedom. We are instead afraid to be free. This shift in our human imagination is perhaps the most dangerous threat to economic and political freedom we have faced yet.
James Buchanan is certainly one of my economist heroes.

Friday, August 12, 2005

Policy Making & Making Errors

Walter Williams discusses error making:

We're not omniscient. That means making errors is unavoidable. Understanding the nature of errors is vital to our well-being. Let's look at it.

There are two types of errors, nicely named the type I error and the type II error. The type I error is when we reject a true hypothesis when we should accept it. The type II error is when we accept a false hypothesis when we should reject it. In decision-making, there's always a non-zero probability of making one error or the other. That means we're confronted with asking the question: Which error is least costly?
[ . . . ]

. . . Food and Drug Administration (FDA) officials, in their drug approval process, can essentially make two errors. They can approve a drug that has unanticipated dangerous side effects (type II). Or, they can disapprove, or hold up approval of, a drug that's perfectly safe and effective (type I). In other words, they can err on the side of under-caution or err on the side of over-caution. Which error do FDA officials have the greater incentive to make?

If a FDA official errs by approving a drug that has unanticipated, dangerous side effects, he risks congressional hearings, disgrace and termination. Erring on the side of under-caution produces visible, sick victims who are represented by counsel and whose plight is hyped by the media.

Erring on the side of over-caution is another matter. A classic example was beta-blockers, which an American Heart Association study said will 'lengthen the lives of people at risk of sudden death due to irregular heartbeats.' The beta-blockers in question were available in Europe in 1967, yet the FDA didn't approve them for use in the U.S. until 1976. In 1979, Dr. William Wardell, a professor of pharmacology, toxicology and medicine at the University of Rochester, estimated that a single beta-blocker, alprenolol, which had already been sold for three years in Europe, but not approved for use in the U.S., could have saved more than 10,000 lives a year. The type I error, erring on the side of over-caution, has little or no cost to FDA officials. Grieving survivors of those 10,000 people who unnecessarily died each year don't know why their loved one died, and surely they don't connect the death to FDA over-caution. For FDA officials, these are the best kind of victims -- invisible ones. When an FDA official holds a press conference to announce its approval of a new life-saving drug, I'd like to see just one reporter ask: How many lives would have been saved had the FDA not delayed the drug's approval?

The bottom line is, we humans are not perfect. We will make errors. Rationality requires that we recognize and weigh the cost of one error against the other.
The economic models we use in class to discuss public policy typically assume perfect information. Of course, making policy choices is subject to the sort of errors Professor Williams discusses. The concepts of Type I and Type II errors can be useful in considering how to evaluate policy alternatives in light of the recognition that our analysis can be subject to error. Does it make sense to say that, in general, we want our policy choices to be consistent with minimizing the costs of our errors?

Thursday, August 11, 2005

Common Property

Tim Habb:
For a while now I've had an uneasy feeling that the Tragedy of the Commons framework was missing something.

Here's the Wikipedia explanation of the Tragedy:
The cause of any tragedy of the commons is that when individuals use a public good, they do not bear the entire cost of their actions. If each seeks to maximize individual utility, he ignores the costs borne by others. This is an example of an externality. The best (non-cooperative) short-term strategy for an individual is to try to exploit more than his share of public resources. Assuming a majority of individuals follow this strategy, the theory goes, the public resource gets overexploited.
So what do I think is missing? Take a simple example. Bob lives on an island with nine other people. On the island, each person has their own piece of land and access to a common area that has a grove of banana trees (is that the right term?). Anyone can go into the banana grove anytime and pick bananas. What do we expect to happen?

According to the Tragedy of the Commons framework, Bob will go into the grove whenever he is hungry, pick all of the bananas necessary to make him happy and then leave. Bob won't consider that each banana he picks makes it more difficult for someone else to pick a banana or that picking bananas too quickly might mean that others might have to go without bananas. What's even worse, Bob will assume that everyone else thinks like he does and 'if everyone else is doing it, why not me?'

Is that in fact what happens? Are the Bob's of the world so greedy that they will ALWAYS exploit common property resources? Consider the 1996 FAO report Halting Degradation of Natural Resources: Is there a role for Rural Communities?. The full report is summarized as:
To the initial pessimism of the tragedy of the commons' doctrine, a more optimistic phase has succeeded characterized by the belief that village societies are able to use their resources efficiently provided that the State does not interfere.
That's right. Some economists now believe that under certain conditions, the commons may be self-regulating. And that government regulation makes things worse. If that's the case, there must be something missing from the economic model. What's missing? In my view it's social interaction (or social norms).
For some time now, I too, have thought that the typical discussion of common property was off the mark. My answer is a bit different than Tim's, although perhaps consistent with his answer in terms of social norms.

First, I have to say that the Wikipedia reference to public goods seems quite incorrect to me. A public good has both the characteristics of nonrival and nonexcludable consumption. Discussions of the application of the "tragedy of the commons" often involve situations where exclusion is feasible but not enforced, and a public good is defined as such if exclusion is technically impossible (and not because of an institutional failure, most likely by government, to enforce exclusion). Further, the tragedy of the commons involves me getting mine before you get yours. This is precisely the property of rival consumption. The tragedy of the commons simply should not be associated with the concept of a public good.

Second, I think that sometimes discussions of the application of the tragedy of the commons involve situations that would be better modeled as club goods. For example, I think the tragedy of the commons has sometimes been used to discuss congestion of highways and perhaps outdoor recreation resources. Highways are owned and provided by a government. If we apply the model of a club good to the situation I think we better understand that for efficiency we need to satisfy three conditions: efficient membership size, efficient facility size, and efficient utilization. Efficiency with respect to outdoor recreation resources also seems to me best described by the club model.

Now, for my specific answer about what bugs me regarding the standard tragedy of the commons. I think that the very notion of "common property" in the "tragedy of the commons" is wrong. The so-called tragedy of the commons is really the "tragedy" of open access. It is the lack of exclusion, and not common ownership, that leads to the perceived problems.

Consider a condominium association. This seems to me to be the epitome of common ownership. There are several owners of a piece of land and there are buildings built upon the land that people reside or vacation in. The owners can utilize the "public" areas because of common ownership of the parcel. But, there is no "tragedy of the commons" with this common property ownership. The members of the condo assocation put a fence around their parcel of land, and they enforce exclusion not only to the parcel but also to the structures.

Now, this common ownership also has private property ownership involved. Specifically, each member of the association stands as a private property owner relative to every other member of the condo association. If the parcel were to be sold by the association, the distribution of the proceeds of the sale is well-defined with respect each individual private member of the association. The distribution of costs incurred by the association in maintaining the property is also well-defined with respect to each individual private member of the association. In addition, the condo association itself stands as a private property owner relative to every other private property owner in the wider community.

It seems that common ownership is not the reason we might see illustrations of a "tragedy of the commons", but rather open access and the failure to enforce meaningful exclusion.

This answer seems to me consistent with Tim's pointing to social norms because the social norms that protect against the "tragedy" do so because they imply exclusion and rules for access.

Wildlife has often been described as characterized by "common property ownership" and therefore subject to "tragedy of the commons." Here again I would point to the issue of exclusion and access. When state government manages wildlife such as deer, elk and trout, it essentially takes on the characteristics of a private property owner vis a vis hunters and fishers. The state wildlife agency excludes people from access to deer, elk and trout, first by requiring a hunting or fishing license. It also limits access to these resources with season length regulations, with regulations about size and type allowed to be harvested, and by the type of lure or catch and release regulation imposed. While many may complain about government's regulations with respect to fish and game, it seems to me there is no question that government acting as the private property owner vis a vis hunters and fishers maintains these resources over time, and the tragedy of open access (a.k.a. the commons) is avoided.

Note also that the government is quite a bit like the condo association in that every citizen has an interest in deer, elk and trout. Every citizen is a private property owner, and there are well-defined rules for each owner's participation in the decision making of the state government and of the wildlife agency. It is very much like we all share common ownership in government's ownership of deer, elk, and trout, and at the same time government is the private property owner that restricts access to deer, elk and trout so these resources are not exhausted. State wildlife agencies are really like condo associations. And, I would also add that state wildlife agencies are also very much like the clubs we model with our concept of a "club good."

Wednesday, August 10, 2005

More Kelo Followup

Todd Zywicki has an interesting post on the politics taking shape post-Kelo:
My casual impression is that the response to Kelo reflects a division along class lines in the liberal coalition, as upper-middle class liberals such as Pelosi (and similar commentators such as here) are generally fine with Kelo, whereas rural (Dean/Sanders) and lower-income Democrats (and minorities in particular, if Waters is representative), are very concerned. So, in addition to the left-right coalition that the article notes, perhaps there is an interesting rural-urban coalition at work here as well.

This may simply reflect who expects to be the likely winners and losers from tossing homeowners into the maw of local political processes. As Waters indicates, upper middle-class homeowners are not likely to bear the cost of the ability to take property for private development, but may favor the amenities that such development may produce, whereas lower-income and working class neighborhoods are more likely to be simply 'run over' (to use Waters's expression) with little direct benefit in exchange.
He also has some excepts from a Washington Times article on Maxine Waters's position on Kelo:
"Government should be in the business of protecting private property," she told me in an interview, sounding every bit a member of the free-market group the Club for Growth. "Private property is precious in America."

What has galvanized Waters and a surprising left-right coalition in defense of private property is the Supreme Court's instantly notorious Kelo decision in June saying government can use its eminent-domain power to take property from one private owner and give it to another. The Constitution says eminent domain — used to force the sale of property — must be exercised in cases involving "a public use," a phrase the court has stretched to encompass any private purpose that will produce more tax revenue. Almost immediately, Waters was on the House floor denouncing the decision, part of a backlash that has dozens of states considering tighter rules in how they use eminent domain.

Waters is a longtime scourge of eminent domain. A few years ago the L.A. Unified School District wanted to take a park and private homes in the community of South Park to build a new school (which at least is a legitimate public use). Waters made it clear that if eminent domain were used, the residents, many of them low-income, would appeal it property by property, holding up the process for years. "We backed them off," she says. If anyone is trying to grab your home, you could do much worse than have Waters — whose public mood seemingly fluctuates between outraged and irate — on your side.

She is acting on a crucial insight — the right to property is the most important check on governmental power and abuse, especially for the poor and vulnerable. The National Association for the Advancement of Colored People filed an amicus brief in the Kelo case arguing against expanding eminent domain and recalling that it was often used in 1960s "urban renewal" projects to dispossess black property owners — "'urban renewal' was often referred to as 'Negro removal.'" Indeed, the naked logic of the Kelo decision is to take property from working- and middle-class people who aren't in a position to build big-box stores, casinos or condos and give it to wealthier interests, who can create more tax revenue and inherently have more political influence. Poor property owners usually don't have the wherewithal to fight back. "I think they'll just be run over," Waters says.
Agreed, government should be in the business of protecting private property. I've posted before that James Madison and his colleagues essentially equated property and individual liberty. If this is the case, then having government see its job primarily as protecting private property is just as important for those who have little property and those who have much property.

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.

Tuesday, August 09, 2005

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?

Friday, August 05, 2005

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, 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.

Thursday, August 04, 2005

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.

Wednesday, August 03, 2005

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?"

Tuesday, August 02, 2005

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)


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.

[ . . . ]

Monday, August 01, 2005

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?