January 19, 2018Are the Tax Cuts and Increased Wages and Bonuses Connected?
January 19, 2018A Golden Journey
January 18, 2018A tax by any other name . . .
January 18, 2018The Big Victims of Drug Prohibition
January 17, 2018Carillion and the reputation of privatisations
January 16, 2018For a Free Market in Plasma
January 16, 2018Whereof One Cannot Speak, Thereof One Must Be Silent
January 16, 2018For Individual Liberty, Size Does Not Matter - or So It Seems
January 16, 2018The Case Against Education vs. Libertarian Education Reform
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Bryan Caplan, David Henderson, Alberto Mingardi, and Scott Sumner, with guest blogger Emily Skarbek, blog on issues and insights in economics.
JANUARY 19, 2018
They might be.
Veronique de Rugy of the Mercatus Center has an excellent piece at Reason on the connection, if any, between the recent cut in the corporate income tax rates and the spate of bonuses, pay increases, and increases in employer contributions to employee 401(k)s. Her article is titled "Is Tax Reform Already Working?"
First, she lays out some basic facts:
The legislation, which permanently slashed corporate tax rates from 35 percent down to 21 percent, was only signed into law last month. But more than 100 companies have already indicated that they will make big moves to benefit workers and the economy--including raising wages, handing out bonuses, granting 401(k) increases, and committing to increased capital investment--while citing the law's reduction in the corporate income tax rate as at least part of the reason.
Here's a list of over 200 companies that have made these pro-employee moves; the list is compiled by Americans for Tax Reform, an organization that strongly favors the tax cut.
The puzzle for an economist is not that we thought these things wouldn't have happened as a result of the tax cut. Instead, I would bet that most of us, certainly I, would not have expected them so soon. Normally, I get directions of effects of policy correct but err on the side of predicting them to happen sooner than they typically do. This time, it's the opposite.
Here's why I would have expected a slower effect, in Veronique's words:
The recent burst of activity isn't at all in line with the standard economic theory of how reductions in marginal federal business tax rates affect workers' compensation. Economists usually argue that lowering marginal tax rates on investment gives companies an incentive to earn more taxable income leading them to invest in other businesses and the expansion of their factories. This in turn raises workers' productivity, and ultimately leads to higher wages.
So why did it happen so quickly?
[Scott] Greenberg [of the Tax Foundation] also offered another, more cynical theory. "Companies may have been planning on raising labor compensation anyway, due to increasingly tight labor market[s], and chose to attribute bonuses and wage increases to the tax bill, as part of an effort to build public goodwill for the legislation." With Moody's estimating that the unemployment rate will drop to 3.5 percent by the end of the year, the raises probably indicate a tighter labor market, and employers taking steps to retain their employees.
That's plausible. I'm not sure how cynical it is. Economic theory predicts that with new investment, there will be more capital per laborer and, therefore, an increased demand for labor. That would lead to a tightening labor market. So maybe some employers are trying to stay ahead of the market by raising employee compensation now. If the employers attribute that to the tax bill, and it can reasonably be attributable to the tax bill, is that cynical? Of course, if the labor market were going to tighten anyway so that the employers would have seen the need to increase employee compensation even absent the tax bill, then yes, it would be cynical. I don't know enough at this point to distinguish between the two explanations.
Veronique writes that "many of the bonuses were announced after the House and the Senate passed the tax bill but before the president even signed it." She uses this fact to cast doubt on using standard economic theory to explain the increases. But virtually everyone was sure, despite Trump's often being a loose cannon on policy issues, that he would sign the tax bill. So once Congress had passed it, it was as good as done. So, again, with employers anticipating a tightening labor market tightening even more with passage of the tax bill, it's reasonable to attribute some of the increase to forward-looking employers trying to get ahead of the labor market.
The above is a little too strong a statement on my part, because bonuses, by definition, are one-time. Why would an employer pay a bonus now to keep an employee in the future?The employee gets the bonus and then, when labor markets tighten, leaves. But just as employers are often loyal to employees, employees are often loyal to employers. An employee who otherwise might have thought of leaving when labor markets tighten might be slightly more willing to stay because of his good feeling about the bonus.
But why would so many of the bonuses be awarded in 2017? Again, this could be due to the tax bill but in a way that has little to do with increased labor demand that is driven by increased investment in capital. Imagine that a company is going to give a bonus and is choosing whether to do so in 2017 or 2018. If it gives the bonus in 2017, it deducts that cost of labor from corporate income that faces a marginal tax rate of 35%. If it gives the bonus in 2018, it deducts it from corporate income taxed at a marginal tax rate of 21%. So, all else equal, it makes sense to give the bonus in 2017. (I'm ignoring state taxes on corporate income.)
On the other hand, the narrative that the bonus frenzy is a direct result of successful tax reform legislation could backfire. For one thing, Americans and employees may incorrectly expect for it to happen year after year. And while tax reform will indeed grow wages over time, it will never be as visible and marketable as the rollout of these announcements at the end of last year. When that doesn't happen it could be used as evidence that tax reform is a failure.
That's a good point. It applies, though, as she says, to bonuses. It doesn't apply to wage increases and increases in 401(k) contributions because those are likely to be more permanent.
JANUARY 19, 2018
Here's the speech I delivered at my in-laws 50th anniversary party a couple of weeks ago. It's anecdotal, but I think social science fans will enjoy it.
On New Year's Day, 1968, a young couple married in Bucharest, Romania. Their names were Corneliu Dumitru Mateescu and Maria Teodora Ghitza. I wasn't there, but I hear it was a three-day Old World extravaganza of feasting and dancing. Despite disapproval from the Romanian Communist Party, Cornel and Maria celebrated an old-fashioned church wedding. At the time, I suspect that loyal Communists were saying, "Well, it's only a wedding. It's not like they're going to reject everything we stand for."
But let's back up. Corneliu, the groom, was born in the mid-1930s. He was the cherished only child of two loving parents who worked hard to give him an idyllic childhood. But then the war came. Daily life was a struggle. By the war's end, young Corneliu was a refugee - fleeing the city to escape the bombing. When peace finally came, it was the peace of the Red Army. The Communists soon closed Corneliu's school, where he had been educated by German monks - "the Brüder." When he reached adulthood, Corneliu was drafted and sent away from home. But he persevered, eventually earning a top job with the electric authority - about as high as anyone in Romania could rise without joining the Communist Party.
Maria, the bride, was born in 1948. She missed the war - and had no memories of pre-Communist Romania. She grew up with her mom, a schoolteacher, and her little brother Alecu. They didn't have their own television set, but a relative did. When Maria was in her late teens, that t.v. malfunctioned. Now, you may ask, where in Communist Romania do you go to get your t.v. repaired? Well, it turns out that a charming young man with the electric authority repaired t.v. sets after hours. He showed up and went to work. And who happened to be visiting her relatives that day? Young Maria Ghitza!
Cornel's electrical skills must have been awesome, because they were soon the stars of a three-day wedding. Three years later, they were parents of a lively, adventuresome, determined, adorable little girl, Corina Ruxandra. Cornel's parents were on site to help raise her in the family home. Cornel, Maria, and Corina hiked together through the beautiful Carpathian Mountains. But as their daughter enjoyed the great outdoors, her parents couldn't help but realize that as long as they remained in Communist Romania, most of the world's beauty and opportunity would remain beyond her reach.
So in 1974, Maria made one of the hardest sacrifices a mother can make. When she received permission from the Communist government to visit the West, she saw a once-in-a-lifetime opportunity to give her daughter a better life. The Communists assumed that a mother of a young girl would return. Instead, Maria reached America - and Cornel began stubbornly asking permission to follow her.
It was a sad time for the Mateescu family. Maria had to make her solitary way in the United States by the sweat of her brow. While learning English, she worked as a nanny. She worked on a lunch truck. And she kept sending money and gifts home to her family. Cornel and his parents had to raise Corina alone. Corina spent years without her mother to guide and comfort her. She was even sent home from school for wearing one of Maria's gifts - a lovely but forbidden "capitalist dress."
Communist officials felt sure that Cornel would eventually stop asking to reunite his family. But there was one thing they didn't count on: the stubbornness of a Mateescu. Despite years of bureaucratic abuse, Cornel kept asking to leave. He refused to give up. He wouldn't take no for an answer. In 1978, he won. Cornel left Communist Romania with his daughter. After six more months as refugees in Italy, Cornel, Maria, and Corina were reunited right here, in Southern California.
The Mateescus were now a family of immigrants - and lived the full immigrant experience. Finding work. Learning English. Exploring a magical new country. Teaching their daughter to excel in life - and to blend the best of two sharply contrasting worlds. Corneliu eventually reentered his chosen profession - electrician - for JPL. Maria became a skilled draftswoman in the prosthetics industry. Corneliu's parents were finally able to join them as well. All four elders poured their love and encouragement into young Corina Mateescu. And that little girl from Bucharest, who didn't speak a word of English when she arrived at LAX in 1978, became the valedictorian of her high school - and a student at UC Berkeley. Dreams do come true.
When Corina went off to college, her father made some dire predictions about the first boyfriend she'd bring to meet the parents. Though she'd given him little cause for pessimism, he announced that she'd fall for a Communist... Berkeley... hippie. Imagine his delight, then, when I showed up! I did live in Berkeley, but my hair was short - and my anti-Communist credentials were rock solid. Well, he may not have been absolutely delighted at first, but Maria reminded him that things could be worse. And when Corina and I got engaged in late 1993, today's honored guests gave us their blessing.
Much has happened since then. Cornel and Maria are now grandparents four times over. Their grandchildren are all here today. Aidan and Tristan, the twins. Simon, our younger son. And Valeria, named after Corneliu's beloved mother. And of course, Cornel and Maria's daughter Corina, their most precious jewel and the organizer of tonight's festivities, is here by their side. This party won't last three days like it did fifty years ago, so please try to squeeze three days worth of revelry into the next couple of hours. But first, friends and family, let's all raise our glasses to a special couple and the courageous and bountiful life they have made together.
JANUARY 18, 2018
When the Supreme Court narrowly upheld the health insurance mandate part of Obamacare, John Roberts suggested that the penalty for not buying health insurance could be viewed as a tax.
I'm not qualified to offer an opinion as to whether that decision was correct from a legal perspective, but economists don't see much difference between regulations and taxes. A fine for speeding, or for double parking your car, looks pretty similar to a $4/pack tax on cigarettes, which might be viewed as a "fine" for smoking.
Suppose the Supreme Court had said that a health insurance mandate was unconstitutional. The government could achieve the same effect with a combination of taxes and subsidies. If the penalty for not buying health insurance had been $2500 per household, then the government could impose a lump sum tax of $2500 on all households in America. Then they could offer a $2500 subsidy to all households that purchased health insurance. For those with health insurance, the tax and subsidy would exactly offset--the government could inform those households to not even bother paying the tax and collecting the subsidy. Those without health insurance would be paying a $2500 tax to the government--exactly equivalent to the health insurance penalty under the mandate.
Today, many states are contemplating using a similar subterfuge to undo one of the most important parts of the recent tax bill, the $10,000 limit on the deductibility of state and local taxes. One idea is to have higher income people donate $X to various state health and education programs, and then receive an equivalent tax credit. The donation would effectively serve as a tax payment, and yet it could be deducted from federal income taxes (unlike with SALT payments). And these "donations" wouldn't really be charity in any meaningful sense. People donating the money are no worse off than if they did not donate the money. The alternative was paying the same amount in taxes.
Because legal definitions often don't coincide with economic definitions, there is plenty of room for gaming the system. If states find a way around the $10,000 cap in SALT deductions, it would be a major setback for tax reform, and also further balloon an already excessive budget deficit. This is an issue to watch.
JANUARY 18, 2018
Never forget consumer surplus.
Steven Landsburg is critical of co-blogger Scott Sumner's proposal to give preference in licensing legal marijuana sellers to those who were previously convicted of marijuana offenses. Scott calls this "affirmative action for drug pushers." Actually, though, his quote about the policy he favors does not mention drug dealers. (The word "pushers" is a misnomer; almost no one who sells drugs "pushes" them.)
Here's the relevant passage that Scott quoted:
In Los Angeles, residents with past marijuana convictions will not only be allowed to buy licences to sell the drug, but will be given priority. Under the city's "social-equity programme", low-income Angelenos who have previous marijuana convictions or who have lived in areas with disproportionately high rates of arrest for marijuana offences will be given preference when licences to open marijuana retail businesses are granted. Oakland, San Francisco and Sacramento have introduced similar initiatives.
We can be sure that many of these convictions, possibly most, were for dealing or producing illegal marijuana. But I would bet that some of them were for simply using marijuana. And even some of the convictions for dealing might have been against users who were heavy users. The police and prosecutors tend to regard being caught with large amounts of marijuana as prima facie evidence that one is a dealer; sometimes, though, some of these people might simply have been stocking up.
All this is relevant for understanding where I'm going to go in responding to Steve. Here's Steve's criticism:
First, if you want to compensate people for past persecution, the right way to do it is with cash, not by misallocating productive resources. If there must be licenses, they should be allocated to those who can use them most efficiently, regardless of any past history.
That's an excellent critique.
Here's where Steve goes off-track though. He continues:
The primary victims of anti-drug legislation are potential consumers who were deterred by artificially high prices. How do you compensate those victims? You can't. In a population of 1000 people who have never used drugs, it's quite impossible to identify the 200 or 300 or 400 who would have happily indulged if only the price had been lower.
No. No. No. Steve has put in finger on the category that contains the primary victims but has totally missed the primary victims within that category. The primary victims are consumers. But they are not potential consumers; they are actual consumers.
Think about a downward-sloping demand curve. Where are the potential consumers "who were deterred by artificially high prices?" They are further down the demand curve than the actual consumers who were not deterred. The loss in consumer surplus to the actual consumers is much higher than the loss in consumer surplus to those who were deterred.
And the loss is even greater to those actual consumers who were caught and fined or imprisoned. That's where my earlier point comes in. Some of those people who Scott wants to give preference in licenses were consumers and so Steve's second argument doesn't apply to them. Overall, though, they are likely to be a small percent of those who were convicted, so Steve's second argument applies to most of the people who, with Scott's proposal, would get preference.
Bottom line: I agree broadly with Steve's argument against Scott's proposal but Steve has badly missed identifying "the biggest losers."
JANUARY 17, 2018
"Privatisations" were done to make again room for the private sector, and for government officials to stop managing a particular business. In reality, of course, the boundaries may be blurred...
Instances of classical liberal-leaning (critics would say: neo-liberal) government were very few in the 20th century. Margaret Thatcher's one was perhaps the most spectacular, as England really walked a long way in the direction of the command-and-control economy. Thatcher's privatisations were the first and as a political leader she cast a long shadow: so that even today, twenty-eight years after she left office, she is regularly evoked in broader debates over the balance between the public and the private sector.
Carillion, a British big construction company that grew enormously in a bunch of different businesses active in public procurement, is now filing for liquidation. In England's cultural climate, which is by no means friendly to conservatives at this moment, this bankruptcy is revitalising those on the left who want to do away with the Iron Lady's legacy. It is probably, by all means, "the end of the love affair between governments and private contractors".
Carillion managed facilities for the NHS, planned to build "smart motorways", managed homes for the Ministry of Defence, built schools and universities, managed libraries and maintained almost half of British prisons. It was thus a giant of public-private partnership, whose demise will have an important effect - politically and perhaps culturally too.
I would like to point to two articles on Carillion, one by libertarian Tim Worstall, one by ostensibly non-libertarian Simon Jenkins.
On CapX, Tim writes:
But the point is that critics of outsourcing cannot have it both ways: firms like Carillion cannot be overpaid leeches surviving on the largesse of the state and insolvent basket cases. Carillion is proof that we weren't paying the costs of the services we received.
I think Tim alludes to an important point. Enemies of "privatisation" often confuse it with "outsourcing". The two things may coincide (ie, government A privatises its service company B and then buys services from it) but are nonetheless rather different. Privatisation emerged when government was owning companies that produced services and goods for the general public, which were brought back into private ownership. Sometimes companies have been privatised even though the government was basically in a monopsonistic position when it comes to their products. Such a privatisation was often motivated by the fact these companies were utterly inefficient, as well as because they were more or less controlled not by "the State" (an abstract entity) but by "political parties" (i.e., groups of real human beings who used these companies to gain consensus by providing jobs or buying stuff from certain suppliers and not others). In some cases--a story we in Italy know all too well--such "privatisations" were "privatisations in the name only", as the government de facto retained control.
What we may say, at a certain level of generality, is that winning a public procurement order is not the same thing as selling goods or services in a market economy. The way in which prices are determined is if not political, bureaucratic: it goes by rules defined ex ante, which can be of course perfectly reasonable, or may be not.
By its nature, companies that live off of government procurement have a different "ethos", if I may say so, than that of "privatisations" in a stricter sense. "Privatisations" were done to make room for the private sector, and for government officials to stop managing a particular business. In reality, of course, the boundaries may be blurred (if you privatise the electricity company, the government will have to continue to buy electricity anyhow) but there is a basic difference between businesses who operate in a market and businesses whose only potential buyer is a sovereign. This difference is profound and crucially concerns the way in which prices emerge
Simon Jenkins recognises this in a short but thoughtful piece for The Guardian.
No one ever lost money doing business with the government: it was too stupid and had too much money. So went the old saying. Carillion has just proved it wrong. Britain's second biggest construction company and state contractor has gone into liquidation.
What the Carillion saga demonstrates is the rampant indiscipline in the contracts themselves. The company's demise is attributable to favouritism, cost escalation, excessive risk, obscene remuneration and reckless indebtedness. Carillion and its bankers clearly thought it too big to fail. Whitehall behaved accordingly. It was like a pre-2008 bank.
These are important points to consider. But of course many will just be happier in saying "down with privatisation".
CATEGORIES: Political Economy
JANUARY 16, 2018
Ottawa, Ontario and Washington, D.C. - A group of professional ethicists and economists published an open letter urging provincial governments to reconsider proposals to ban compensation for blood plasma donations. The letter is signed by 26 ethicists and economists, including two Nobel Prize winners (Alvin Roth and Vernon Smith), a recipient of the Order of Canada (Jan Narveson), amongst others.This is the opening paragraph of today's press release advocating legalizing a market for blood plasma. Georgetown University's Peter Jaworski, one of the signers, asked me to sign because I am both an economist and a Canadian. I did. The actual statement is very well argued.
Some excerpts from the statement:
There is no evidence that compensation for blood plasma donations in, for example, Saskatchewan, the United States, Germany, Austria, Hungary, or the Czech Republic has promoted the view that donors or their blood plasma are regarded as mere commodities. There is as yet no evidence that Saskatchewanians have different attitudes towards their blood plasma than, say, British Columbians currently have.
Everyone involved in blood plasma donation in Canada--the nurses, the doctors, the administrators, the medical scientists, the professors who study the matter, the chief executives of Canadian Blood Services, the manufacturers of plasmapheresis machines, the fractionators, and so on--receives compensation, except the donor. There is no evidence that Canadians regard the services so provided, or the people providing those services, as mere commodities in virtue of the fact that they are financially compensated. For the argument that donor compensation would so promote this view to be compelling, one would need an explanation for why the connection between compensation and commodification applies exclusively to compensating donors, and not to these other forms of compensation. No such explanation has been offered, nor is any apparent or plausible.
All of the signers at the end with little red maple leafs by their name are either Canadian or affiliated with Canadian institutions.
JANUARY 16, 2018
We talk too much. I probably talk way too much. Humans like to explain everything, even things that cannot be explained.
Saying NASDAQ had an OK value in 2000 brings up the same question as the 1987 crash: how could both the 2000 and 2002 NASDAQ prices be efficient? For that matter, how could both 2002 and 2003 NASDAQ prices be efficient? End of 2002: NASDAQ was at $1,300. End of 2003: NASDAQ was at $2,000.
This is a very good question, and one that reaches into the field of epistemology. What can we know about the world? Which I would rephrase as "What information is useful"?
To make my views easier to see, let's start with an analogy. Suppose I have been playing a certain roulette wheel in Vegas and believe it is tilted toward the red numbers, with relatively few blacks showing up. So the casino offers a test, 10 spins of the wheel. In this test, the number of reds and blacks is pretty even, but I notice another interesting pattern in the numbers:
Notice anything odd? Nine of the ten numbers fall in the right side column of the number grid on a roulette table:
I claim the roulette wheel is fixed, biased towards numbers divisible by three. In fact, this pattern is no more unlikely than any other pattern. Weird things happen all the time in casinos. Indeed the first time I ever walked into a casino (Surfer's Paradise, Queensland, 1991) I won my first 12 hands of blackjack, before losing the 13th. How likely is that!
I hope you see the problem here. It's not kosher to ex post make up a theory to fit the data. (I'm not accusing Matthew of that---we'll get to his excellent question later.) Yes, much of social science is done exactly this way, but that doesn't make it right. Indeed data mining (aka P-hacking) helps to explain why people don't believe social science research, unless they already found the hypothesis to be plausible before being presented with the regression results.
Matthew is right that the EMH doesn't do a good job of explaining the 1987 stock market crash, or the 2000-02 tech stock crash. It's hard to find fundamentals that would justify such a dramatic shift in prices over a short period of time. (Actually much harder for the 1987 crash than the tech stock declines, which took considerably longer.) So how do I defend the EMH? Two points:
1. The EMH is very useful to me in all sorts of ways. It's also consistent with a lot of research on the wisdom of crowds, and basic economic ideas such as competitive rates of return in competitive markets with free entry. It's got a lot going for it. Because of the EMH, I've invested in index funds, and also engaged in buy and hold of stocks (not day trading). I ignored Shiller's 2011 comments on overvalued stocks. My 401k has done very well as a result. It also helped me during my research on the Great Depression, when I found that market responses to policy shocks were much more perceptive that expert opinion, even the expert opinion of Friedman and Schwartz.
2. The EMH cannot explain certain puzzling facts. (Matthews right about that). And on these points we should just keep our mouths shut.
But people cannot leave well enough alone, they want to explain everything. So they don't keep their mouths shut; they develop alternative anti-EMH theories, such as the bubble theory of asset prices. And this is where they get into trouble.
I have many posts that talk about the way that cognitive illusions bias people toward believing that bubbles exist. One of my themes is that the debate over the existence of bubbles is meaningless, unless it has useful information. And (as we will see) it does not. If not useful, a bubble theory is just a sort of insult directed at the market, calling the market "irrational."
Now bubble theories might be useful. For instance, if bubbles exist and can be spotted in real time, it could provide useful investment advice. Or point to the need for regulation. But if not useful, then they are pretty meaningless.
If you are going to claim that NASDAQ was "obviously" wildly overpriced in 1999 and 2000, you had better be confident of that claim. If 18 years later it no longer looks so obvious, then you can't say, "well then NASDAQ was obviously wildly underpriced in 2002, and so the EMH is still wrong". "It was a negative bubble." The claim back in 2002 was that the whole world was obviously crazy in 2000, and that a mania had taken hold. The view was that now (in 2002) we had come to our senses, and the NASDAQ was back to appropriate levels. So are we now to believe that in 2018 we now know that people were actually rational in 2000, and that a wild mania of depression had obviously gripped the country in 2002, causing tech stocks like Amazon and Apple to be wildly undervalued? If all of this is so obvious, why do we keep having to change the story? When will we reach a point where we can look at the world dispassionately? (I say never.)
What you should say is that moves in the stock market are often larger than we'd expect, based on our knowledge of the fundamentals. We simply don't know why that is the case, and bubble theories don't help. Perhaps the value of stocks to the public is highly sensitive to things that we don't understand very well.
Robert Shiller has one of the best anti-EMH bubble theories. He looks at historical patterns for things like P/E ratios, and then correlates that data with the performance of the stock market over the next few decades. Unfortunately, while his theory looks good on paper, apparently it is not very useful, as he seems to frequently give questionable investment calls. (I.e. calling stocks overvalued in 1996 and 2011.)
But I actually have a lot of sympathy for Shiller. When I looked at the market in 2011, it wasn't obvious to me that it was over or undervalued. And as I look at the market today, at a dramatically higher level, it's still not obvious to me as to whether it is over or undervalued. For some reason, it seems extremely hard (for me) to figure out what stocks should be worth. I wish I could explain why, but I can't. (And don't get me started on bitcoin, which is even more inscrutable).
When looking at investment puzzles, we are faced with two choices:
1. Develop anti-EMH theories of anomalies such as bubbles.
It's more useful to keep silent---saves wear and tear on the vocal cords.
PS. The EMH can be "falsified", i.e. found not useful, when anti-EMH theories are found to be useful. For instance, if mutual funds that are based on bubble theories fairly consistently outperform index funds, that would falsify the EMH.
The EMH cannot be "falsified" by engaging in data mining. Finance profs make the mistake of looking for market patterns inconsistent with the EMH, when they ought to be looking for evidence that others have found market patterns that are inconsistent with the EMH.
In another post I used the following analogy. If I were looking for evidence that lead could be turned into gold at low cost, I would not study theories of alchemy, I'd look for evidence (in global gold output data) that someone else had recently made the breakthrough.
JANUARY 16, 2018
by Pierre Lemieux
"... let's have a look at the empirical evidence. Do available data show a correlation between individual liberty and the size of a country? A positive or a negative one?"
In a recent Econlog post, Alberto Mingardi provided an interesting reflection on the Catalonia secession attempt. Since then, a secessionist government has been reelected in the region, and the future is uncertain.
More generally, Alberto suggested that, if states are unavoidable, having more of them is better than fewer. One reason is that individuals will have more choices as to which state to live under according to their preferences. A related reason is that competing states will have an incentive to satisfy the preferences of their clienteles. More numerous and homogeneous states will thus offer public services more in line with what citizens want. Alberto Alesina and Enrico Spolaore make related arguments in their book The Size of Nations.
However, there are also good arguments for larger, more cosmopolitan societies. What Friedrich Hayek, in his trilogy Law, Legislation and Liberty, calls the Great Society, i.e. the abstract classical-liberal order, is more likely to flourish in a large, cosmopolitan society than under small-group tyranny. In a large and diversified society, Leviathan may be less effective at oppression. At any rate, smaller, homogeneous nation-states will typically not allow individuals to move freely between themselves.
Alesina and Spolaore argue that, ceteris paribus, Leviathan prefers to rule over a large country because he can extract a larger rent. However, he may find it easier to take over a small country and will be able exploit the minorities there more harshly. There is no totally homogeneous country, and Leviathan will always find minorities to exploit in favor of its favored clientele, which is often the dominating cultural group. In this perspective, it is not surprising that most secessionist movements are run by socialists. (In Québec, it started with rightist, nativist organizations, but was taken over by socialists in the 1960s.)
Political scientist Karl Deutsch was on to something when, in Nationalism and its Alternatives (as quoted by Alesina and Spolaore), he defined a nation as "a group of people united by a common error about their ancestry and a common dislike of their neighbors."
The issue of whether large or small countries offer better chances for individual liberty is not simple, and the two opposite theories seem defendable. So let's have a look at the empirical evidence. Do available data show a correlation between individual liberty and the size of a country? A positive or a negative one?
The cloud of data points on my scatter diagram below suggests that there is no correlation between the size of a country, measured by its population, and its degree of liberty, as measured by the Fraser Institute's Economic Freedom of the World index. My data incorporates the 160 countries included in that index. The variation of the scores (where 10 represents the highest level of economic freedom and 0 the lowest) reminds us that some small countries are relatively free (Hong Kong and Switzerland are examples) and that in others, as Émile Faguet would have said, people "are more oppressed than in Turkey" (Venezuela or the Central African Republic, for example). Same for large countries: some (consider the United States) are relatively free, others much less free (India or China).
A simple regression analysis confirms the absence of statistical correlation between country size and economic freedom. The R-square--a measure of correlation that indicates the proportion of the variation in freedom explained by population size--is tiny: 0.004. The slope of the regression line, which suggests that the freedom index score decreases by 0.00038 for every increase in 1,000,000 inhabitants, is not statistically significant: the P value is 0.42. In other words, there is a 42% probability that the apparent negative effect (already tiny) of size on freedom is due to random factors.
The statistical conclusion does not change if we replace the countries' population by their size in square miles; or if we exclude China and India as outliers; or if we redo the analysis with both population and geographical size as variables (a multivariate regression).
In case the problem lies in the economic freedom index, I re-ran the simple regression using instead Freedom House's Freedom in the World index (for 194 countries). This index measures mostly political freedom, that is, such things as free elections, government openness, the rule of law, free speech, and other civil rights. The Freedom House index is slightly biased towards positive, as opposed to negative, freedoms. The results of the statistical analysis using this index are similar: the R-square is 0.005 while the P value goes down to 0.30.
It is true that correlation is not causation, but non-correlation is even less so. According to my simple statistical analysis, whatever the theoretical arguments are for the outlook of liberty in small versus large countries, there is no supporting evidence one way or another.
As my economist friend Sinclair Davidson pointed out to me, this does not prove that secession from a larger country (or for that matter, integration into a larger one) will have no effect on freedom. Statistical analysis is a tough master. We would need to compare freedom levels before and after secession (or before and after union) in a representative sample of countries having experienced such a move, but such a database is not available.
It does not follow that liberty never justifies secession. In particular cases, it may very well do so. Breaking a Leviathan's stranglehold on the seceding region would be a libertarian justification, assuming that a worse Leviathan is not likely to take over the "emancipated" region. The argument against a world government is closely related: under the reign of a single Leviathan without competition, there would be no way to escape into a separate space of liberty. So some government diversity is required as an insurance policy against monopolistic Leviathan.
In other words, it must be possible to break away from an existing state, even if the required majority is in many ways arbitrary. As Alberto argues, it should be more than 50% plus one, and there should be an accepted process, some agreed-upon rules, to realize the secession. Indeed, states that prohibit secession, like the Spanish state seems to be doing, thereby provide an argument to secede, as opposed to such states as the Canadian or the British states which would (from what we know) recognize secession under some democratic rules. Note that the European Union, a sort of state, also accepts secession.
What I think my reflection suggests is that, in regard to liberty, the size of a country does not matter per se.
JANUARY 16, 2018
Libertarian education reformers have long argued that education is great, but education plus market reforms is even better. The Case Against Education in contrast, argues that the education industry is more like government-sponsored football stadiums: Government support is good for the industry, but bad for society. Here's an excerpt from the book's final chapter, "Five Chats on Education and Enlightenment."
Frederick [fictional character who writes for the Wall St. Journal and blogs for the Chronicle of Higher Education]: You make your reforms sound pragmatic, but isn't libertarian ideology right below the surface?
Bryan: It's complicated. My heterodox views on education long precede my interest in political philosophy. I've believed in something like signaling since kindergarten.
Frederick: [ironic] Strangely enough, the facts all fit the theory you cooked up when you were five.
Bryan: I had no "theory" in kindergarten. Just two epiphanies:
First, I had to excel academically in order to get a good job when I grew up.
Second, I would never use most of my book learning on the job.
Though it took me years to see the tension between these two epiphanies, I (crudely) reinvented the signaling wheel sometime in junior high. Armed with my crude signaling theory, I gamed the system, working as little as possible to get A's in all the classes I deemed boring
Frederick: So you were a rebel, not a reformer?
Bryan: Right, until my senior year of high school. Once I discovered libertarianism, education reform came naturally. Why on earth should government subsidize socially wasteful education?
Frederick: Then you admit your education reforms are ideologically driven.
Bryan: No. I only admit that my political philosophy--or "ideology" if you prefer--sways
the questions I ask.
Frederick: But surprise surprise, the facts are in perfect harmony with your ideology.
Bryan: Hardly. Libertarians rarely challenge the beloved education sector. Instead, they promise, "Free markets will make education even better."
Frederick: Well, why don't you say that?
Bryan: Because I disbelieve it. It goes against everything I've seen. I've attended both public and private schools. They're cut from the same cloth.
CATEGORIES: Economics of Education
JANUARY 15, 2018
I'm not a huge fan of affirmative action programs. It's not obvious to me why a Hispanic-American should be favored over an Italian-American when the fire department is hiring workers. But there is one type of affirmative action I can support---helping former drug pushers. Here's the Economist:
[F]or a state seen as a Petri dish for socially liberal policy, California's new regulations are notably progressive. For a start, they allow residents convicted of drug offences that would not be crimes under the new order to have their records expunged. Between November 2016, when Proposition 64 was passed, and September 2017, 4,885 Californians petitioned to reduce or void their convictions. Donnie Anderson, chairman of the California Minority Alliance, which champions people who have been harmed by drug criminalisation, applauds this initiative. "In the past, if you were white and caught with marijuana you would be let off. If you were black or Latino, you were not," he says. A study by the American Civil Liberties Union, an advocacy group, found that between 2001 and 2010 African-Americans were more than three times as likely to be arrested for marijuana possession as white Americans, despite similar consumption rates.
Better yet, former drug pushers will be given priority in some cities
In Los Angeles, residents with past marijuana convictions will not only be allowed to buy licences to sell the drug, but will be given priority. Under the city's "social-equity programme", low-income Angelenos who have previous marijuana convictions or who have lived in areas with disproportionately high rates of arrest for marijuana offences will be given preference when licences to open marijuana retail businesses are granted. Oakland, San Francisco and Sacramento have introduced similar initiatives.Given how drug pushers have been persecuted over the years, it's about time we provided some compensation.
As a candidate, Trump promised to leave the marijuana question up to the states. In his confirmation hearings, Jeff Sessions promised not to make marijuana a priority for federal law enforcement. It turns out that all of those promises were meaningless.
JANUARY 15, 2018
Maerker: In Mexico, there are those who propose not keeping going with this battle and legalize drug trafficking and consumption. What is your opinion?
This is from an interview of then Secretary of State Hillary Clinton in early 2011. It's quoted by Jacob Sullum of Reason. Denise Maerker of Televisa had asked Clinton's opinion of proposals to reduce black-market violence by repealing drug prohibition.
As Jacob wrote at the time:
Clinton evidently does not understand that there is so much money to be made by selling illegal drugs precisely because they are illegal. Prohibition not only enables traffickers to earn a "risk premium" that makes drug prices much higher than they would otherwise be; it delivers this highly lucrative business into the hands of criminals who, having no legal recourse, resolve disputes by spilling blood. The 35,000 or so prohibition-related deaths that Mexico has seen since President Felipe Calderon began a crackdown on drugs in 2006 are one consequence of the volatile situation created by the government's arbitrary dictates regarding psychoactive substances. Pace Clinton, the way to "stop" the violent thugs who profit from prohibition is not to mindlessly maintain the policy that enriches them.
So what have been the results of deregulation of medical marijuana in the United States?
We show that the introduction of medical marijuana laws (MMLs) leads to a decrease in violent crime in states that border Mexico. The reduction in crime is strongest for counties close to the border (less than 350 kilometres) and for crimes that relate to drug trafficking. In addition, we find that MMLs in inland states lead to a reduction in crime in the nearest border state. Our results are consistent with the theory that decriminalisation of the production and distribution of marijuana leads to a reduction in violent crime in markets that are traditionally controlled by Mexican drug trafficking organisations.
This is from Evelina Gavrilova, Takuma Kanada, and Floris Zoutman, "Is Legal Pot Crippling Mexican Drug Trafficking Organisations? The Effect of Medical Marijuana Laws on US Crime," Economic Journal, November 16, 2017.
This result should not be surprising and, I'm willing to bet, didn't surprise the authors. Because the above Economic Journal article is gated, I went to the 2014 ungated version here.
Here's their explanation:
We argue that the main difference between states with and without MML is not the availability of marijuana. Many studies show that marijuana is widely available in states without MML in place (e.g. National Drug Threat Assessment Report NDIC, 2011, Kilmer et al., 2014). Moreover, a large number of states have decriminalized the use of marijuana in policies dating back to the 1970's. Instead the main difference between states with and without MML lies in the origin of the drug. Traditionally, marijuana markets have been firmly in the hands of Mexican DTOs. However, since their introduction MML create legitimate competition to DTOs by increasing the local production of marijuana within the US.
JANUARY 14, 2018
I don't believe in intellectual cooties.
Reason: This year there has been a lot of discussion about whether there's a pipeline between libertarians and the alt-right.
This is from Matt Welch, "Selling Freedom," Reason, February 2018.
It's Matt's interview with Larry Sharpe, who almost won the vice-presidential nomination of the Libertarian Party in 2016. It's a fascinating interview.
I highlighted the section above because it expresses my view.
Back in the early 1990s, after having spent many weeks in a group with an amazing local man named Fred Jealous and then "graduating" to taking a course in Reevaluation Counseling, I worked with Fred and about 6 to 8 other people to start a local chapter of the National Coalition Building Institute. We had a 2- or 3-day long "training for trainers" put one by Cherie Brown, who founded the NCBI. One of the principles that I remember being emphasized was that we should welcome prejudice. Prejudice needed to be expressed if we were ever to get anywhere in reducing it.
I loved Sharpe's statement about Daryl Davis. I've kept on my DVR a program that my wife and I both enjoyed in which he talks to members of the Ku Klux Klan and, person by person, turns many of them away from KKK views.
I realized some years ago how differently I thought about this from many libertarians around me whom I respect. About 10 years ago, I was talking to my friend Steve Chapman and sensing that we thought differently about this. So I gave him the following thought experiment.
You are about to get on a coast-to-coast flight and you find out at the last minute that you are upgraded to first class. You get on the flight and sit beside a pleasant looking man. Before the door is even closed, he introduces himself as the head of the American Nazi Party. He seems to want to talk. What do you do?
Steve answered the way I think many libertarians would answer: I would speak to the flight attendant and ask to be moved.
Here's what I said: I wouldn't. My reaction would be that I was given a gift. I would get a chance to talk for up to 5 hours with someone so that maybe I could find out what makes him tick. I have no idea how someone would come to those views. Was it old hurts? Was it bad information? What was it? I would be careful how I asked, but I would try to ask questions rather than make assertions or tell him my views, unless he asked my views.
Sometimes I think that many people, including many libertarians, think that in talking to someone with views they detest, they can get "intellectual cooties." I don't think that.
JANUARY 13, 2018
The President's recent remarks on immigration were widely characterized as offensive. The problem was not so much how he characterized Haiti and sub-Saharan Africa (although that was hardly diplomatic), but rather the implication that immigrants from those places share the bad qualities of their homeland. So I decided to a take a look at some data on average family income by ethnicity.
Haitian Americans average $47,541, which is below the national average, but well above the average for African Americans ($40,931) and Mexican Americans ($38,000). Immigrants from countries such as Somalia tend to be quite poor, reflecting their status as refugees. On the other hand, immigrants from Nigeria and Ghana are near the middle of the pack, as their educational levels are very good:
If you wanted an almost perfect example of what average Americans mean by the term 'squalor', you might point to India (especially the India of 10 or 20 years ago.) It features high levels of abject poverty, many beggars on the streets, extremely poor sanitation and cleanliness, poor quality schools, and all sorts of other problems associated with third world countries. And yet immigrants from India actually score number one on the list of average income by ethnicity:
Second, this post is not advocating any specific immigration policy. Rather I'd argue that if your goal is bringing in immigrants who will make a lot of money (which, BTW, I do not equate with high quality immigrants, as relatively uneducated Mexican farm workers and hotel maids also perform valuable service to America), then it makes little sense to base your immigration policy on country of origin. Rather you'd want to bring in highly educated people from all sorts of countries, including countries that are neat and tidy and rich, like Norway, and also countries that have massive amounts of squalor and poverty, like India, Philippines and Nigeria.
JANUARY 12, 2018
Over at his other blog, TheMoneyIllusion, fellow EconLog blogger Scott Sumner writes:
I've often suggested that Presidents have far less power than people assume, and that events tend to follow the "zeitgeist", or the prevailing mood in the country. That's why Obamacare was not repealed, and it explains why Trump has not been very consequential, despite his obvious personal flaws.
I agree with Scott that Presidents have far less power than people assume.I don't agree, though, that he "has not been very consequential." The way to tell is to do one's best to imagine what a President Hillary Clinton would have done.
There are a number of areas in which we have seen and, I think, will see, a big difference between him and her.
1. Tax policy. I'm confident there's no way, if Clinton had been elected, that we would have seen such a good combination of tax cut and tax reform. Yes, she might have cut the corporate income tax rate to 28%, but it's hard to believe it would have gone lower. Also, given her support from high-tax states, she almost certainly wouldn't have limited the state and local tax deduction to $10,000. One libertarian friend on Facebook pointed out that the initiative for the tax bill came from a Republican Congress, not Donald Trump, and that's largely true. But so what? If Clinton had been elected, she would not have signed a tax bill close to what we got.
2. Immigration policy. Trump is moving in a dangerous direction, continuing the Obama policy of cracking down on illegal immigrants but stepping it up a notch and even limiting further legal immigration. That's consequential. And I fear that we haven't see the end of it.
3. Judges. There's no way we would have got Neil Gorsuch for Supreme Court or many of the other excellent picks for federal judgeships had Hillary won.
4. Regulation. Trump has been much more of a deregulator than I expected. I think this is already consequential.
There is one area where I think it's clear that Trump has not been very consequential--and I'm thankful: international trade. This is a possible explanation.
In the same post, Scott writes:
The one possible exception is foreign policy, where Presidents might be influential, in certain cases. But even there I don't really expect much change. Rather the problem is that Trump's recklessness makes a miscalculation with countries such as North Korea slightly more likely.
I agree. Both Hillary Clinton and Donald Trump are pretty reckless on foreign policy.
For a balanced assessment of Trump, see my recent piece.
JANUARY 11, 2018
"Marin County has long resisted growth in the name of environmentalism. But high housing costs and segregation persist."
So reads the title of a news story by Liam Dillon in the Los Angeles Times. The reporting is excellent. I hope Mr. Dillon didn't choose the title.
Here are four key paragraphs:
Marin residents often win fights to keep the county's landscape unspoiled by large, new construction. The county, which sits across the Golden Gate Bridge from San Francisco, is home to Point Reyes National Seashore and many other natural splendors.
As reporter Dillon shows and clearly understands, it's precisely because of the restrictions on building in Marin County that house prices and rents are so high and, therefore, that lower-income members of minorities have trouble affording housing in the more-affluent areas.
JANUARY 11, 2018
And an appeal to basic principles of freedom explains why.
In his novel 1984, George Orwell gave us the memorable term "thoughtcrime" to describe thoughts which the state punishes to protect itself from criticism. The Strategic Affairs Ministry's recent decision to bar the members of numerous BDS (Boycott, Divestment and Sanctions) groups from traveling to Israel is punishing them for the "thoughtcrime" of trying to voluntarily persuade people to boycott Israeli goods. BDS members taking this position are violating no one's rights, but the Israeli travel bans, by contrast, do violate people's rights, ironically making the Israeli government guilty of the very illiberality that the BDS movement has long accused it of.
This is the opening paragraph of an op/ed in the Jerusalem Post by Michael Makovi, a Ph.D. student in economics at Texas Tech University.
And in case, you think Michael is sympathetic to members of BDS, think again. He writes:
On the other hand, the 2005 open letter entitled "Palestinian Civil Society Call for BDS" does unfortunately "call upon international civil society ... to pressure your respective states to impose embargoes and sanctions against Israel." In essence, advocates of BDS wish to impose their opinions on others. It is not enough for them to voluntarily boycott Israeli goods themselves.
And what's the principle underlying both of Michael's points above? People's right to exchange freely, people's right to travel freely, and people's right to speak freely.
No consumer has an obligation to purchase anyone's product, and therefore, no seller can complain their rights have been violated when a consumer chooses not to purchase from them.
The article is "BDS Blacklist Punishes Thoughtcrime," Jerusalem Post, January 10, 2018.
Side note: When I was a representative of Libertarians for Peace on the steering committee of the Peace Coalition of Monterey County, a number of reps of other groups pushed for BDS. The opposition to that push was great enough that the PCMC never came out in favor of BDS. But the more interesting triumph was that I persuaded one of the chief advocates of BDS that sanctions require the use of, or threat of, force and, therefore, violated the principles of peace that we were supposed to be advocating. I argued that she should support, not BDS, but BD. She agreed, although I think she might have backslid later.
JANUARY 11, 2018
In this post I'll try to describe what various groups seem to believe about interest rates. Undoubtedly I'll get some of the nuances wrong, and I'll try to do updates as people correct this initial post:
1. Low real interest rates are easy money and high real interest rates are tight money. Because inflation expectations have been low and stable in recent decades, for all intents and purposes nominal interest rates are now a pretty good indicator of the stance of monetary policy.
2. Easy money occurs when the Fed sets short-term rates (fed funds rate) below the natural rate, and tight money occurs when interest rate targets are set above the natural rate. Because the natural rate is usually fairly slow to change, a major period of declining interest rates usually represents an easing of money policy, and substantially rising interest rates usually represent tighter monetary policy.
3. Interest rates are not a reliable indicator of the stance of monetary policy. On any given day, an unexpected reduction in the fed funds target is usually an easing of policy. However, an extended period of time when interest rates are declining usually represents a tightening of monetary policy. That's because during periods when interest rates are falling, the natural rate of interest is usually falling even faster (due to slowing NGDP growth), and vice versa.
4. A permanent decline in nominal interest rates is usually a tight money policy, and permanently higher interest rates usually constitutes easier money.
In my view, the first two claims are partly false, the third is true, and the fourth is true but does not have the implications that NeoFisherians seem to assume it has, due to reasons explained in point #3 (unexpected rate cuts are usually inflationary.)
Thoughts? How would you characterize the different views on interest rates?
JANUARY 10, 2018
On January 31 at 4 PM, I'm presenting The Case Against Education at the Cato Institute, with comments by New America's Kevin Carey. (See here and here for my earlier thoughts on Carey's work). Many thanks to Cato's Neal McCluskey for setting this up.
Book copies will be available for signing. Hope to see you there!
CATEGORIES: Economics of Education
JANUARY 10, 2018
We couldn't leave EconLog out of our year-end reflections, now could we? We'll share our EconTalk listener survey results soon... In the meantime, here's a look at the most-read EconLog posts of 2017. Here's to another great year of continuing conversation!
9. Scott Sumner. A penny for your thoughts... Should the penny be abolished? How about larger coins, or even bills? Sumner shares his thoughts..
7. Bryan Caplan, Hard Questions About the Protestant Reformation... On its 500th Anniversary, Caplan (and later his eldest sons) asks some tough questions.
6. Bryan Caplan, Reply to Noah on The Case Against Education...Caplan's new book has been getting lots of media attention, including this piece in The Atlantic. Here he replies to the criticisms of Noah Smith.
3. Bryan Caplan, Why Libertarians Should Oppose the Universal Basic Income...A popular topic across Econlib last year, Caplan lays out why you might be opposed.
2. David Henderson, Nancy MacLean's Distortion of James Buchanan's Statement...One of many entries in the saga of out-of-context quotes. (Also includes a link to EconTalk host Russ Roberts's equally popular Medium post on MacLean, one of the few to which she responded.)
1. Bryan Caplan, IQ With Conscience...An "IQ realist, all the way, Caplan quibbles with some of the policy conclusions of his fellows.
CATEGORIES: Economic Education
JANUARY 10, 2018
To paraphrase the Eleventh Circuit, imposing a surcharge rather than offering a discount is no more misleading than calling the weather warmer in New Orleans rather than colder in San Francisco.
This is from the United States Court of Appeals for the Ninth Circuit decision allowing retailers to state they are charging a surcharge for use of credit cards rather than giving a discount for the use of cash.
Here's another excerpt from their decision:
Applying intermediate scrutiny, the panel held that the activity to which plaintiffs' desired speech was directed - charging credit card users more than cash users - was not unlawful or misleading. The panel held that enforcing section 1748.1 against plaintiffs did not directly advance California's asserted interest in preventing consumer deception. Finally, the panel held that there was no reasonable fit between the broad scope of Section 1748.1 and the asserted state interest, and therefore the statute was more extensive than necessary. The panel therefore agreed with the district court that Section 1748.1 violated the First Amendment, but only as applied to plaintiffs.
The plaintiffs were allowed to state that they gave a discount for using cash. But the California law prevented them from charging a surcharge for using credit cards. They argued that for a given set of prices those are equivalent and that they wanted to advertise a lower price, not a higher price.
It is obvious that the activity to which plaintiffs' desired speech is directed--charging credit card users more than cash users--is not unlawful. Cent. Hudson, 447 U.S. at 564. After all, Section 1748.1 permits cash discounts.
HT2 Phil Candreva.
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