Saturday, 2 August 2014

Xenophobia is not a good basis for economic policy

Isaac Davison writes in the New Zealand Herald:
Economic Development Minister Steven Joyce has accused Labour of "xenophobia" in their opposition of the potential sale of Lochinver Station to the Chinese company that bought the Crafar Farms.

Mr Joyce and Grant Robertson, economic development spokesman for Labour, appeared on TV3's The Nation this morning and discussed the sale.

Mr Robertson said under Labour the sale would not go ahead.

"Our criteria would definitely mean that a sale like this would be highly unlikely."

Mr Joyce said the opposition were "electioneering" in relation to the issue.

"When did [Labour] go out and oppose the purchase of James Cameron's land?"

"A little xenophobia from the Labour Party to start the day," he said.
Let me make a couple of points here. For efficiency reasons we want resources to be in the hands of those who value them most highly and the way to do that is sell them to the highest bidder. We want land (and other resources) to be used in the most efficient manner and the country of origin of the buyer is irrelevant to this. A thought experiment: ask yourself, Why are auctions used for so many goods? Its a way of finding out who values the good most highly. Whoever bids the most gets the goods. This is how we maximise the probability of getting an efficient allocation of resources. Secondly would a Labour government compensate the seller of the land for their policy? Under the Labour policy the seller would be forced to sell their land at a lower price than they would otherwise get (or not sell at all) and would a Labour government make up the difference between the actual sale price and the highest possible price? And if not, Why should the seller receive a lower return than they otherwise would?. And if this is a good policy for land why not implement it for other goods as well? What makes this idea land specific?

While I'm thinking about this let me add that the "logic" of our xenophobic friends must be symmetric. That is, if it is bad for foreigners to invest in New Zealand it must be equally bad for foreign counties to have New Zealanders investing in them. So why are New Zealand First, the Conservatives and Labour not announcing their intention to introduce legislation preventing New Zealanders from investing overseas?

Presidents and the U.S. economy

There is a new NBER working paper out on Presidents and the U.S. Economy: An Econometric Exploration by Alan S. Blinder and Mark W. Watson. The abstract reds:
The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.
So Democrats got lucky.

Friday, 1 August 2014

Incentives matter: drug mules file

This is the abstract of a new paper The market for mules: Risk and compensation of cross-border drug couriers by David Bjerk and Caleb Mason in the International Review of Law and Economics, Volume 39, August 2014, Pages 58–72.
This paper uses a unique dataset to examine the economics of cross-border drug smuggling. Our results reveal that loads are generally quite large (median 30 kg), but with substantial variance within and across drug types. Males and females, as well as U.S. citizens and non-U.S. citizens are all well represented among mules. We also find that mule compensation is substantial (median $1313), and varies with load characteristics. Specifically, for mules caught with cocaine and meth, pay appears to be strongly correlated to expected sentence if caught, while pay appears to be primarily correlated with load size for marijuana mules, who generally smuggle much larger loads than those smuggling cocaine and meth. We argue that our results suggest that this underground labor market generally acts like a competitive labor market, where a risk-sensitive, reasonably well-informed, and relatively elastic labor force is compensated for higher risk tasks.

Thursday, 31 July 2014

Why capitalism is better than socialism

In this short (8 mins) video from ReasonTV philosopher Jason Brennan discusses his book "Why Not Capitalism?".
"We're not the Borg from Star Trek. We want to engage in private projects we do by ourselves and not with others," says Jason Brennan, an associate professor of philosophy at Georgetown University.

Brennan's new book, Why Not Capitalism?, casts a critical eye on a notion with wide appeal among academics, politicians, and the general public: That even though history has shown that socialism is unworkable in practice, it's still the best way to run society in theory.

Brennan says that such thinking neglects the fact that even in utopia people will have significantly different visions of a life well lived. "You want a system under which you can realize all these different conceptions of the good life and the good community," he argues. Even in a world free of petty rivalries, tribalism, and human failings, capitalism would still be superior because it uniquely affords citizens the rights and freedoms necessary to customize their lives and pursue their own, personally meaningful projects.

Tyler Cowen on inequality and what really ails America

Eduardo Porter writes-up an email interview he had with economics professor Tyler Cowen on the subject of inequality.

A few interesting questions:
Q: Inequality is running amok. The richest one percent of Americans pull more than a fifth of the nation’s income. The top 10 percent take half, more than during the Roaring Twenties. President Obama seems to believe this is “the defining issue of our time.” Is it?

A: “Income inequality” consists of at least three separate issues: 1) the top one percent is earning more; 2) the relative return to education is rising; and 3) economic growth is slow, and thus many lower- and middle-income groups are not seeing their incomes rise very much over time. The third of these is arguably the defining issue of our time. Grouping these issues all together under the broad heading of “income inequality” I view as a big intellectual mistake.

Q: So should we worry at all about the chasm opening up between the income of the rich and the rest?

A: I worry about stagnation in the middle and towards the bottom, not the income gap per se. A lot of the income growth at the top has come from globalization; for instance, Apple now sells a lot of iPhones to China. That’s not something we should be worried about. Rather, we should celebrate it.

Q: So, your conclusion is we should obsess less about rising inequality in America.

A: We should focus policy on increasing the quality and affordability of housing, health care and education, and on raising the rate of technological advancement. If we did that, we wouldn't have to worry about this red herring of “inequality” writ large any more.

By the way, the biggest inequalities are those across borders. So if we are talking policy, how about a more liberal immigration policy for the United States? That should be the No. 1 priority for anyone concerned about income inequality.

Wednesday, 30 July 2014

"Neo-liberals" and "progressives": never the twain shall meet?

I was asked to give evidence on behalf of the Fabian Society to the Beveridge Committee on Broadcasting, and although I refused on the grounds that I was not a Socialist (this was countered by saying that there was not a specifically Socialist point of view on broadcasting), I did in fact prepare the first memorandum considered by the Fabian Society Committee on broadcasting and which was the basis from which their discussions proceeded.

Ronald Coase 1961

There is an interesting new working paper out on Ronald Coase and the Fabian Society: Competitive discussion in liberal ideology by David M. Levy and Sandra J. Peart. Levy and Peart open the paper by saying:
Ronald Coase wrote the 1949 memo that guided the discussion of the Fabian Research Group on broadcasting. In the evidence presented to the Beveridge Committee on broadcasting, the Fabians endorsed his recommendations by and large. These two facts have previously escaped notice and, as a result, our understanding of post-war economic thought has been misinformed. The stereotype of post-war economic thought divides the profession into two groups, “neo-liberals” and “progressives”. In this stereotyping “neo-liberals” are said to advance a policy agenda in which markets, rather than governments, provide services; “Progressives”, by contrast, are said to favor a greater role for governments in the provision of services. In this admittedly broad characterization, there is little room for “neo-liberals” to collaborate with “progressives”.

Coase is said to typify the “neo-liberal”, while the Fabians do the same for “progressives.” As such, we would expect that they would have nothing in common in the dimension of policy recommendations. The evidence presented below, however, demonstrates that Coase and the Fabians proposed a third alternative, one that avoided the government-market dichotomy that has been so important in stereotyping post-war thought. Instead of proposing a market or a government solution, Coase and the Fabians recommended that broadcasting in Britain be fragmented to break up the BBC monopoly whose origins Coase had so carefully studied (Coase 1950). When the Beveridge Committee recommended a continuation of the monopoly, Coase was, not surprisingly, distressed. Moreover, he was not pleased with the minority report that recommended commercializing television because Coase thought that policy would be outside the British consensus.

Coase’s willingness to allow public consensus to trump the theoretical rationale for market provision of broadcasting suggests a deep problem with the stereotype of post-war market liberalism. In both the memo for the Fabian Society and his book, Coase used a recently coined word—totalitarian—to describe the theoretical rationale for a broadcasting monopoly presented by the spokesperson of the BBC, Lord Reith. By the word “totalitarian” Coase meant something more general than the policies advocated by Hitler, Mussolini, or somewhat nearer at hand, Mosley, but rather the view that state policy can ignore the legitimate wishes of the citizens of the state. The idea that there are “democratic goals” that can be separated from “democratic means”—a view that Lord Reith articulated frequently as we document in note 8—is the heart of the danger which Coase always and everywhere opposed.
Interesting stuff. The idea that a socialist group like the Fabians were willing to go along with Coase on breaking up the BBC monopoly is not something we would expect to see given the standard division of post-war thought into two, non-intersecting, groups of socialists and (classical) liberals. Coase's opposition to totalitarian thought is somewhat less surprising.

Levy and Peart continue,
The first two paragraphs of the Coase memo reproduced in the documents section below (p. 20) speak to the heart of the issue. What is needed, Coase urged, is sufficient public information to allow an informed discussion to take place. In Coase’s view public discussion had been stymied. Perhaps for strategic reasons, those in authority have not revealed the requisite information about possible alternative arrangements. The issue Coase stresses is not the efficient satisfaction of wants by market processes but public knowledge with which people can work out what institutions seem best to them. In his 1950 British Broadcasting, Coase closes the chapter “Public Discussion of the Monopoly” with the consequences of systematic suppression of information:
Though the programme policy of the Corporation gave the lower social classes what they ought to have, it gave the educated classes what they wanted; or, at any rate, more of what they wanted than they thought they would obtain with what was believed to be the only alternative—commercial broadcasting (1950, p. 177)
The paternalism of the BBC is obvious in that the "lower social classes" got what the BBC considered they should have, rather than what they actually wanted and the "educated classes" got an amount of what they wanted decided by the BBC.

The first two paragraphs of Coase's memo referred to above read:
Memorandum by Mr. R. H. Coase

1. The task of the Beveridge Committee

What is wanted is an entirely new approach to the problems of broadcasting policy in Great Britain. The present attitude is one of uncritical acceptance of the existing organisation. This can largely be attributed to the way in which previous Committees worked. The Crawford Committee, which led to the establishment of the BBC, made (so far as I have been able to discover) no detailed examination of alternative schemes. And we know from Lord Elton that the Ullswater Committee (of which he was a member) came to their conclusions without questioning the basic assumptions on which the case for the existing organisation (and in particular the monopoly) rested.

The present Committee should take a different view of its responsibilities. Alternative arrangements should be examined. And most (if not all) of the evidence presented to the Committee should be published. The lack of information on what is possible has greatly handicapped public discussion. Publication of the evidence would permit an independent assessment of the conclusions reached by the Committee and would assist in the development of an informed public opinion on broadcasting policy.
Here we can see the typical Coaseian call for comparative institutional analysis. And a call to make sure that people have the information to basis such analysis on. We should always think about the role that alternative institutions play in ameliorating or exacerbating conflicts in a world of positive transaction costs - including broadcasting.

Tuesday, 29 July 2014

EconTalk this week

Sam Altman, president of startup accelerating firm Y Combinator, talks to EconTalk host Russ Roberts about Y Combinator's innovative strategy for discovering, funding, and coaching groundbreaking startups, what the company looks for in a potential startup, and Silicon Valley's attitude toward entrenched firms. The two also discuss Altman's thoughts on sectors of the economy that are ripe for innovation and how new firms are revolutionizing operations in these industries.

A direct link to the audio is available here.

Monday, 28 July 2014

Trade and the poor

A interesting new NBER working paper on Measuring the Unequal Gains from Trade by Pablo D. Fajgelbaum and Amit K. Khandelwal. The abstract reads:
Individuals that consume different baskets of goods are differentially affected by relative price changes caused by international trade. We develop a methodology to measure the unequal gains from trade across consumers within countries that is applicable across countries and time. The approach uses data on aggregate expenditures across goods with different income elasticities and parameters estimated from a non-homothetic gravity equation. We find considerable variation in the pro-poor bias of trade depending on the income elasticity of each country's exports and imports. Non-homotheticities across sectors imply that trade typically favors the poor, who concentrate spending in more traded sectors. (Emphasis added.)
So trade helps the poor given the fact that the poor concentrate their spending in the traded sectors of the economy. Fajgelbaum and Khandelwal writes,
We also find important effects from sectoral heterogeneity. As in the single-sector setting, the pro-poor bias increases with a country’s income elasticity of exports. But, in contrast with the single-sector estimation, the multi-sector model implies a strong pro-poor bias of trade in every country. On average over the countries in our sample, the real income loss from closing off trade are 57 percent for the 10th percentile of the income distribution and 25 percent for the 90th percentile.5 This bias in the gains from trade toward poor consumers hinges on the fact that these consumers spend relatively more on sectors that are more traded, while high-income individuals consume relatively more services, which are the least traded sector. Additionally, low-income consumers happen to concentrate spending on sectors with a lower elasticity of substitution across source countries. As a result, the multi-sector setting implies larger expenditures in more tradeable sectors and a lower rate of substitution between imports and domestic goods for poor consumers; these two features lead to larger gains from trade for the poor than the rich.

Deirdre McCloskey on the great enrichment

From the IEA comes this short video of Professor Deirdre McCloskey. Deirdre McCloskey, Author of The Bourgeois Era series, speaks to ieaTV about inequality, the amazing growth in the wealth of the working class over the past three hundred years and how wealth and commerce has been viewed over the centuries.

Deirdre is the Distinguished Professor in English, Economics, History and Communication at the University of Illinois. As a self-described "postmodern free-market quantitative Episcopalian feminist Aristotelian", she has worked on numerous areas of economic history, including British economic 'failures' during the 19th Century. She has written fourteen books and edited another seven.

Sunday, 27 July 2014

Interesting blog bits

  1. Andrew Cohen on Libertarianism and Parental Licensing
    Back in December of 2011, I posted “Licensing Parents,” defending a view Hugh LaFollette had introduced into philosophical literature in 1980: that the state should license parents (LaFollette further defended this stance in 2010; see Note 1). LaFollette is not a libertarian and as I indicated then, I disagree with him about a lot–including the need to license medical doctors and lawyers. I nonetheless think he is right that we ought to license parents. In this post, I explain why libertarians—or at least minarchist BH-libertarians—ought to endorse parental licensing.
  2. Bryan Caplan on The Economist on Overparenting
    Though I'm no fan of The Economist's editorials, their science coverage remains outstanding. Check out their latest piece on overparenting.
  3. Ryan Bourne on ‘Does good broadcasting require compulsion?’ The question the BBC won’t address
    I got to thinking about how helpful this interview style would be when I read the BBC’s own Director of Policy James Heath’s response to my response to his original blog post on why the licence fee is the right method of funding for the BBC. Rather than focusing on the arguments that I had made as to why a licence fee – a compulsory charge applied to everyone who wants to watch any live television – was indefensible and unnecessary, Heath instead used his article to outline why the BBC itself was of value to us.
  4. Thorsten Beck, Hans Degryse, Ralph De Haas and Neeltje van Horen on When arm’s length is too far
    The small and medium-size enterprises (SMEs) were among the most severely affected in the Global Crisis. This column discusses new evidence on how different lending techniques affect lending in bad and good times. Data from 21 countries in central and eastern Europe show that ‘relationship lending’ alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
  5. Linda Goldberg, Signe Krogstrup, John Lipsky and Hélène Rey ask Why is financial stability essential for key currencies in the international monetary system?
    The dollar’s dominant role in international trade and finance has proved remarkably resilient. This column argues that financial stability – and the policy and institutional frameworks that underpin it – are important new determinants of currencies’ international roles. While old drivers still matter, progress achieved on financial-stability reforms in major currency areas will greatly influence the future roles of their currencies.
  6. David Saha on The Transatlantic Trade and Investment Partnership: Review of the debate on economic blogs
    An early draft of the Transatlantic Trade and Investment Partnership (TTIP) sparked an intensive public debate over possible advantages and disadvantages. This column reviews some arguments in favour of the Partnership and against it. While there is some debate over how large the economic benefit could be in the face of already relatively low trade barriers, critics claim that the deal will lower standards of consumer protection, provision of public services, and environmental protection in the EU.
  7. Tim Woratall on Don't Believe What You Read; Google Doesn't Avoid Tax
    It’s the results reporting season over in my native UK again and once again, as regular as the seasons themselves roll around, we’ve spluttering pieces in the press about how Google avoids all of this tax that it should justly and righteously pay. Which means it must be the time of year for me to point out that Google doesn’t in fact avoid paying UK corporation tax, whatever you might be being told in the newspapers.
  8. John Cochrane on Lucas and Sargent Revisited
    The economics blogosphere has a big discussion going on over Bob Lucas and Tom Sargent's classic "After Keynesian Macroeconomics."

FEE video: John Blundell - Lessons from Margaret Thatcher

John Blundell speaks about his experience with Margaret Thatcher at "An Evening at FEE" on May 21st, 2011.