externalities are not technologically but rather socially determined. There are no inherent properties of a good or service producing external effects, therefore, citizens have to use the political process to determine what is to be considered to be an externality.

If I provide a private security guard to patrol the neighborhood, the neighbors who don't pay for the security guard nonetheless cannot be excluded from enjoying some of the benefits. Moreover, the benefits that they get from the security guard do not detract from the benefits I get (i.e., our consumption of security services is "non-rivalrous"). Non-excludability and non-rivalry are thought to be conditions of public goods.

Even though the security guard is not excludable and non-rivalrous, it may not be a public good. Perhaps I get enough benefits from the security guard that I am willing to pay for it, without needing contributions from the neighbors. In that case, the positive externality is not big enough to worry about. Conversely, the total value of the security guard to everyone may be less than the cost of providing it. In that case, we should not collect taxes and pay for the security guard.

For education, the positive externality is the benefits that accrue to me from your education. I think that those benefits tend to be pretty small. You get a higher income, and most of those benefits flow to you. I get some of the benefits, because you are more likely to pay taxes and less likely to require government transfers, so that my tax obligations can be correspondingly reduced.

You also get the consumption benefits of your education. I personally don't benefit from your experiments with drugs, sex, rock'n'roll. Nor do I particularly care that you take a class in art appreciation or get tickets to your school's basketball games.

Finally, you are supposed to be a better citizen because of education, and I should be happy about that. But if what you learn is that profits are evil, man-made global warming is beyond doubt, and it is wrong to question that gender differences are socially constructed, then from my perspective your education is not making you a better citizen.

If the higher income that you get from education is due to its signaling effects, then that is a classic negative externality. The investment in the signal is wasteful, and your investment forces others to make a wasteful investment.

On the whole, the case for taxing education rather than subsidizing it is really quite plausible. It is counter-intuitive, perhaps, but the case for free trade is also counter-intuitive to most people.

The Frey-Eichenberger quote is from p. 30 of The New Democratic Federalism for Europe, where they lay out the idea of FOCJ, which stands for functional, overlapping and competing jurisdictions. It's a form of competitive government. So far (I'm only about a third through the book), they seem to avoid solving the three tough issues with competitive government in general and their idea in particular. These questions are:

1. How should income redistribution be handled?
2. How should paternalism be handled?
3. What should be the process for determining what is or is not a public good?

The quote above pertains to the third problem.

For the first problem, if you have many government agencies pursuing income redistribution, you could get messy results. For example, in the U.S., there are so many programs that have income cutoffs that the marginal tax rate on poor people is alarmingly high.

The second problem, paternalism, crops up because with FOCJ people are supposed to be able to opt out of "one-size-fits-all" programs like Social Security. As long as you're at least a little paternalistic, you worry about what they will opt into. But which government agency is in charge of determining how that paternalism applies?

Questions:

1. Are markets for ideas/culture less subject to market failure than other markets? Why or why not?

For pure entertainment, probably yes. The "If you don't like it, don''t watch" argument is very powerful. While it's possible for someone to be outraged by the very existence of "offensive" material, I think this is largely cheap talk.

For ideas and culture with policy implications, though, I'd reverse my answer. The economic biases I discuss in my book, for example, are the main thing that prevents poor countries from switching to pro-growth policies.

2. Is well-intended regulation of idea/culture markets more likely to have unintended negative consequences than well-intended regulation of other markets?

I'd say well-intended regulation is less likely to have negative consequences than it is in other markets. Price controls - the classic example of policies with unintended consequences - aren't very relevant for idea/culture markets. Censorship is basically isomorphic to prohibition, which does have well-known unintended consequences, especially decline in product quality. But in idea/culture markets, the decline in product quality is usually less serious. Alcohol prohibition gets you rotgut liquor that kills and blinds; censorship gets you low-quality printing (e.g. samizdat).

3. Is regulation of idea/culture markets less likely to be well-intended than regulation of other markets?

Maybe. Regulation in idea/culture markets is often aimed at "enemy" groups, such as rival ethnicities and religions. However, regulation in economic markets is also often aimed at "enemy" group, such as "the rich" and "foreigners."

4. Is the average consumer a better judge of his own best interest in idea/culture markets than in other markets?

For entertainment, yes. For policy, the opposite is true.

5. Is efficiency less normatively important in idea/culture markets than in other markets? If so, what normative goal(s) do we satisfy by sacrificing efficiency?

My gut reaction is to say "yes," but I think that's just because I've grown up in the U.S. National prejudice aside, I don't see the difference. In both cases, as I've said before, it's worth sacrificing efficiency to respect liberty (not "equity," which really has little to do with idea/culture markets).

6. Should countries with weak civil liberties liberalize their regulation of idea/culture markets? If so, would you advocate "shock therapy"? Why or why not?

Yes, I favor shock therapy in idea/culture markets. But I'm a lot more comfortable with instant liberalization when the status quo protects bad policies ideas against good ones, rather than vice versa. I would have been eager to press a button to instantly abolish Soviet censorship. But in 1950, I would have been pretty worried about legalizing Nazi expression in Germany. In the end, though, I would have pushed the button.

1. What do we do about inequality in incomes depending on education levels?

2. Should the curriculum be designed by experts or emerge in the market?

3. To what extent is education a public good?

Journalists should avoid presenting both sides of a story when one is false - and take into account how readers' brains process the disagreements. The following four rules can guide their efforts.

1. State the facts without reinforcing the falsehood...

2. Tell the truth with images...

3. Provide a compelling storyline or mental framework for the truth.

4. Discredit the source.

Their point is that reporting both sides and letting people make up their own minds is dangerous. Often, people will believe the side of the story that is false.

It is true that people often will believe a false narrative. But I fear that some of the most dangerous false narratives are promulgated by the very reporters that Wang and Aamodt are speaking to.

In the end, I do not believe that the best way to counteract manipulative narratives is to engage in manipulative counter-narration. I would advocate trying to seek the truth and to report it without manipulation.

Gee – the [Social Security] Trust Fund will have $5 trillion in bonds earning interest.

The economic planners want to blame consumers for not saving, and they want to "nudge" consumers to save more. But the most prodigious dis-saving has been done by the economic planners.

If Social Security consisted of personal accounts, then that $5 trillion would be sitting in what I once called the ultimate lockbox. Instead, it needs to be collected again in future taxes.

Feldstein writes,

The federal government would offer every homeowner with a mortgage the opportunity to replace 20 per cent of that mortgage with a low interest government loan – up to a loan limit of $80,000. . .that reflects the government’s lower borrowing rate. Creditors would be required to accept this partial mortgage pay-down and to reduce the monthly interest and principal by the same 20 per cent. That mortgage replacement loan would not be collateralised by the house but would be a loan that the government could enforce by lodging a claim on an individual who does not pay.

In fact, Feldstein doesn't know the proper value of everyone's house. And I think it's time to stop looking for ways for government to make more bets and enact more subsidies in that market.

Finally, Steven Pearlstein writes,

But over the past 35 years, the typical American household has managed to eke out only a 15 percent increase in its pretax income. During that same period, the productivity of the American worker -- the value of the goods and services produced per hour worked -- has increased by 90 percent.

What accounts for the discrepancy?

1. My guess is that the Census data do not include health benefits as income. Workers have no idea what their health benefits are worth, and so they do not report the value of those benefits to people doing the Census surveys. The fact is that worker compensation is up by far more than 15 percent, but a lot of that increased compensation consists of health benefits.

2. Pearlstein compares median worker salaries to average productivity growth. Adding low-wage immigrants will lower the median by more than the average. Increasing the wage premium for high-skilled workers will raise the average by more than the median.

I'm not denying that there has been a big increase in the dispersion of earnings. But there is no need to exaggerate it with baloneous numbers.

UPDATE: a comment points to an article by Terry Fitzgerald on reconciling the income numbers.

People should be more worried than they are by the fragmentation of states. . .in recent years, the main cause has been, essentially, ethnic separatism. . .the resulting nation states can be too small to govern themselves – Kosovo is an example, again. They either become failed states, magnets for terrorists and drug smugglers, or wards of powerful states or what is mischievously called the “international community.”

Of course, if people choose mainly on the basis of ethnic identity, then a government that satisfies the desire for ethnic solidarity or ethnic dominance has a lot of freedom to govern badly without losing power. In that case, a multi-ethnic state will put more pressure on government to govern well.

Casse concludes that “Voter bias has fueled some foolish national debate in recent years but imposed very little foolish national policy.” In effect, he defends democracy by saying that the voice of the people falls on deaf ears.

The Myth of the Rational Voter explicitly states that democracies’ policies are better than you would expect given public opinion. But this does not imply that public opinion is unimportant. If voter bias has no effect on policy, why were extensive protectionist measures adopted in the first place? Why does protectionism remain after three decades of liberalization? The most convincing explanation is also the simplest: Politicians backed the original measures to win votes; their successors remain reluctant to liberalize because they are afraid they will lose votes.

Casse may be right that, in recent years, voter bias has imposed few new foolish policies (though the Iraq War is a strong counter-example). But this is misleading in two ways. First, very little new national economic policy of any kind has been imposed in recent years, because gridlock keeps the status quo in place. Second, and more importantly, Casse focuses on how policies have changed instead of what policies exist. A democracy should not be judged a success merely because it refrains from making bad policies worse – or makes a half-hearted effort to correct long-standing mistakes.

This isn't an easy pattern to understand. If you take market failure theories seriously, it's child's play to apply them expression. Negative externalities? Come on - many bloggers write for the sole purpose of offending others! Asymmetric information? Hey, if information were symmetric, what would be the point of sharing your thoughts with the world?

I'm curious about why economists so uniformly embrace civil liberties. But I'm especially curious about why so many non-libertarian economists end up being civil libertarians. So I'll aim my questions at the latter group - but whatever your view, feel free to chime in.

Questions:

1. Are markets for ideas/culture less subject to market failure than other markets? Why or why not?

2. Is well-intended regulation of idea/culture markets more likely to have unintended negative consequences than well-intended regulation of other markets?

3. Is regulation of idea/culture markets less likely to be well-intended than regulation of other markets?

4. Is the average consumer a better judge of his own best interest in idea/culture markets than in other markets?

5. Is efficiency less normatively important in idea/culture markets than in other markets? If so, what normative goal(s) do we satisfy by sacrificing efficiency?

6. Should countries with weak civil liberties liberalize their regulation of idea/culture markets? If so, would you advocate "shock therapy"? Why or why not?

Just so you can't accuse me of having a hidden agenda, let me state my agenda openly. I think that the typical social democratic economist's arguments in favor of civil liberties are much weaker than the typical free-market economist's arguments in favor of laissez-faire for the broader economy. If a free-market economist opposed regulation of the oil industry on the same grounds that the typical economist opposes regulation of religion, the typical economist would dismiss him as a "market fundamentalist."

My challenge, then, is to defend laissez-faire in idea/cultural markets using arguments that you wouldn't be embarassed to make in other markets. Can you do it?

However, particularly over time, political decisions look less and less like grand designs. They dissolve into the overall emergent order.

Meanwhile, within the market people and businesses work with designs and plans. If I could use a metaphor (not used in the podcast), the emergent order is like a pool, and the plans of businesses are like rocks tossed into the pool. They cause some disturbances, but the pool settles down in its own way. The plans of government may work similarly. We want to pretend that the government can transform the pool into any shape it chooses. In fact, it can only toss in rocks, just like anyone else.

Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories.

When economists reach this broad of a consensus, I normally defer to it. But after writing my op-ed, I started paying more attention to the interaction between oil and gas prices. And frankly, I'm finding it pretty hard to buy the refinery bottleneck story. Did you notice how quickly the price of gas seemed to respond to the recent fall in oil prices? If the bottleneck story were true, the price of gas would have stayed at $4.00 to ration a fixed supply - not dipped to $3.60 in a matter of weeks.

The lesson, I suspect, is that outside observers - economists included - tend to underestimate elasticities. It's tempting to slide from, "I can't think of any way to expand gasoline production under existing conditions," to "No one knows how to expand gasoline production under existing conditions." But it's a temptation we've got to resist, because industry insiders see margins of flexibility that outsiders can barely imagine.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings.

Be grateful that you have a brain for thinking,
And legs to take you places.

Example: Suppose your problem is that you have an excessive love of fried chicken and potato chips. Then I suggest you spend some money to sample much higher-quality food than you're used to. This will raise your expectations - and help kill your love affair with cheap calories.

If, like me, you rarely experience self-control problems, you don't need to follow this strategy. But if you need a little extra help, perhaps you should spoil yourself for a while. After you've gotten used to fine food, cheap buffets may no longer tempt you.

So how does a voter decide which candidate would be best for the economy?

[...]

Forgive me for not caring what your grandma thinks of NAFTA. I want to know which economic policies seem best according to the majority of economists. I got tired of waiting for someone else to give me some useful information and decided to go get it myself. [I sent him a copy of my book, but I assume it got filtered out. -B.C.]

I woke up this morning with the strange feeling that I might own the most important information in the world. Although 90% of voters have made up their mind, the race is so tight that the remaining 10% will settle things. If the media reports the results of my survey of economists, will it influence independent voters and thus the arrow of history? Probably not. But you can't rule it out.

But if you ignore the opinions of 500 economists you are either a well-informed genius who needs no advice, or an idiot who doesn't realize it would be helpful.

The real contribution of an Adams-like survey is the information it provides about economists' specific policy views. NAFTA, for example, enjoys economists' bipartisan support. If the public merely deferred to policies enjoying such support, we'd live in a very different and vastly better world.

The results from Adams' survey aren't yet in, and I've heard some complaints about his questions. Even so, I'm excited to see how his survey of economists turns out.

Stay tuned.

HT: Eric Crampton

The only preschool programs that seem to do more good than harm are very intense interventions targeted toward severely disadvantaged kids. A 1960s program in Ypsilanti, Mich., a 1970s program in Chapel Hill, N.C., and a 1980s program in Chicago, Ill., all report a net positive effect on adult crime, earnings, wealth and welfare dependence for participants. But the kids in the Michigan program had low IQs and all came from very poor families, often with parents who were drug addicts and neglectful.

Even so, the economic gains of these programs are grossly exaggerated. For instance, Prof. Heckman calculated that the Michigan program produced a 16-cent return on every dollar spent -- not even remotely close to the $10 return that [its] advocates bandy about.

Dalmia and Snell want to engage the LFs on what the research shows. That will not work. When you know that the state rather than parents ought to be raising kids, evidence is not going to make a difference.

In a 2006 visit to the Czech capital, then-president Vladimir Putin expressed Russia's 'moral responsibility' for crushing the Prague Spring.

However, a recent poll found that 70 per cent of Czechs younger than 20 have 'no opinion' on the events of 1968.

Still, I'm not one to dwell on the negative. The members of former Soviet bloc - including Russia itself - are not free. (Hey, neither is the U.S.). But they are far freer than any reasonable person would have guessed in 1988 when a few Czech and Slovak emigres were protesting the 20th anniversary of the Soviet invasion of their homeland.

HT: David Cesarini