EconLog
Bryan Caplan and David Henderson

Uber Wars. The Ban Menace

Alberto Mingardi

The BBC reports that Uber has been banned in Germany by a Frankfurt court:

A court in Frankfurt ruled that the firm lacked the necessary legal permits to operate under German law.
It has emerged that the firm was told last week that it could no longer take passengers and faced a fine if it did so. The ruling is a temporary injunction, meaning that the situation could change after a follow-up hearing

Before that, Uber had been banned in Berlin. The anti-Uber climate is not a German exclusive, but arguably a Berlin ban would hurt Uber more than banning it in Athens or in Milan, because Germany is currently enjoying the reputation of being a functioning economy, vis-à-vis other European states (Philip Booth disagrees).

Uber may be trying to "appeal to the people", as Art has argued here. However, to see if this strategy is conducive to a demand for lighter regulation of the taxi industry, I think it'll be interesting to see whether any major political figure emerges in Europe who sides with Uber as a symbol of new opportunities and the so called "digital economy". Italian prime minister Matteo Renzi called Uber "an extraordinary service," and a couple of words by the prime minister have so far successfully slowed down attempts to crack it down. But I haven't seen any other major political figure coming out on the issue.

There is an exception: European Commissioner Neelie Kroes has reacted to the Berlin ban with a tweet. She remarked that "zero evidence = bad policy" but did not openly mention any competition-related argument (Kroes is now Vice President of the Commission but used to be the Competition Commissioner). The debate that developed on Twitter is interesting. Kroes remarked that she thinks "there should be licenses", running person transport service, but that she opposes "protectionism" and "bans based on lobbying" (by taxi drivers). She also, however, wrote that "taxi services are a national legal competence", and so there isn't much that the Commission could do.

The problem Uber has, in Europe, is the old one: concentrated interests win over dispersed interests. Taxi drivers are homogeneous interest groups that can represent their own positions relatively easily to politicians, who understand the possible electoral gain by agreeing with them. Consumers of taxi or Uber services do not speak with a single voice and typically won't be heard in the decision making process. Uber is a profit seeking, multinational company, that is a less interesting interlocutor for decision makers than taxi drivers.

But besides the obvious public choice problems, it is a fact that allowing for Uber in most European states would require extensive rewriting of the existing regulations - which means some political entrepreneurship is needed. Concentrated interests, in this case, have the obvious advantage of siding with the status quo.

CATEGORIES: Regulation

   


Against Winning

Bryan Caplan
When I was a child, adults taught us to look down on bad winners.  The maxim: "It's not whether you win or lose; it's how you play the game."  The implicit model was something like: Yes, winning is better than losing, all else equal.  And yes, there's a trade-off between winning and common decency.  But losing with common decency is better than winning without it.  If you face a choice between losing and foul play, you should choose to lose.

I'm usually skeptical of narratives about the Good Old Days.  But when I look at the modern world, the ethic of noble defeat that I vividly remember from my youth seems virtually extinct.  When was the last time you witnessed the public shaming of a dishonorable winner?  Nary an example comes to my mind.  In everything from politics to reality t.v., our bottom line is "Who won?," not "Who deserved to win?"

The evils of overrating winning are most obvious in violent conflict.  During the 20th-century, every major power embraced blatant war crimes in the name of victory - even though it's unclear whether these war crimes even helped.  The exemplars of Sore Winner's Syndrome, though, are terrorists.  They're too weak to win by any conventional means, yet too proud to compromise or submit, so they murder innocents and cross their fingers.

It's tempting to accuse the proponents of honorable defeat of bad faith.  "This is just an attempt to bolster the status quo by guilting its opponents into ineffectual strategies - or quietism."  But when you're all alone with your conscience, the duty to gracefully lose is hard to deny. 

I say these words as a perennial political loser.  I have little hope that any of my favorite causes will prevail in the foreseeable future.  For example, I don't expect to see anything like open borders in my lifetime.  I'm happy to try my luck by writing, speaking, and organizing on behalf of freedom of movement.  I unabashedly advocate Huemerian civil disobedience to these unjust laws.  But if these tactics fail to open the borders, as they almost surely will, I won't resort to anything scarier. 

Pragmatically, of course, scarier tactics would probably fail or backfire.  But my objection is fundamental: "Victory by any means necessary" is the slogan of a political criminal, and I will have no part in it.  Neither should you.


   


Predicting bubbles

Scott Sumner

MaynardGKeynes recently left this comment:

Simple fact is that Shiller correctly predicted 3 of the last 3 bubbles (2000, housing, 2007).
That's a widely held view, but is it correct? This is from Eugene Fama's Nobel Prize lecture (in the AER):
On the website for his book Irrational Exuberance, Shiller says that at a December 3, 1996, lunch, he warned Fed Chairman Allan Greenspan that the level of stock prices was irrationally high. Greenspan's famous "Irrational Exuberance" speech followed two days later. How good was Shiller's forecast? On December 3, 1996, the CRSP index of US stock market wealth stood at 1518. It more than doubled to 3191 on September 1, 2000, and then fell. This is the basis for the inference that the original bubble prediction was correct. At its low on March 11, 2003, however, the index, at 1739, was about 15% above 1518, its value on the initial "bubble" forecast date. These index numbers include reinvested dividends, which seem relevant for investor evaluations of "bubble" forecasts. If one ignores dividends and focuses on prices alone, the CRSP price index on March 11, 2003, was also above its December 3, 1996, value (648 versus 618). In short, there is not much evidence that prices were irrationally high at the time of the 1996 forecast, unless they have been irrationally high ever since.

The second "success" story is the forecast in the mid-2000s that real estate prices were irrationally high. Many academics and practitioners made the same forecast, but an easy one to date is Case and Shiller (2003), which was probably written in late 2002 were early 2003. To give their prediction a good shot, I choose July 2003 is the date of the first forecast of a real estate "bubble." The S&P/Case Shiller 20-City Home Price Index is 142.99 in July 2003, its peak is 206.52 in July 2006, and its subsequent low is 134.07 in March 2012. Thus, the price decline from what I take to be the first forecast date is only 6.7 percent. The value to homeowners from housing services during those nine years from July 2003 to March 2012 surely exceeds 6.7% of July 2003 home values. Moreover, on the last sample date, October 2013, the real estate index, at 165.91, is 16% above its value on the initial "bubble" forecast date. Again there is not much evidence that prices were irrationally high at the time of the initial forecast.


I see this sort of thing all the time. In January 1987 John Kenneth Galbraith claimed stock prices were a bubble. They then proceeded to rise by nearly 1000 points and then fall by nearly 1000 points, all within 1987. After stocks fell sharply, some people assumed Galbraith had predicted the crash. Back in 2003, The Economist magazine predicted that housing prices would fall in a number of specified markets. After the housing bubble burst, they ran an advertisement bragging about their prescience, even though their specific predictions were almost all incorrect. Housing prices rose strongly after 2003 in most markets, and remained well above 2003 levels even after declining.

If Shiller had lived in the UK, Canada, Australia or New Zealand, his housing price forecast would not have been just a little bit wrong, but rather wildly off base. He's lucky that he lives in a market that recently had a once in a century housing price drop, and yet as Fama shows his prediction was still somewhat off target. And of course his stock market model has done very poorly since 2010, when his model suggested the S&P500 was 20% overvalued. At the time it was at 1070!

We all make either implicit or explicit forecasts about the markets. If we later notice market movements that seem to align with our initial forecasts we tend the pat ourselves on the back and assume the forecasts were correct. This is just one of many cognitive biases that we human beings are prone to. My suggestion is to pay no attention to bubble forecasts. They are useless. Indeed the entire bubble concept is useless.


   


The Role of Unions

David Henderson

Every Labor Day in the last few years, we hear about the decline of unions and how that has been a bad thing. What I find striking is how economically uninformed most of this commentary is.

Start with the fact that what gave unions their big push in the 1930s was federal legislation allowing them to be the sole bargainer for employees, even for employees who had no wish to join or pay dues. What we do call an organization that is the sole seller? We call it a monopoly. And not the kind of monopoly that some people say Microsoft is or had been. Microsoft always has to compete with other software companies. No. Unions are the kind of monopoly that George Stigler wrote about in "Monopoly" in The Concise Encyclopedia of Economics. Stigler wrote:

Even today, most important enduring monopolies or near monopolies in the United States rest on government policies.

Interestingly, even two of the most prominent modern economist/defenders of unions admit that fact. In the article Labor Unions in The Concise Encyclopedia of Economics, Morgan Reynolds, formerly chief economist with the U.S. Department of Labor, writes:
According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, "Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels"

Unions, moreover, have a pretty ugly track record on race relations, which is why two prominent early 20th century black leaders, W.E.B. DuBois and Booker T. Washington, who agreed on little else, agreed that unions were bad for black workers. When people forcibly prevent you from competing and figure out ways to exclude you from working, you don't feel very good about them. I remember attending an antiwar rally in San Francisco in 1980 (when some people were worried that the U.S. government would go to war against the Soviets in Afghanistan--little did we know that the U.S. government was already at war against the Soviets in Afghanistan) and hearing some young black women sing a song in which some of the words were: "The union man, he decide whether I live or die." Incidentally, as Reynolds points out in Labor Unions, one of the economists who did the most to document the early negative effect of unions on black workers was President Carter's chief economist of the Labor Department, Ray Marshall.

You'll often hear people complain about unions today and say words to the effect: "At one point in our early history we needed them but today they're no longer needed." But this golden age of unions is a myth. That doesn't mean that we don't need them--possibly some people do. But what we don't need is government support of union monopolies.

By the way, over the last 40 years or so, unionization has changed dramatically. As Reynolds writes:

In the United States, union membership in the private sector peaked at 17 million in 1970 and had fallen by nearly half--to 8.8 million--by 2002. Barring new legislation, such as a congressional proposal to ban the hiring of nonunion replacement workers, private-sector membership will likely fall from 8.5 percent to 5-6 percent by 2010, no higher than the percentage a hundred years ago. While the unionization rate in government jobs may decline slightly from 37.5 percent, public-sector unions are on schedule to claim an absolute majority of union members within the next few years, thereby transforming a historically private-sector labor movement into a primarily government one. Asked in the 1920s what organized labor wanted, union leader Samuel Gompers allegedly answered, "More." Today's union leader would probably answer, "More government." That answer further exposes the deep, permanent conflict between union members and workers in general that inevitably arises when union-represented employees are paid monopoly prices for their services.

So our big challenge with unions nowadays is to rein in unions of government workers who are negotiating high wages and high pensions. That is what is wrecking state and local government budgets all over the United States.

CATEGORIES: Labor Market , Regulation

   


Robert Litan gives a nice 15-minute speech in which he highlights some of the main contributions that microeconomists have made that have generated, over 30+ years, hundreds of billions (and possibly trillions) of dollars in consumer and producer surplus. (These are my estimates, by the way: he doesn't give estimates in his talk.)

It's misleadingly titled "An Economist Walks Into a Bar."

Of all the stories he tells, the one that I have some connection with professionally is the deregulation of airlines story.

I would have missed this talk had Alex Tabarrok over at marginalrevolution.com not highlighted it. If you want to see some pretty upset people, though, most of whom missed the point, go and look at the comments. The one legitimate complaint in the comments is that Litan attributes Billy Beane's strategy in the success of the Oakland A's to economists even though Bill James is not an economist. James probably could have been a good economist, but he's not.

I was disappointed by this comment from Kent Guida:

Is every marketing innovation to be attributed to some economist? Is that what economics has come to -- the desperate attempt to take credit for marketing?

Of course, Litan did not credit economists for "every marketing innovation." Instead he credited economists for specific innovations: he gave specific examples, named the particular people involved, and told the specific story. Guida doesn't gainsay any of this.

By the way, speaking of airline deregulation, Tyler Cowen at marginalrevolution.com links to a great explanation, by Amy Cohn, of the cost to airlines of canceling flights. It's well worth reading.

Note: Bob Litan wrote the article "Regulation" for The Concise Encyclopedia of Economics.

CATEGORIES: Microeconomics , Regulation

   


The Weather Channel's daily and hourly forecasts often seem logically incompatible.  Consider Oakton, VA's forecast for today.  The current daily prediction says "60% chance of rain."  But several evening hours individually have the same probability of 60%.  Unless I'm missing something, this is only possible if those probabilities are perfectly dependent (if rain happens, it happens during every hour) or negatively independent (if rain happens one hour, it doesn't happen during other hours). 

These extreme cases seems unlikely.  The ironclad puzzle, though, is that the current forecast for 7 PM is a 70% chance of rain.  How can an hour have 70% when the whole day only has 60%?  Nor is this a fluke case; in my experience, hourly rain probabilities slightly above the daily probabilities pop up every few days.

I'm tempted to dismiss my own puzzlement by quoting The Simpsons:
Comic Book Guy: Last night's Itchy & Scratchy was, without a doubt, the worst episode ever. Rest assured I was on the Internet within minutes registering my disgust throughout the world.

Bart: Hey, I know it wasn't great, but what right do you have to complain?

Comic Book Guy: As a loyal viewer, I feel they owe me.

Bart: For what? They're giving you thousands of hours of entertainment for free. What could they possibly owe you? If anything, you owe them.

Comic Book Guy: ...Worst episode ever.
Fair point, but is there anything I'm missing? 

Update: Minutes after writing this post, I realized that the problem is more severe than I thought.  The daily and multiple hourly forecasts can indeed be equal if the probabilities are perfectly dependent (or nearly perfectly dependent, with a slight rounding error).  But the "negative dependence" loophole I suggested is completely confused.  If there is a 60% chance at 6 PM and 7 PM, and rain doesn't happen at 6 PM, then any lingering positive probability of rain at 7 PM implies that the probability of rain for the day initially exceeded 60%.  This is true for partial dependence, independence, and negative dependence.

CATEGORIES: Economic Methods

   


I had lunch yesterday with Richard McKenzie, one of the co-authors of the Econlib Feature Article that will appear Monday. He gave me a copy of a special little paperback he produced of what he calls "Dwightisms." They're actual sayings that economist Dwight Lee, another contributor to Econlib Feature Articles, has come up with over the years. Richard handed out copies at a special retirement party held for Dwight at Southern Methodist University last May. It's roughly the size of the handouts some of us suffered through in the late 1960s when Maoists on college campuses handed out things titled "The Wisdom of Chairman Mao." With this difference: Dwight actually is wise.

There's a lot of good content there. I'll give some of the best "Dwightisms" below. I'm arranging them in three categories: (1) his insights on economics, (2) his well-known self-deprecating style, and (3) his insights on other things.

Insights on economics

A preacher blaming his congregation for being too small would be recognized as a moron. But blaming suppliers for price gouging, while equally moronic, is considered impressive economic insight.

Businessmen are more honest about the quality of their products than preachers, politicians and professors are about the quality of theirs. [DRH note: When I read this, I thought of a similar comment from the late George Stigler. This is the one in particular that I thought of:

Advertising itself is a completely neutral instrument and lends itself to the dissemination of highly contradictory desires. While the automobile industry tells us not to drink while driving, the bourbon industry tells us not to drive while drinking.... Our colleges use every form of advertising, and indeed the typical university catalog would never stop Diogenes in his search for an honest man.

Self-Deprecating Style

I got over embarrassment at an early age. I grew up in a house full of mirrors.

Those who limit their friendships to those socially superior to themselves are commonly criticized. This is unfair to me since that is the only choice I have.

Insights on Other Things

I like teaching a lot, I just don't like teaching a lot.

My wife and I like to take cruises, or more accurately, my wife likes to take cruises and I like my wife.

CATEGORIES: Economic Philosophy

   


This started as a comment on my post about mandating the teaching of cursive in Tennessee, which got some great comments (as usual; thanks, EconLog readers), but it got long enough that I decided to make it its own post. The best came from Tom West:

I can pretty much guarantee that either no one asked "what will we *not* teach so that we can teach cursive writing", or if that was asked, the question was roundly ignored.

When dealing with things like the value of cursive writing (or other abstracts), people do *not* like to face the fact that there are still trade-offs that will be made.

At best, it's ignored. At worst, it's considered immoral to be consciously and deliberately making those trade-offs.

Another great comment came from...Tom West again:

On another point, I'm sad to see hand-written class notes disappearing altogether in favor of typed, or even worse, teacher-provided, class notes. If my sons are any guide, the physical act of hand-writing the notes allows a significantly larger proportion of the information to actually "stick" in the student's brain.

For some reason, typing notes on a computer ends up more like stenography, going from ear to fingers without hitting the brain in the middle. Does hand-writing require that much more engagement?

Typed or not, too many notes turn into stenography: it pains me to see students essentially try to transcribe what I'm saying or to simply reproduce whatever I put on the whiteboard while they're otherwise completely checked out (yes, students, we can often tell when your mind is elsewhere). About a year ago, I started experimenting with Sketchnotes, and I think these combine the best of all worlds as pictures probably are worth 1000 words. I'm going to be playing around this semester with different writing and drawing apps for my iProducts, and I look forward to seeing what that does to the flow of the classes I'm teaching and to my retention when I'm at church or listening to a lecture or what have you.

I've seen coverage of the "if you write it by hand, it sticks better" research, and I've seen an argument that books read on paper stick better than books read on a Kindle. First, I'm not *that* surprised at these results, Second, from the coverage I've seen there's no discussion of the magnitude of the effects. Third, the experiments being reported on are pretty small. Even if the results hold up, I'm not sure they recommend writing by hand and reading on paper.

The first objection is the economist's: at what price? If ereaders and typing make reading and note-taking more convenient, might we be willing to trade depth for breadth?

There's a second objection: retention is less important in a world where we carry supercomputers in our pockets and have virtually unlimited data storage. Being able to recall specific bits of information is less important today, and it will continue to get less important in the future. Why? With this virtually unlimited storage, we will see people substituting away from knowing a lot of facts and toward analytical and creative reasoning.

Just as my friend Steven Horwitz has cautioned against corner solution parenting, I think it's important to avoid corner solution teaching and corner solution learning. Yes, it is important to know a lot of facts; however, unlimited storage and the ability to look up anything instantly from (almost) anywhere means that we can be a lot choosier about the facts we carry around in our heads and the facts we instead decide to outsource to the cloud.


   


Anthony de Jasay on "rights"

Alberto Mingardi

One of the many treats of Econlib are the articles of Anthony de Jasay. Mostly renowned for his remarkable book The State, De Jasay is among the most brilliant libertarian political thinkers.

This month he has a profound article on "distributive justice." The point he raises is a very interesting one. Conventions and laws historically build to restrain the "might is right" approach to political power. But he sees modern redistributionism as the return of "might is right": the almighty sovereign no longer being a king, but rather a collective sovereign, blessed by majority rule. De Jasay thinks carefully on how words in politics are symbols that both cover and enable a certain kind of measure or action. His conclusion is worth quoting in full (but read the whole thing, too):

When cave man became civilised, "might is right" was gradually restrained by the rule of justice, which was almost certainly a better evolutionary strategy for groups. Nearer our own age, two loopholes open up in the restraint, and are getting larger. Both are powerfully widened by the corruption of language.

As collective choice acquires the power to make rule-making rules that supplement or replace conventional rules, it typically excludes certain options and permits others. (...) The state is called upon to protect property against all comers except against itself. This is justified by the supremacy of the public interest over rules governing property. Public interest is supreme because no argument can long sustain the proposition that the interest of the public is not supreme. Thus, an elementary sleight-of-hand using a truism pierces and widens a loophole for distributive justice to rise above the rule of ordinary justice.

The other and equally convenient loophole is created by the persistent employment of the word "equal" as a moral qualification. Thus, "equal" comes to stand in relation to "unequal", and "equality" to "inequality", as "good" stands in relation to "bad", "true" to "untrue", "faithful" to "faithless" or "just" to "unjust". A more equal distribution of resources is eo ipso better than an unequal one, and no argument to the contrary could resist the charge of perversity or heartlessness. Distributive justice, by attempting to make the distribution of resources more equal, is serving justice.

It is the great good fortune of this somewhat shoddy doctrine that its demand coincides with what the modern form of collective choice, namely majority rule, produces, for majority rule is might disguised as right. By the same token, it is the great good fortune of democracy that its manner of awarding the control of government namely redistribution, happens to coincide with what distributive justice, a doctrine of moral superiority, demands of it. "Might is right" is back with a vengeance.

CATEGORIES: Economic Philosophy

   


Another semester is upon us, and in my principles of macroeconomics class at Samford we spent the first week reading Frederic Bastiat's What is Seen and What is Not Seen and Leonard Read's I, Pencil. In class yesterday we considered a fundamentally Hayekian upon reading "I, Pencil:" markets and prices allow us to use knowledge we don't have.

Specialization, division of labor, and division of knowledge allow us to harness and deploy others' knowledge for our own purposes. I don't know how to build a diesel engine, but as I'm writing this I'm harnessing others' knowledge in order to prepare a cup of coffee. I don't know how petroleum becomes the specific kind of plastic that makes up the K-Cup I'm brewing, but I'm able to harness others' knowledge of chemical engineering in order to accomplish my own goals.

Every good we buy and every price we pay embodies knowledge and expectations that are not our own but that nonetheless appear to us in intelligible form: goods and services have physical, temporal, and spatial characteristics, and prices are pretty straightforward ("you can have this iProduct and all it entails for just a few hundred dollars"). If you want to get spiritual or cosmic about it, this means that we are linked across time and space not only by our common humanity, but also by our every action. Far from being an alienating and atomizing force, I think the market actually draws us together in ways that are hard to appreciate but that become really beautiful once you come to understand them.


   


When I was in high school, Murray Rothbard's analysis of government ownership was a revelation.  Why was my high school a den of waste, incompetence, and stagnation?  Because it was a government enterprise!
On the free market, in short, the consumer is king, and any business firm that wants to make profits and avoid losses tries its best to serve the consumer as efficiently and at as low a cost as possible. In a government operation, in contrast, everything changes. Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it. The government bureau does not get its income as does the private firm, from serving the consumer well or from consumer purchases of its products exceeding its costs of operation. No, the government bureau acquires its income from mulcting the long-suffering taxpayer. Its operations therefore become inefficient, and costs zoom, since government bureaus need not worry about losses or bankruptcy; they can make up their losses by additional extractions from the public till. Furthermore, the consumer, instead of being courted and wooed for his favor, becomes a mere annoyance to the government someone who is "wasting" the government's scarce resources. In government operations, the consumer is treated like an unwelcome intruder, an interference in the quiet enjoyment by the bureaucrat of his steady income.
Twenty five years and a Ph.D. in economics later, Rothbard's words still sound like a revelation.  They handily explain everything wrong in government enterprises.  There's just one problem: Rothbard's words explain far too much.  Since graduating high school, I've seen a lot more government enterprises.  I've paid more attention to the ones I already knew.  And I've worked in a government enterprise for seventeen years.  Their performance is almost always disappointing.  But contrary to Rothbard's story, their performance is rarely disastrous.  The U.S. Post Office almost always delivers my letters in three days or less.  One hurricane aside, I always have clean tap water for pennies a gallon.  And most public school teachers put on a smile every morning and try to share some knowledge with their students.

What's going on?  Consider the following stories.

1. Rothbard mischaracterizes government employees' incentives.  Somewhat, but he's not far off.  In the public sector, the connection between pay and performance is truly weak.  Public universities, for example, are satisfied with professors' teaching as long as they demonstrate "high competence."  In plain English, that's the top 95% of the distribution, or even the top 98%.  Universities hold research to higher standards, but one lame article a year in A Refereed Journal usually suffices for tenure.

2. Elected politicians compete to make government work.  There's definitely something to this, but status quo bias is pervasive.  Voters may throw politicians out if there's a sudden decline in the performance of government enterprises.  But voters yawn in the face of eternal mediocrity.

3. Government employees take pride in their work.  In many parts of government, workers would feel bad about themselves if they fully exploited the system.  This is obvious for teachers, most of whom clearly like children.  But even most mailmen seem to care about doing a decent job. 

4. Government employees care about their co-workers' esteem. Government employees, like most human beings, don't want people around them to hold them in contempt.  As a result, a solid core of motivated government employees can use peer pressure to squeeze effort out of their careerist co-workers.  Some professors, for example, love teaching - and therefore look down on professors who teach poorly.  Fear of this down-looking impels conformist professors to do a better job. 

Am I damning with faint praise?  Sure.  Even the best government enterprises are slow to cut costs.  They're bad at innovation.  And they're almost uniformly terrible at putting aside Social Desirability Bias to answer every enterprise's most fundamental question: Is this worth doing at all?  Yet the anomaly remains: Simple economics implies that government enterprises should be far worse than they really are.

Unfortunately, I doubt the economics profession will ever take this anomaly seriously.  Left-leaning economists don't want to grant the obvious case against government enterprise - and market-leaning economists would rather reiterate the obvious case against government enterprise than calmly test it against the facts.

Update: Nathaniel Bechhofer points out I wrote a near-identical post five years ago.  I had a slight suspicion that this was so, but my search missed it.  The good news is that my thinking is consistent, all the way down to the order of explantions...

CATEGORIES: Microeconomics

   


Intellectual decay

Scott Sumner

Tyler Cowen recently linked to a good article by Francis Fukuyama:

The two dominant American political parties have become more ideologically polarized than at any time since the late nineteenth century. There has been a partisan geographic sorting, with virtually the entire South moving from Democratic to Republican and Republicans becoming virtually extinct in the Northeast.
Fukuyama talks a lot about "political decay." Here I'd like to focus on what I see as intellectual decay. At the risk of angering everyone, I'm going to try to be fair and balanced by picking 4 examples from each side. Let's start with the left:

1. In 1987 the New York Times suggested that we abolish the minimum wage. Now the left seems almost totally united in favoring a higher minimum wage. And not just the left. Mitt Romney endorsed a higher minimum wage. Even the Economist magazine called opponents of a higher minimum wage "stingy." One counterargument is that inequality has gotten worse. But the liberals who opposed the minimum wage back in the 1980s and 1990s did so primarily because they believed it hurt the poor. Another argument points to new research that suggests the minimum wage might not reduce employment. But you can find research on both sides of almost any social science question. Certainly Keynesians aren't going to abandon their theories because a study shows fiscal stimulus doesn't work. They think they have a model. But the supply and demand model that predicts minimum wages cause unemployment is far more firmly established that any macroeconomic model, especially Keynesianism. Or here's another example---how many liberals stopped supporting Head Start when studies came in showing no long term effects?

2. Greg Mankiw recently suggested abolishing the corporate income tax. Younger readers might find this hard to believe, but many liberals used to make the same sorts of arguments. Liberals were especially fond of the idea of a progressive consumption tax. They understood that it's pointless to redistribute income; the only way to help the poor was by redistributing consumption. Now they seem to be moving away from support of the progressive consumption tax, and when I read their explanations they aren't even close to being persuasive.

3. Back in the 1980s lots of liberals like Ted Kennedy voted for a cut in the top income tax rate from 50% to 28%, along with closing loopholes. Many foreign countries ruled by the left also slashed their top income tax rates. Now liberals concoct absurd theories to justify high MTRs on the rich, even if those tax rates don't raise any revenue at all. The models they rely on to justify these high rates are no more well established than the Laffer Curve theories they used to ridicule.

4. Back in the 1990s liberals had pretty much given up on fiscal policy, and instead favored using monetary policy. Now fiscal policy is all the rage. Again there is a superficial justification---the zero rate "problem." But when I was in school the idea of a liquidity trap was treated as a big joke. I keep asking for some empirical evidence that would justify a change in the conventional wisdom. The number one money textbook used to say that monetary policy was "highly effective" at the zero bound. Has some new evidence suddenly appeared that shows this is not true? If so, I'd sure like to know what that evidence is. Instead when I ask people to explain their views they typical point to "examples" that don't at all show what they claim.

And now 4 from the right:

1. Back when Reagan was president the right seemed to be supportive of more immigration. Now they have turned against immigration, but I can't see any empirical data that would justify this shift.

2. I recall that when liberals favored lots of "command and control" regulation to address global warming, and conservatives favored a carbon tax. That was the "market solution" comparable to the market-based approach to reducing sulfur emissions from coal-fired power plants. Some conservatives now latch on to "contrarians" in the scientific community. OK, but how come when the shoe was on the other foot conservatives would talk about "scientific consensus." For instance, conservatives used to criticize a lot of the excessive regulation of chemicals in the environment, by pointing to scientific studies that showed many of the pollutants that environmentalists were obsessing about did not have a statistically significant impact on health. When I read the Wall Street Journal in the 1970s it seemed like it was the clear thinking conservatives relying on science vs. the muddy-headed romantic environmentalists.

3. Conservatives used to have much more pragmatic views on health care reform. The plan adopted by Mitt Romney in Massachusetts was put together with input from the Heritage Foundation. Now the right seems to think that sort of approach is pure communism.

4. Conservatives used to have a pragmatic view of monetary policy. Milton Friedman thought money was too tight just about as often as he thought it was too easy. Now conservatives almost never seem to complain that money is too tight, even in situations where it clearly is, and where Friedman would have complained about tight money. Even worse, they have forgotten that Friedman warned them that low interest rates were not easy money; rather low rates are a sign that money had been tight. This is obviously the issue I have followed most closely, and don't see any justification for conservatives changing their views on monetary policy.

I worry that readers might get the wrong message from this post. I'm not really trying to argue that I'm right about these 8 issues, I freely concede that my opponents might be right on all 8 points. They are complex problems. But that's not the issue I'm raising. Rather I'm claiming that the left and right are moving ever further apart, taking ever more extreme views, without good reasons.

Once again, monetary policy is the issue I know best. What has shocked me about the debate is not so much that people disagreed with my views, but rather that the entire intellectual consensus on macro changed radically after 2007, and no one I talked to was able to provide any sort of intellectual justification. Indeed most people didn't even realize that the previous consensus had collapsed.

A note to commenters. Before you mention some study that has the support of 5% of climate scientists, ask yourself how you'd feel if some massive liberal big government intervention was being proposed on the basis studies that 5% of scientists supported, and 95% thought were nuts. Wouldn't you ridicule the heterodox view? And if you are a liberal, suppose someone as well known as Milton Friedman had claimed that 2013 would be a test of Keynesianism. And suppose the austerity had caused RGDP growth in 2013 to plunge sharply lower, contrary to what Friedman predicted. Do you seriously deny that you would be out there claiming monetarism was totally discredited?

PS. I will be traveling, and may be slow in responding to comments.


   


I wrote an article to that effect in 2011, noting that airline seats are an excellent case study for the Coase Theorem. This is an economic theory holding that it doesn't matter very much who is initially given a property right; so long as you clearly define it and transaction costs are low, people will trade the right so that it ends up in the hands of whoever values it most. That is, I own the right to recline, and if my reclining bothers you, you can pay me to stop. We could (but don't) have an alternative system in which the passenger sitting behind me owns the reclining rights. In that circumstance, if I really care about being allowed to recline, I could pay him to let me.
So writes Josh Barro in "Don't Want Me to Recline My Airline Seat? You Can Pay Me," New York Times, August 27.

His economic analysis is fine.

But the ultimate owner of the right to recline is the airline, not the passenger. It happens to be the case that the airline assigns the right to the passenger. But one could imagine the airline acting differently if enough passengers were upset.

As I'm writing this, I'm starting to think that I'm quibbling. After all, if the airline has assigned the right to the passenger, then Josh is correct in saying that he owns the right.

But I think it's more than a quibble, because Josh's way of putting it ignores the fact that the airline owns the whole airplane and gets to decide how to allocate the space. He might not be misled and probably would agree with my claim about the ultimate owner. But I think some of Josh's readers would be misled.

Why do I think that? Because look at the discussion over smoking in restaurants back in the 1990s when various state governments started to ban it. There was a huge discussion about externalities that smokers imposed on non-smokers. But that discussion ignored the fact that the restaurant owner has well-defined rights and, therefore, there is no externality. The Coase Theorem does not need to be invoked. The restaurant internalizes all costs and benefits. I've written about that in "Smoking in Restaurants: Who Best to Set the House Rules," Econ Journal Watch, 2007, Vol. 4, Issue 3 and in "How Property Rights Solve Problems," Econlib, April 2, 2012.

Barro challenges Donald Marron, former director of the Congressional Budget Office. Barro writes:

Mr. Marron says we ought to allocate the initial property right to the person likely to care most about reclining, in order to reduce the number of transactions that are necessary. He further argues that it's probably the person sitting behind, as evidenced by the fact people routinely pay for extra-legroom seats.

Barro responds to Marron as follows:
Mr. Marron is wrong about this last point. I understand people don't like negotiating with strangers, but in hundreds of flights I have taken, I have rarely had anyone complain to me about my seat recline, and nobody has ever offered me money, or anything else of value, in exchange for sitting upright.

But there's an even better response.

First, notice that Marron talks about how "we" ought to allocate the initial property right as if "we" should have any say about it. So Marron at least doesn't seem to get that it's the airline's property right. Even if Barro is not misled, Marron is. And notice that Barro didn't challenge Marron, which suggests that maybe Barro is misled about who has the right. (Notice that my own worry above about whether I'm quibbling now seems less justified.)

Barro doesn't quote Marron correctly, but he comes close enough. Marron actually writes:

I'd bet on the "reclinee" not the recliner. Which might explain why more airlines now offer the ability to pay extra for more legroom.

Here's my second response to Marron:

It is true that airlines offer the ability to pay extra for legroom. Even I, by the way, a man who is only 5'5" tall, sometimes pay for this legroom, especially if I'm planning to work and I don't want the recliner in front of me to prevent me from having my computer on the tray table. But that they offer extra legroom and get takers says nothing about which people value the space more. Remember that the problem occurs when someone reclines into an area where the person suffering from the recline has not paid extra for legroom. The fact is that the majority of people on the airplane are not willing to pay for that extra legroom. So the evidence that some are willing to pay what the airline charges is not nearly enough evidence to address the issue at hand.

BTW, after starting to write this, I noticed that Megan McArdle has weighed in and, as usual, gives a lot of insight in a short space.

CATEGORIES: Property Rights

   


Read this neat NYT write-up of new research by Nancy Segal and co-authors.  Segal, famous for her work on twins, got an idea when she encountered the oeuvre of Francois Brunelle, "a photographer in Montreal who takes pictures of pairs of people who look alike but are not twins":

When [Segal] saw the photographs, she realized that the unrelated look-alikes would be ideal study subjects: She could compare their similarities and differences to those of actual twins.

[...]

For Dr. Segal's initial study, she asked Mr. Brunelle to send questionnaires to some of his subjects, and she received completed forms from 23 pairs of unrelated look-alikes. The questionnaires yield a score based on five personality measures: stability, openness, extroversion, agreeableness and conscientiousness. The participants also took the Rosenberg Self-Esteem Scale...

[...]

For a second study, she teamed with a skeptic, Ulrich Ettinger, a psychologist at the University of Bonn in Germany who had heard about the look-alike project during a postdoctorate at the University of Montreal.

"I thought that if two people looked alike, they would have similar personality traits because people would treat them the same," he said. "For example, I thought men who looked alike and were tall and handsome would probably be extroverts."

Their analysis was consistent with the findings of Dr. Segal's first study: Personality traits do not appear to be influenced by the way people are treated because of appearance.
Typical personality correlations for identical twins are .5.  Here are the combined results from both studies of Unrelated Look-Alikes, reported in Segal, Graham, and Ettinger (Personality and Individual Differences, 2013):

ula.jpg

Though fascinating, this approach isn't quite as convincing as studies of socially mis-identified twins.  Whatever you think, don't miss Brunelle's pictures; they boggle the mind.

HT: Nathaniel Bechhofer

CATEGORIES: Family Economics

   


In an otherwise excellent reporting piece in the New Republic, Senior Editor Noam Scheiber gives his view about why the governor's race in Wisconsin is so important. To recap, Governor Scott Walker is running for reelection and he's the one who took on the teachers union a few years ago.

Scheiber writes:

Walker achieved conservative icon status by gutting collective bargaining rights for public-sector unions and preventing the unions from automatically deducting dues from members' paychecks. The law he signed triggered a backlash from Democrats across Wisconsin and ultimately led to an attempted recall in 2012, while also causing the state's public unions to hemorrhage members.

But did Walker gut collective bargaining rights for public-sector unions? No, he did not. He gutted some of their power. There is no such thing as a right to bargain collectively unless those who are represented want to be represented and those with whom they want to bargain want to bargain with them. What Scheiber misses is that what Walker really did is uphold freedom of association for workers. His (correct) claim that the law Walker signed caused "the state's public unions to hemorrhage members" should have led Scheiber to that conclusion. Those workers, presumably, did not want to associate with the union and they exercised their right.

The other thing that should have clued Scheiber in to what was going on is his statement that unions are prevented "from automatically deducting dues from members' paychecks." In other words, again, members can not be forced to pay. That's another victory for freedom of association.

Put that issue aside and Scheiber's piece is a good piece of reporting on the stakes involved. But even there, he misses one of the big stakes involved: the attempt to rein in the greediness of government-sector unions. I live in what could be called a one-party state: California. Democrats dominate on every level of state politics. Government-sector unions are very powerful and have used this power to extract huge inflation-adjusted, and not fully funded, pensions that many of them can collect as early as in their early 50s. The governor of the state, Jerry Brown, is a Democrat. Guess who wrote a letter to the Board of the California Public Employees Retirement System (CALPERS) a few days ago expressing his upset about a CALPERS decision to "include temporary pay hikes in the way pensions are calculated for newly hired workers." That's right. Jerry Brown.

CATEGORIES: Labor Market

   


I recently read Erik Brynjolfsson and Andrew McAfee's The Second Machine Age, and I will have more to say on it later. This story caught my attention in light of their emphasis on developing skills that are complements to technology: Tennessee, my former home, has decided to mandate the teaching of cursive in grades 2-4. The executive director of the Tennessee School Board calls it "an art that is losing its form because of the keyboard."

I'm really not sure why this is a bad thing; a few weeks ago, I asked for examples of skills that will probably be obsolete before too long and got some great answers.

The reintroduction of mandatory cursive kind of baffles me: how did a coalition develop that turned this into the law of the land? At Reason, Robby Soave notes that it might be part of a backlash against Common Core, and I think this might be plausible, but is learning cursive really God-mom-and-apple-pie salient enough to appeal to the Conservative base?

I'm willing to believe that knowing cursive might make you a better reader, but is it really worth the cost? Or is it like learning a foreign language, according to Bryan? I don't think I'm that impoverished culturally because I can't read Tolstoy in Russian; will our children be culturally impoverished if they don't write in cursive?


   


Mencken's Appeasement

Bryan Caplan
I just learned that the great H.L. Mencken's Prejudices contains an eloquent plea for appeasement.  From Mencken's "Martyrs":

[I]t seems to me sheer vanity for any man to hold his religious views too firmly, or to submit to any inconvenience on account of them. It is far better, if they happen to offend, to conceal them discreetly, or to change them amiably as the delusions of the majority change. My own views in this department, being wholly skeptical and tolerant, are obnoxious to the subscribers to practically all other views; even atheists sometimes denounce me. At the moment, by an accident of American political history, these dissenters from my theology are forbidden to punish me for not agreeing with them. But at any succeeding moment some group or other among them may seize such power and proceed against me in the immemorial manner. If it ever happens, I give notice here and now that I shall get converted to their nonsense instantly, and so retire to safety with my right thumb laid against my nose and my fingers waving like wheat in the wind. I'd do it even to-day, if there were any practical advantage in it. Offer me a case of Rauenthaler 1903, and I engage to submit to baptism by any rite ever heard of, provided it does not expose my gothic nakedness. Make it ten cases, and I'll agree to be both baptized and confirmed. In such matters I am broad-minded. What, after all, is one more lie?
Notice: In a sense, Mencken's candor precludes him from undiluted appeasement.  If he ever recanted this essay in the face of persecution, he would be entirely true to its theme.  Fortunately, most persecutors are too illogical to grasp the absurdity.

HT: The excellent Shanu Athiparambath


   


Vaidas Urba sent me an interesting piece from the Financial Times:

For macro investors, the end of summer is usually signalled by the Kansas City Fed's annual conference at Jackson Hole. On occasions, former Fed chairman Ben Bernanke used this gathering to indicate major changes in monetary policy, going far beyond the minor, incremental adjustments that central bankers undertake in their regular policy meetings. Two years ago, he described high unemployment as a "grave concern" and presented the case for an open-ended increase in the Fed's balance sheet, which came to be known as QE3.

With US quantitative easing ending in October, the focus this year was on whether Fed chairwoman Janet Yellen would provide any fireworks. She did not. But Mario Draghi did, raising expectations in the markets that the European Central Bank might be ready to follow in the footsteps of Bernanke two years ago. This may be going a bit far, but the ECB President certainly stole the show this year. After Jackson Hole 2014, the world's two major central banks are clearly headed in very different directions.


Let's set the scene:

1. When Bernanke was at Jackson Hole in August 2012, the most recent unemployment reading was 8.2%, for July. And that's exactly where unemployment started the year---at 8.2% in January 2012. No wonder Bernanke expressed "grave concern."

2. Many people argued the unemployment problem was "structural." Even the demand-siders were pessimistic, with the Fed expecting an exceedingly gradual reduction in unemployment over the next few years.

3. Bernanke knew that lots of fiscal austerity was likely to occur in 2013.

4. If you had claimed that 2 years later unemployment would have fallen to 6.2%, people would have thought you were crazy.

Bernanke responded with QE3, and (more importantly) more aggressive forward guidance. To be sure, the recovery has been too slow, even with the rapid fall in unemployment. Labor force growth has been weak. Nonetheless, the fall in unemployment (which I expect to continue) is a major achievement. Bernanke was right and the structuralists were wrong. And don't think of it as the unemployment rate falling by roughly 1/4th. While that's technically correct, as a practical matter the natural rate of unemployment is about 5%. Thus the Bernanke policy eliminated almost 2/3 of the "excess unemployment." Yes, there are other labor force problems, but that doesn't mean the specific problem of people who say they are looking for work but can't find work is something to be minimized. And that problem has been greatly reduced by monetary stimulus. God knows it wasn't fiscal stimulus!

Lots of people talk about the "Yellen Fed," but so far it seems a continuation of the Bernanke policy. I see no important changes. There is also optimism that Draghi may act to boost the eurozone economy. While he makes the right noises, the markets don't seem convinced. The 10-year German Bund yields 0.94%, the 30-year is at 1.8%. Those yields suggest to me that Draghi's vague promises lack credibility. Eurozone trend inflation is well below US levels. Interest parity implies the euro is likely to appreciate strongly over the next 30 years. He needs the eurozone establishment to get behind monetary stimulus; markets assume he can't do much by himself. Recall that Japan moved very aggressively and inflation is still only in the 1% to 2% range. Japanese bond yields are still quite low. The eurozone is far from being out of the woods.

I will present a paper at the Mont Pelerin meetings in Hong Kong next month. My session is entitled "The Coming Inflation Threat." I wonder how long it will take me to say; "there is none." And to back up my claim with "TIPS spreads."


   


I'm currently reading a truly interesting book, which some of EconLog's readers may be already familiar with: "The Intellectuals and the Masses. Pride and Prejudice among the Literary Intelligentsia 1880-1939" by John Carey. Carey argues, in his own words, "that modernist literature and art can be seen as a hostile reaction to the unprecedentedly large reading public created by late nineteenth-century education reform." He thus describes How intellectuals endeavoured to develop an increasingly less intelligible sort of artistic production, to distinguish and separate themselves from "the masses."

But of course "the masses" do not exist in nature: they are instead an intellectual construct, manufactured, according to Carey, to dismiss in a much easier fashion those individuals who could be classed as "mass men." Mass men are a fictionalised version of what intellectuals suppose ordinary people, with ordinary tastes, are. This latter species of human beings surely is a fault of the Industrial Revolution, in the sense that it multiplied in the process of "Great Enrichment" Deirdre McCloskey speaks of.

Carey's analysis reminded me somehow of the one developed by Ludwig von Mises in "The Anticapitalistic Mentality." There, Mises explains that capitalism "could render the masses so prosperous that they buy books and magazines. But it could not imbue them with the discernment of Maecenas or Can Grande della Scala. It is not the fault of capitalism that the common man does not appreciate uncommon books."

One of the ways in which "common men" are depicted in "uncommon books," Carey points out, is as partakers of bad food. Simple and "industrialized" food habits speak badly of those who hold them. In particular, a customary enemy of the high culture intellectual happens to be tinned food.

Being essentially unknowable, the mass acquires definition through the imposition of imagined attributes. (...) Another curiously persistent attribute, worth noting in conclusion, is tinned food. We saw E.M. Forster's Leonard Bast eats tinned food, a practice that is meant to tell us something significant about Leonard, and not to his advantage. The Norwegian Knut Hamsun waged intermittent war in his novels against tinned food, false teeth and other modern nonsense. T.S. Eliot's typist in "The Waste Land" 'lays out food in tins' (...) Tinned salmon is repeatedly a feature of lower-class cuisine in Graham Greene.

(...) In the intellectual's conceptual vocabulary tinned food becomes a mass symbol because it offends against what the intellectual designates as nature: it is mechanical and soulless. As a homogeneous mass product it is also an offence against the sacredness of individuality, and can therefore be allowed into art only if satirised and disowned.


My impression is that this goes on today as well. "Man is what he eats," and certain food habits are either proof of lack of sensibility (aesthetic but also environmental, think about food miles), or of lack of refinement and education, a deficiency individuals should be rescued from. Would the equivalent of tinned food, in the language contemporary intellectuals speak, be fast food? The "mass men" to be "re-educated" thanks to the political process eat burgers and drink sodas. But does any other example come to your mind? How food habits are used as a signal for the need of straightening the crooked timber of humanity?


   


No one needs a political philosophy to tell them how to treat people they personally know.  Once human beings forge personal bonds, they understand what to expect from each other.  The main point of political philosophy is to tell people how to treat strangers

In practice, unfortunately, the way we treat strangers has more to do with our personal feelings about strangers than abstract philosophy.  Or to be more precise, the political philosophies we're willing to entertain heavily depend on our default emotions about people we've never met.

Which leads to a libertarian question: Which of these default emotions are most consistent with a free society? 

Obviously, default emotions like hatred and disgust bode poorly for a free society.  If you hate strangers, you're likely to favor government action to make them suffer.  But default emotions like love and devotion are also inimical to human freedom.  If you love every stranger like your own child, the idea of respecting their freedom to make their own mistakes is hard to stomach.  You'll want to give strangers what they need, regardless of what they want.  This yearning makes both paternalism and the welfare state quite enticing. 

If neither hate nor love cohere well with a free society, what does?  Indifference sounds promising.  Imagine trying to sell government persecution or government salvation to an society where the predominant emotion toward strangers is, "Meh.  That's got nothin' to do with me."  But sheer indifference is not ideal.  Free societies generate obvious benefits for your fellow man: prosperity, peace, and choice.  So you'd expect someone who viewed strangers with moderate benevolence to support a free society more enthusiastically than someone who lacked these feelings.

What then is the sweet spot of freedom?  "Moderate benevolence," a friendly cosmopolitan tolerance, is my tentative answer.  If you seek a free society, you should want people to smile upon mankind.  But that's about it.  Stronger feelings - including heartfelt love - turn human beings into demanding busybodies.  And if demanding busybodies predominate in a free society, it won't remain free for long.


   


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