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July 9, 2007

Aye: "The Most Sophisticated and Successful Criminal Organizations in History"

Pirate ships as efficient, democratic, incentive compatible business enterprises:

The Pirates’ Code, by James Surowiecki, The New Yorker: ...While pirates were certainly cruel and violent criminals, pirate ships were hardly the floating tyrannies of popular imagination. As a fascinating new paper by Peter Leeson, an economist at George Mason University, and “The Republic of Pirates,” a new book by Colin Woodard, make clear, pirate ships limited the power of captains and guaranteed crew members a say in the ship’s affairs. The surprising thing is that, ... pirates were, in Leeson’s words, among “the most sophisticated and successful criminal organizations in history.”

Leeson is fascinated by pirates because they flourished outside ... the law. They could not count on ... authorities to insure that people would live up to promises or obey rules. Unlike the Mafia, pirates were not bound by ethnic or family ties; crews were ... remarkably diverse... Nor were they held together primarily by violence... [P]irate ships were governed by ... simple constitutions that, in greater or lesser detail, laid out the rights and duties of crewmen, rules for the handling of disputes, and incentive and insurance payments to insure that crewmen would act bravely in battle. ... The Pirates’ Code ... was not, in that sense, a myth, although in effect each ship had its own code.

But rules alone did not suffice. Pirates also needed to limit the risk that their leaders would put individual interests ahead of the interests of the ship... Some pirates had turned to buccaneering after fleeing naval and merchant vessels, where the captain was essentially a dictator... Royal Navy and merchant captains guaranteed themselves full rations while their men went hungry, beat crew members at their whim, and treated dissent as mutinous. So pirates were familiar with the perils of autocracy.

As a result, Leeson argues, pirate ships developed ... democracies. First, pirates ... divided and limited power. Captains had total authority during battle, when debate and disagreement were ... inefficient and dangerous. Outside of battle, the quartermaster ... was in charge—responsible for food rations, discipline, and the allocation of plunder. On most ships, the distribution of booty was set down in writing, and it was relatively equal; pirate captains often received only twice as many shares as crewmen. ... The most powerful check on captains and quartermasters was that ... the crew elected them and could depose them. And when questions arose about the rules..., interpretation was left not to the captain but to a jury of crewmen. ...

Interestingly, ... most corporations since the mid-nineteenth century have behaved more like the Royal Navy, with C.E.O.s who have close to unlimited power and employees who have no say in ... the organization...

This model of C.E.O. leadership is increasingly being questioned, with a greater emphasis being placed, at least rhetorically, on the need for executives to be more responsive to employees and on the value of dividing authority (although no one is seriously considering letting ordinary employees elect the boss). ... You can take this comparison only so far... But it may be only a matter of time before someone publishes “The Management Lessons of Captain Kidd.” I’d read it.

The "Single-Villain" Rhetoric, the Two Al Qaedas, and the Multi-Faceted Challenges in Iraq

I would guess that people who visit here try to keep up with the news and have a pretty good idea about what is going on in the world. So I'm curious to see how well the press has been informing you about the administration's discussions of the Iraq war.

Did you know there are two Al Qaedas? The public editor at the New York Times thinks you should realize that the Al Qaeda emphasized by the administration when discussing the surge did not exist prior to the invasion, is not same as Bin Laden's Al Qaeda, and  is but one part of the problem we are facing:

Seeing Al Qaeda Around Every Corner, by Clark Hoyt, Public Editor, NY Times: As domestic support for the war in Iraq continues to melt away, President Bush and the United States military in Baghdad are increasingly pointing to a single villain on the battlefield: Al Qaeda.

Bush mentioned the terrorist group 27 times in a recent speech on Iraq at the Naval War College... The Associated Press reported last month that although some 30 groups have claimed credit for attacks on United States and Iraqi government targets, press releases from the American military focus overwhelmingly on Al Qaeda.

Why Bush and the military are emphasizing Al Qaeda to the virtual exclusion of other sources of violence in Iraq is an important story. So is the question of how well their version of events squares with the facts of a murky and rapidly changing situation on the ground.

But these are stories you haven’t been reading in The Times in recent weeks as the newspaper has slipped into a routine of quoting the president and the military uncritically about Al Qaeda’s role in Iraq...

And in using the language of the administration, the newspaper has also failed at times to distinguish between Al Qaeda, the group that attacked the United States on Sept. 11, and Al Qaeda in Mesopotamia, an Iraqi group that didn’t even exist until after the American invasion.

There is plenty of evidence that Al Qaeda in Mesopotamia is but one of the challenges facing the United States military and that overemphasizing it distorts the true picture of what is happening there. While a president running out of time and policy options may want to talk about a single enemy ... in the hope of uniting the country behind him, journalists have the obligation to ask tough questions about the accuracy of his statements.

Middle East experts with whom I talked in recent days said that the heavy focus on Al Qaeda obscures a much more complicated situation...

“Nobody knows how many different Islamist extremist groups make up the insurgency” in Iraq, said Anthony H. Cordesman of the bipartisan Center for Strategic and International Studies. “Even when you talk about Al Qaeda in Mesopotamia, the idea of somehow it is the center of the insurgency is almost absurd.” ...

Al Qaeda in Mesopotamia, which came into being in 2003, pledged its loyalty to Osama bin Laden’s Al Qaeda the next year but is not believed to be under his operational control.

Jonathan Landay, a friend and former colleague, wrote a sharply skeptical story for the McClatchy newspaper group after the president’s June 28 speech. Bush called Al Qaeda “the main enemy” in Iraq, but Landay reported that “U.S. military and intelligence officials” reject that characterization. ...

links for 2007-07-09

Paul Krugman: Health Care Terror

Paul Krugman discusses how the "medical-industrial complex and its political allies have used scare tactics" to prevent Americans from making health care available to all:

Health Care Terror, by Paul Krugman, Commentary, NY Times: These days terrorism is the first refuge of scoundrels. So when British authorities announced that a ring of Muslim doctors working for the National Health Service was behind the recent failed bomb plot, we should have known what was coming.

“National healthcare: Breeding ground for terror?” read the on-screen headline, as the Fox News host Neil Cavuto and the commentator Jerry Bowyer solemnly discussed how universal health care promotes terrorism.

While this was crass even by the standards of Bush-era political discourse, Fox was following in a long tradition. For more than 60 years, the medical-industrial complex and its political allies have used scare tactics to prevent America from following its conscience and making access to health care a right for all its citizens.

I say conscience, because the health care issue is, most of all, about morality.

That’s what we learn from the overwhelming response to Michael Moore’s “Sicko.” Health care reformers should, by all means, address the anxieties of middle-class Americans, their ... fear of finding themselves uninsured or ... den[ied] coverage when they need it most. But reformers shouldn’t focus only on self-interest. They should also appeal to Americans’ sense of decency and humanity.

What outrages people who see “Sicko” is the sheer cruelty and injustice of the American health care system — sick people who can’t pay their hospital bills literally dumped on the sidewalk, a child who dies because an emergency room that isn’t a participant in her mother’s health plan won’t treat her, hard-working Americans driven into humiliating poverty by medical bills.

“Sicko” is a powerful call to action — but ... defenders of the status quo  ...[are] very good at fending off reform by finding new ways to scare us.

These scare tactics have often included over-the-top claims about the dangers of government insurance. “Sicko” plays part of a recording Ronald Reagan once made for the American Medical Association, warning that .... the program now known as Medicare ... would lead to totalitarianism...

Mainly, though, the big-money interests with a stake in the present system want you to believe that universal health care would lead to a crushing tax burden and lousy medical care.

Now, every wealthy country except the United States already has some form of universal care. Citizens ... pay extra taxes as a result — but they make up for that through savings on insurance premiums and out-of-pocket medical costs. The overall cost of health care ... is much lower...

Meanwhile, every available indicator says that in terms of quality, access to needed care and health outcomes, the U.S. health care system does worse, not better, than other advanced countries. ...

All of which raises the question Mr. Moore asks at the beginning of “Sicko”: who are we?

“We have always known that heedless self-interest was bad morals; we know now that it is bad economics.” So declared F.D.R. in 1937, in words that apply perfectly to health care today. This isn’t one of those cases where we face painful tradeoffs — here, doing the right thing is also cost-efficient. Universal health care would save thousands of American lives each year, while actually saving money.

So this is a test. The only things standing in the way of universal health care are the fear-mongering and influence-buying of interest groups. If we can’t overcome those forces here, there’s not much hope for America’s future.

_________________________
Previous (7/6) column: Paul Krugman: Sacrifice Is for Suckers

July 8, 2007

Tim Duy: On The Employment to Population Ratio

Tim Duy with thoughts on the employment to population ratio:

On The Employment to Population Ratio, by Tim Duy: Dean Baker watches the employment to population ratio for signals of job market weakness, but I would warn against reading too much into the short run variation in these statistics. For instance, Baker notes:

This drop is being driven primarily by workers ages 35-44. Their EPOP has fallen from 81.5 percent in January to 80.6 percent in June. This is 2.1 pp below the peak of 82.7 percent in Jan-Feb of 2000 and 1.2 pp above the trough of 79.4 percent in July of 2003.

It is very difficult to think of any reason why hundreds of thousands of prime age workers (both men and women, the declines are roughly equal) would suddenly drop out of the labor market, other than limited job opportunities.

Time to go to charts on this one. For men 35-44 (note, all charts are for the 35-44 demographic Baker refers to):

Employment to Population ratio: Men aged 35-44
1997:01 to 2007:06

Duy17807

Note the sharp drops in the employment to population ratios in 1999 and 2000, both of which occurred during a period of strong job growth (weakness in the labor market was not manifest until the second half of 2000). So clearly there may be reasons for variation other than limited job opportunities. For women in the same age group:

Employment to Population ratio: Women aged 35-44
1997:01 to 2007:06

Duy27807

Again, note the variation in the 1997-2000 period. One can read the recent retreat as a signal of impending doom, but then you need to explain why the job market was so strong in late 2006 (when the economy was slowing) that it dragged thousands of women into the workforce.  Alternatively, we are seeing pretty typical shifts of an indicator that exhibits a significant amount of variation.

Also, Baker claims that this is not a demographic story.  While for short term variation I agree, I think it is very misleading to examine this data without regard to the long term demographic story (and I think this applies to efforts to measure these numbers from the 2000 peak). For men:

Employment to Population ratio: Men aged 35-44
1948:01 to 2007:06

Duy37807

Since the 1970s, the employment to population ratio of these prime age male workers has ratcheted downward with each recession. For decades this has been offset by increasing female participation:

Female labor Force Participation Rate
1948:01 to 2007:06

Duy47807

For whatever reason, female employment (participation really) reached a plateau beginning in 1990 or so. My view is that we have pretty much tapped out labor force participation among females, and if the downtrend for males holds, employment to population trends in the long term have nowhere to go but down.  Consequently, it is misleading to assume that declines in these measures (similarly, labor force participation) automatically indicate cyclical weakness. [Comments welcome, or email Tim at timduy@msn.com]

Update: PGL has comments on the same topic.

knzn Fiscal Policy

knzn clarifies his stance on fiscal policy:

Keynesian Fiscal Policy, by knzn: A conventional “Keynesian” view of fiscal policy holds that the government should run deficits when the economy is weak and surpluses when the economy is strong. Some commentators suggest (as Andrew Samwick does here; hat tip: Brad DeLong) that the budget should be balanced over the business cycle, with no net accumulation of debt. I consider myself a Keynesian, but I think this conventional view is consistent neither with that of Keynes himself nor with what we have learned in the subsequent years.

My alternative view, which I submit for Lord Keynes’ posthumous approval, is that fiscal policy should depend on nominal interest rates. When interest rates are high, for example, it makes no sense to run deficits no matter how weak the economy is. When interest rates are high, the central bank has the option of stimulating the economy by creating more money and pushing interest rates down. If it isn’t doing so already (which, by assumption, it isn’t; otherwise interest rates wouldn’t be high), either the central bankers aren’t very smart (in which case why should we expect the fiscal authorities to be any smarter?) or else they are deliberately keeping the economy weak for some reason. In the latter case, they can be expected to react to any anticipated fiscal stimulus by tightening monetary policy and raising interest rates even further. Indeed, this is just what the Fed did in response the Kemp-Roth tax cut in 1981. I would have recommended running a surplus instead of a deficit under those conditions, even in the depths of the 1982 recession. A fiscal surplus would have minimized the damage done by the tight money policy, and, my guess is, it would not have slowed the recovery materially, because the weak demand would have brought inflation down more quickly, and consequently the Fed would have loosened more quickly.

Now consider an example where interest rates are low. In this case the central bank has the option of slowing down the economy by tightening the money supply and pushing interest rates up, but it may not have the option of stimulating the economy by creating more money and pushing interest rates down. If interest rates are already low, there isn’t much room to push interest rates down, and the stimulus that can be accomplished by this process may be inadequate. And the business cycle is not very predictable. Therefore, even if the economy appears to be growing adequately today, there is no guarantee that it will be doing so tomorrow. In times of low interest rates, fiscal policy should plan for the possibility of a recession by running a deficit, even if economists don’t see a recession as a strong possibility (which, after all, they seldom do, but somehow recessions happen anyway). As long as the central bank isn’t worried about a recession, it can use monetary policy to prevent the economy from overheating, but if it does begin to foresee weakness, it will have room for a stimulus, since the budget deficit will have prevented interest rates from getting too low.

You might object, “What if interest rates stay low and the government keeps borrowing money? We don’t want to pass on these debts to our children (at least Andrew Samwick doesn’t).” My answer – and I think Keynes would have agreed – is, “So what?” For one thing, if interest rates are low, the cost of running a deficit is low. In fact, it can be argued that there is no cost to running a deficit when the interest rate is lower than the growth rate, because the revenue available to pay back the debt will be greater (relative to what needs to be paid) than the revenue available to avoid a deficit in the first place. My own belief is that marginal return on government investment will be sufficient to justify spending levels under these circumstances, but even if it isn’t, the harm done is not great. The harm done by not running sufficient deficits could be quite substantial. And recalling historical periods when interest rates remained low and the government continued borrowing money – the 1930s-1940s in the US and the 1990s-2000s in Japan – I don’t think they regretted the borrowing, and I think most economists would say they didn’t borrow enough.

Plus, I have a more fundamental objection to the idea that passing on debts to our children is unfair. Those who have read my blog from the beginning will feel a sense of déjà vu here, but: Is it unfair to bequeath your children a house with a mortgage? I don’t think so. And I expect there will always be a “house” to go along with the “mortgage” our government leaves to future generations of Americans. In the past it has almost always been the case (across times and places) that each generation left more net economic wealth to the following generation than it had received from the previous one. And in those rare situations where this wasn’t the case, it wasn’t because the generation in question had borrowed too much. My guess is it will continue to be the case in America’s future. If our generation does fail subsequent generations, it will perhaps be because we didn’t spend enough on finding solutions to global warming (or other problems that may plague future generations); it won’t be because we borrowed money to pay for those solutions.

I think there are two separate issues here, one is stabilization policy and for that part of fiscal policy I have no problem with requiring that the budget be balanced over the business cycle. The other is investments in, say, human and physical capital that can increase our growth rate in the future. For investments where the benefits will persist for generations, I have no problem with passing along the part of the cost consistent with the benefits that will be realized. But I don't think we should treat future generations any different than we were treated, i.e. we ought to pass along as much public wealth, in proportion, as we inherited ourselves free of charge.

Threats to Our Freedom

Remembering Norman Brook:

Memo to No 10 on the threat of a bomb, by Ben Fenton, Commentary, Financial Times: The British people are scared..., destruction of their way of life ... looms over them like a dreadful spectre. ... Inside a jittery Number 10, the new prime minister has come under pressure ... to pass new laws to counter such treachery. They are laws that will restrict civil liberties as they have not been restricted in peacetime for centuries. Uncertain how to face the hawks in his cabinet next day, the prime minister turns to his cabinet secretary for advice.

The civil servant replies: “You [should] challenge the critics to say whether they are prepared to ... arrest on suspicion, to detain without trial, to extract ‘confessions’ by duress, etc. Are they prepared to tear up Habeas Corpus and the Bill of Rights, and to abandon our traditional conceptions of justice and fair dealing? Most of us are not prepared to abandon the rights and liberties and way of life which we have fought so hard to preserve. And we have enough sense of proportion to see that an occasional jihadi is not too high a price to pay for those things.”

This may sound like some imagined exchange... But it is not... The only liberty I have taken with the account is to replace one word. The cabinet secretary did not write “jihadi”; he wrote “Maclean”.

The date was October 1955. The huge bomb was the first Soviet atomic device, detonated 13 months earlier. The traitors were Guy Burgess and Donald Maclean, part of a ring whose betrayal helped Joseph Stalin and Nikita Khrushchev bring terror to the hearts of the British people and their government: the terror of nuclear annihilation. Now, that is a terror...

Anthony Eden ... was the prime minister in 1955, Harold Macmillan his foreign secretary and the man bent on ... negations of civil liberty in an effort to deter and root out other spies in the heart of the establishment.

And the cabinet secretary who stiffened Eden’s spine? Sir Norman Brook. One of those extraordinary, anonymous men whose contributions to winning wars, rebuilding shattered nations or simply safeguarding the common weal are seldom noted outside the pages of academic history. ...

For when the next ham-fisted jihadi doctor or lawyer or student or whatever actually manages to make one of their devices work as intended, ... the cry will go up to set aside the traditional freedoms. Those rare and hard-won prizes will be presented as outmoded. They will be portrayed as detrimental to “national security”, as if any nation could have a higher security than the integument of commonly held liberties that shields it through true threats to its survival. As if having shared values to defend were not the essence of “national security”.

And we, who are too far removed in time from genuine threats to our freedom to value them as they should be valued, we will stand by and watch our liberties fade away, with no Norman Brook to speak for us.

Future tense? We're hardly watching now.

Should Stadiums be Subsidized?

Roger Noll of Stanford on subsidies for sports stadiums:

Are stadiums worth the high price?, by Roger G. Noll, Commentary, SFGate.com: ...[A]re new stadium[s]... really a good fit for the fans, the teams and [a] cities' taxpayers?

For fans, a new facility is a nicer place to watch a game because the design and technology of sports facilities has improved. These benefits, however, can be offset if a new facility is less convenient, whether that translates into longer travel times to the stadium or more headaches in the parking lot.

The teams themselves look at these stadium proposals from a different perspective. For ... sports franchises, a new facility is a good idea only if the team can earn a reasonable return on its share of the investment. [Many current] ... proposals ... involve direct or implicit subsidies, but these are relatively small compared with the open-wallet era of stadium construction in the 1990s. ...

In general, sports facilities are not good investments. Owners can add more concessions and high-cost seating such as luxury suites and theater-style reserve seats. But even during the robust early years of the stadium, these features bring in annual profits of only $25 million to $50 million -- not enough to justify an investment of $500 million.

For a stadium investment to make sense, the team needs some free money.

One potential source is a subsidy... Another potential source is personal seat licenses, which amount to a price increase for season tickets that, when tied to a new stadium, seems not to generate as much fan resistance as an ordinary price increase.

But the big innovation in stadium finance is to tie the stadium to a real estate deal. [For example, the] original 49ers plan was to replace Candlestick with a stadium, a shopping center and perhaps a gambling casino. The A's and Earthquakes facilities are tied to larger developments that require rezoning large, undeveloped parcels. The expectation of the team is that by making the stadium part of a larger development, the team will earn an adequate overall return on investment. ...

For local governments and their taxpayers, the desirability of a facility depends on two things: the magnitude of the subsidy for the team, and the impact of the stadium on the local economy and local tax revenues. ...

Can cities expect a significant financial benefit that will offset their investment?

The economic benefits of a sports team are the most contentious issue surrounding new stadiums. Economic consultants working for teams typically claim annual benefits to a city of hundreds of millions of dollars, thereby implicitly offsetting even a 100 percent subsidy in a few years. If true, these returns would make sports facilities a terrific investment -- sort of like getting stock options from Google just before its initial public offering.

But these studies vastly overstate the economic returns of sports facilities. Before-and-after studies of new stadiums show no statistically significant effect on local employment, income and retail sales, and more often than not the effect can be slightly negative. These results make sense. Sports teams employ few people in relation to the revenue they generate. To the extent that fans reduce spending on other entertainment and recreation to attend sports events, the effect is to reduce employment. Moreover, many professional athletes do not live where their team plays, so less of their high salaries are spent in the local economy.

For local governments, sports facilities generate only a limited amount of new tax revenue. Typically, stadiums are exempted from property taxes. Facilities do generate sales tax from tickets and concessions, but most of this goes to the state. Local governments are not likely to collect more than a few million dollars per year in new revenue, which is not sufficient to justify an investment of $100 million or more.

When stadiums are part of larger developments, the local economic impact can be more favorable. Residential development generally is not exempt from property tax. Shopping centers provide sales taxes. Yet the tax return would be even larger if the stadium were not part of the package.

Notwithstanding the limited local economic benefit of a sports team, citizens still may regard a public subsidy as worthwhile. But the basis for this conclusion must lie in the consumption value of having a local team, rather than the return on public investment. Cities invest in many cultural and recreational facilities that do not earn much return on investment, such as libraries, playgrounds and high school sports facilities. Whether stadiums for pro teams fall in this category is up to citizens to decide for themselves.

[The original article has a fairly detailed description of stadium plans in the San Francisco Bay Area]

links for 2007-07-08

To Reduce Crime, Get the Lead Out

The fall in the crime rate in New York and elsewhere may not have much to do with enhanced law enforcement measures, instead the fall in crime may have resulted from government regulations that reduced lead exposure in children:

Research Links Lead Exposure, Criminal Activity, by Shankar Vedantam, Washington Post: Rudy Giuliani never misses an opportunity to remind people about his track record in fighting crime as mayor of New York City from 1994 to 2001. ...

Although crime did fall dramatically..., a broad range of scientific research has emerged ... to show that the mayor deserves only a fraction of the credit... The most compelling information has come from an economist in Fairfax who has argued in a series of little-noticed papers that the "New York miracle" was caused by local and federal efforts decades earlier to reduce lead poisoning.

The theory offered by the economist, Rick Nevin, is that lead poisoning accounts for much of the variation in violent crime in the United States. It offers a unifying new neurochemical theory for fluctuations in the crime rate, and it is based on studies linking children's exposure to lead with violent behavior later in their lives.

What makes Nevin's work persuasive is that he has shown an identical, decades-long association between lead poisoning and crime rates in nine countries. "It is stunning how strong the association is," Nevin said... "Sixty-five to ninety percent or more of the substantial variation in violent crime in all these countries was explained by lead."

Through much of the 20th century, lead in U.S. paint and gasoline fumes poisoned toddlers as they put contaminated hands in their mouths. The consequences on crime, Nevin found, occurred when poisoning victims became adolescents. ...

Many other theories have emerged to try to explain the crime decline. ... Steven D. Levitt and Stephen J. Dubner said the legalization of abortion in 1973 had eliminated "unwanted babies" who would have become violent criminals. Other experts credited lengthy prison terms for violent offenders, or demographic changes, socioeconomic factors, and the fall of drug epidemics. ...

Most of the theories have been long on intuition and short on evidence. Nevin says his data not only explain the decline in crime in the 1990s, but the rise in crime in the 1980s and other fluctuations going back a century. His data from multiple countries, which have different abortion rates, police strategies, demographics and economic conditions, indicate that lead is the only explanation that can account for international trends.

Because the countries phased out lead at different points, they provide a rigorous test: In each instance, the violent crime rate tracks lead poisoning levels two decades earlier.

"It is startling how much mileage has been given to the theory that abortion in the early 1970s was responsible for the decline in crime" in the 1990s, Nevin said. "But they legalized abortion in Britain, and the violent crime in Britain soared in the 1990s. The difference is our gasoline lead levels...

Lead levels plummeted in New York in the early 1970s, driven by federal policies to eliminate lead from gasoline and local policies to reduce lead emissions from municipal incinerators. Between 1970 and 1974, the number of New York children heavily poisoned by lead fell by more than 80 percent... Lead levels in New York have continued to fall...

The later drop in violent crime was dramatic. In 1990, 31 New Yorkers out of every 100,000 were murdered. In 2004, the rate was 7 per 100,000 -- lower than in most big cities. The lead theory also may explain why crime fell broadly across the United States in the 1990s, not just in New York.

The centerpiece of Nevin's research is an analysis of crime rates and lead poisoning levels across a century. The United States has had two spikes of lead poisoning: one at the turn of the 20th century, linked to lead in household paint, and one after World War II, when the use of leaded gasoline increased sharply. Both times, the violent crime rate went up and down in concert, with the violent crime peaks coming two decades after the lead poisoning peaks.

Other evidence has accumulated in recent years that lead is a neurotoxin that causes impulsivity and aggression, but these studies have also drawn little attention. In 2001, sociologist Paul B. Stretesky and criminologist Michael Lynch showed that U.S. counties with high lead levels had four times the murder rate of counties with low lead levels, after controlling for multiple environmental and socioeconomic factors.

In 2002, Herbert Needleman, a psychiatrist at the University of Pittsburgh, compared lead levels of 194 adolescents arrested in Pittsburgh with lead levels of 146 high school adolescents: The arrested youths had lead levels that were four times higher.

"Impulsivity means you ignore the consequences of what you do," said Needleman, one of the country's foremost experts on lead poisoning, explaining why Nevin's theory is plausible. Lead decreases the ability to tell yourself, "If I do this, I will go to jail." ...

Within the field of neurotoxicology, Nevin's findings are unsurprising, said Ellen Silbergeld ... at Johns Hopkins University and the editor of Environmental Research. "There is a strong literature on lead and sociopathic behavior among adolescents and young adults with a previous history of lead exposure," she said.

Two new studies by criminologists Richard Rosenfeld and Steven F. Messner have looked at Giuliani's policing policies. They found that the mayor's zero-tolerance approach to crime was responsible for 10 percent, maybe 20 percent, at most, of the decline in violent crime in New York City. ...

Nevin's finding may even account for phenomena he did not set out to address. His theory addresses why rates of violent crime among black adolescents from inner-city neighborhoods have declined faster than the overall crime rate -- lead amelioration programs had the biggest impact on the urban poor. Children in inner-city neighborhoods were ... more likely to live in substandard housing that had lead paint and ... public housing projects were often situated near highways.

Chicago's Robert Taylor Homes, for example, were built over the Dan Ryan Expressway... Eighteen years after the project opened in 1962, one study found that its residents were 22 times more likely to be murderers than people living elsewhere in Chicago.

Nevin's finding implies a double tragedy for America's inner cities: Thousands of children in these neighborhoods were poisoned by lead in the first three quarters of the last century. Large numbers of them then became the targets, in the last quarter, of Giuliani-style law enforcement policies.

NY Times: The Time to Leave Iraq is Now

The New York Times editorial board has come to a conclusion:

The Road Home, Editorial, NY Times: It is time for the United States to leave Iraq, without any more delay than the Pentagon needs to organize an orderly exit.

Like many Americans, we have put off that conclusion, waiting for a sign that President Bush was seriously trying to dig the United States out of the disaster he created by invading Iraq without sufficient cause, in the face of global opposition, and without a plan to stabilize the country afterward.

At first, we believed that after destroying Iraq’s government, army, police and economic structures, the United States was obliged to try to accomplish some of the goals Mr. Bush claimed to be pursuing, chiefly building a stable, unified Iraq. When it became clear that the president had neither the vision nor the means to do that, we argued against setting a withdrawal date while there was still some chance to mitigate the chaos that would most likely follow. ...

It is frighteningly clear that Mr. Bush’s plan is to stay the course as long as he is president and dump the mess on his successor. Whatever his cause was, it is lost. ...

Continuing to sacrifice the lives and limbs of American soldiers is wrong. The war is sapping the strength of the nation’s alliances and its military forces. It is a dangerous diversion from the life-and-death struggle against terrorists. It is an increasing burden on American taxpayers, and it is a betrayal of a world that needs the wise application of American power and principles.

A majority of Americans reached these conclusions months ago. Even in politically polarized Washington, positions on the war no longer divide entirely on party lines. When Congress returns this week, extricating American troops from the war should be at the top of its agenda.

That conversation must be candid and focused. Americans must be clear that Iraq, and the region around it, could be even bloodier and more chaotic after Americans leave. There could be reprisals against those who worked with American forces, further ethnic cleansing, even genocide. Potentially destabilizing refugee flows could hit Jordan and Syria. Iran and Turkey could be tempted to make power grabs. Perhaps most important, the invasion has created a new stronghold from which terrorist activity could proliferate.

The administration, the Democratic-controlled Congress, the United Nations and America’s allies must try to mitigate those outcomes — and they may fail. But Americans must be equally honest about the fact that keeping troops in Iraq will only make things worse. ...

President Bush and Vice President Dick Cheney have used demagoguery and fear to quell Americans’ demands for an end to this war. They say withdrawing will create bloodshed and chaos and encourage terrorists. Actually, all of that has already happened — the result of this unnecessary invasion and the incompetent management of this war.

This country faces a choice. We can go on allowing Mr. Bush to drag out this war without end or purpose. Or we can insist that American troops are withdrawn as quickly and safely as we can manage — with as much effort as possible to stop the chaos from spreading.

links for 2007-07-07

July 5, 2007

What Can We Learn from Successful Autocracies?

The Economist's blog, Free Exchange, recently posted a graph from the IMF's World Economic Outlook showing that politically repressed countries have higher economic growth rates than politically free countries, and worry is expressed over this result at Free Exchange ("The thing that worries me ..."), and elsewhere ("Democracies will stay in the game, but ... their victory is not assured").  Tim Beasley and Masa Kudamatsu look into this issue further and note that there is quite a bit of variation in economic outcomes across autocracies, and they wonder what we can learn from this. Their examination and resulting "lessons for institutionalising good government" find that one of the keys to success is the accountability of the leadership for economic outcomes:

What can we learn from successful autocracies?, by Tim Besley and Masa Kudamatsu, VoxEU: One of the most striking economic phenomena of the past twenty years is growth and development in communist China. Rates of growth in income per capita of around 10% per annum have led to one of the largest falls in absolute poverty that the world has ever seen. But, while China has embraced many aspects of the market, it has resolutely opposed most aspects of democracy.

But there is another image of autocracy, typified by the recent experience of Zimbabwe, where a despotic leader (Robert Mugabe) seems content to preside over economic chaos, standing coolly by while millions of people descend into destitution. There is no way of getting rid of a leader like Mugabe who rigs elections and represses the opposition in order to stay in power. This is government failure on a vast scale.

A brief look at the data on growth in democratic and autocratic regimes shows that the stories of China and Zimbabwe typify the experience of economic development among autocracies in the post war period. Economic growth rates differ more substantially among autocracies than among democracies. This is illustrated in Figure 1 which depicts the distribution of growth performance in autocracies and democracies that survive for five years or more. Successful autocracies outperform democracies at the top of the distribution. However, they perform worse at the bottom.

Figure 1: Economic Growth Distributions among Democracies and Autocracies

From a scientific point of view, this raises the question of whether we can develop a systematic account of why some autocracies perform better than others.

At a superficial level, it is clear that we are lumping together a wide variety of regime types under the rather blunt heading of “autocracy”, such as military dictators and former democrats who then cancel or subvert election.

Our approach to answering this question focuses on how political institutions make political leaders accountable, or make their survival in office depend on their policy performance. This is a long-standing theme in political economy. Moreover, a central role of regularised democratic elections has been to create some feedback from good performance by government to continued hold on power, a link which is missing in autocratic government.

Autocrats typically rely on key groups to stay in power. This could be a party structure or the military or a close group of allies. Concerted action by this group may, in principle, depose the leader. Following recent work, we refer to this group as the “selectorate” as opposed to the “electorate” in democracies.

In the absence of elections, it is important to focus on what incentive this group has to support leaders that foster good policies. As citizens, this group will tend to benefit from economic prosperity. But, equally they are likely to enjoy some trappings of power by having allied themselves with the leader. If deposing the leader threatens these benefits, they may be reluctant to do so.  This leads us to predict that secure selectorates will tend to create performance-related incentives for their leaders and would be willing to remove the leader from office if he does not perform well. Selectorates whose own hold on power is closely tied to a specific leader are willing to preside over bad policy.  But to remove the leader from power, the selectorate has also to be strong enough to resist any attempts at repression. The history of autocracy is replete with examples of despotic leaders purging their closest allies. Given that his inner circle has the most credible threat against the leader, this is not surprising.

Extension of this logic also reveals why democracy is not always able to achieve the best policy outcome. Effective democratic accountability requires that the salient issues on which elections are fought are those that promote general interests. Democratic accountability may founder when factional rather than general interests influence election outcomes. Today’s Iraq may be an example of this. Successful autocratic accountability can still work in such circumstances as long as one faction is able to hang on to power and discipline bad leaders.

The logic of this argument suggests three things that we should observe in reality. First, we should find that successful autocracies are those where the selectorate can and will exercise control to discipline poor performance.

In communist China, the selectorate are around 20 members of the Communist Party Politburo. When Hu Jintao succeeded Jiang Zemin as General Secretary in 2002, Jiang had reportedly tried to convince his colleagues in the Politburo to allow him to stay in power. But he failed, probably because the selectorate were concerned that rising income inequality in China under Jiang’s rule would undermine the overall economic success.

Another example comes from the Brazilian economic “miracle” in the late 1960s and the early 1970s under the military dictatorship. Members of the armed forces, the selectorate of the military regime, always picked as the next president the person behind whom the military could be united. The succession in 1967 resulted in a new president whom the predecessor tried to prevent from assuming office. One factor behind this succession struggle was that the armed forces were disgruntled with the incumbent’s economic policies. The Brazilian economy took off under the new president’s economic management.

Second, if our view of successful autocracy is correct, we should find that high growth autocracies have higher leadership turnover than low growth autocracies. This turns out to be the case.  The probability of leadership change in a given year is 13% for high growth autocracies and 7% for low growth ones.

Finally, we can also exploit “natural experiments” when leaders die in office to see what happens. We should find that successful autocracies are those where such random deaths do not undermine the power of the selectorate whereas poorly performing autocracies will experience change in the ruling elite.

The incapacitation of Portuguese dictator Oliveira Salazar in 1968 provides one such “experiment”. Under Salazar, Portugal experienced a rapid economic expansion. The succeeding dictator, Marcello Caetano, was appointed by the military and its civilian cooperators who were the supporters of Salazar. Caetano then managed to stay in power until 1974 without slowing down the economic growth rate. Similar regime stability was observed after the death of a Thai military dictator, Sarit Thanarat, in 1963 under whose rule Thailand’s economy took off.

On the other hand, the death of Ahmed Sekou Toure, a civilian dictator of Guinea in west Africa, in 1984 was immediately followed by a military coup toppling the regime. The Guinean economy had been shrinking under Sekou Toure’s rule. The Guinean selectorate apparently feared that getting rid of Sekou Toure would lead to the loss of their own power.  The selectorate in today’s Zimbabwe probably fear the same.

The aim of this research is not to argue for autocracy. But there are lessons for institutionalising good government in a wider context. To bring it closer to home, consider the recent experience of the UK where Gordon Brown has replaced leader Tony Blair without an election taking place. The selectorate in this case was the ruling Labour party and their incentive was to pick the best leader they could find; they voted in Gordon Brown based on his record to date. This serves as a reminder that, even in a mature democracy, accountability resides in more places than general elections. In due course, there will, of course, be an election in the UK at which the new Prime Minister will have to win a fresh mandate. However, the role of party leadership selection is an important supplementary force to achieve accountability and is a characteristic of Parliamentary systems. Our analysis of successful autocracies shows that accountability by insiders becomes even more important in the absence of open elections. This is also a challenge in one-party democracies like modern day South Africa.

The lesson from successful autocracies is that supporting good government with effective accountability requires institutional arrangements appropriate to that task, given the circumstances of the country in question. Efforts to build effective governments that work in the interests of a broad range of citizens need to be cognisant of this and to identify the institutional features necessary for the task.

Will the Euro Replace the Dollar?

Will the Euro Replace the Dollar as the currency of choice for world financial transactions? NYU's William Silber says perhaps, but it is unlikely to happen anytime soon:

Will the dollar lose its crown to the euro?, by William L. Silber, Project Syndicate: Much of America's dominance in world finance comes from the dollar's status as international money. ... But American spending habits have undermined the dollar's reputation, with the excess supply of dollars on world markets depressing its price.

This spring, the euro's exchange rate against the dollar reached an all-time high, and central banks have increased the euro share of their international reserves. Is the dollar about to lose the crown of world finance to the euro? History suggests otherwise...

American financial supremacy in the 21st century resembles Britain's position ... a century ago. Before the outbreak of World War I in August 1914, the pound sterling served as the currency of choice for international transactions...

John Maynard Keynes worried that countries would not use sterling to settle trading balances with each other if the pound were not viewed as a reliable store of value. ... Britain maintained the pound's convertibility into gold at the outbreak of World War I to preserve its credibility as the international medium of exchange.

The dollar could not challenge sterling's role as the world's currency without matching its reputation. August 1914 provided the opportunity. The biggest gold outflow in a generation imperiled America's ability to repay its debts abroad. Fear that the U.S. would abandon the gold standard sent the dollar plummeting on world markets.

But Treasury Secretary William G. McAdoo secured American financial honor in August 1914 by remaining true to gold while everyone else, except for the British, abandoned their obligations. Despite the dollar's instant credibility, however, it took more than a decade for America's currency to match Britain's as an international medium of exchange. Payment habits melt at a glacier's pace.

Britain's transformation from international creditor to international debtor during World War I gave the dollar a second wind in its battle with sterling. The British were forced to abandon gold convertibility in April 1919... Six years later ... Britain ... returned to the gold standard. But the pound had already suffered irreparable damage.

The experience of 1914 implies that a credible alternative can replace an entrenched world currency, especially after an unfavorable balance of trade has weakened it. But even then, dethroning the reigning king of international exchange takes time.

Today, the euro — a currency without a country — lacks a long track record of credibility. Thirteen countries in the European Union use the euro... But the commitment of these independent political entities to the euro cannot match the history of America's commitment to the dollar.

The European Central Bank, established in 1998, has a mandate ... to maintain price stability. But the ECB needs time to establish its inflation-fighting credentials. It cannot hitch a ride on gold, the way America did a century ago. So the euro must earn its reputation crisis by crisis...

Recent experience with the euro as an official reserve asset is instructive. Between 2000 and 2005, the dollar lost more than 25 percent of its value against the euro. Meanwhile, the fraction of international reserves held in euros grew from 18 percent to 24 percent, and the dollar's share dropped from 71 percent to 66 percent. In short, the euro has clearly made some headway during this period of U.S. balance of payment deficits, but this reflects an evolutionary decline in the dollar's dominance, not a revolutionary regime shift.

What might trigger a fatal run on the dollar in world markets? While a broad and abrupt selloff by major foreign holders of dollars — for example, China — appears unlikely, a cataclysmic event, similar to the outbreak of World War I in 1914, could prompt a search for a new international medium of exchange. In the modern era of automated payments, the upheaval might come from a terrorist attack that undermines the computerized transfer facilities of the world's banking system. A catastrophic loss of electronic records could surely destroy the credibility of the dollar as the international medium of exchange.

But exactly what would replace the dollar under such circumstances remains an open question. After all, a loss of computer records would make the euro equally suspect. Perhaps gold, a store of value impervious to physical distortion, could make a comeback. Of course, one can only hope that such a scenario remains pure conjecture.

"Lack of Civil Liberties, Not Poverty, Breeds Terrorism"

These results have been noted here before, but they're worth highlighting again. Terrorism is not driven by economic conditions:

Princeton Economist Says Lack of Civil Liberties, Not Poverty, Breeds Terrorism, by David Wessel, Capital, WSJ (Free): When Princeton economist Alan Krueger saw reports that seven of eight people arrested in the unsuccessful car bombings in Britain were doctors, he wasn't shocked. He wasn't even surprised.

"Each time we have one of these attacks and the backgrounds of the attackers are revealed, this should put to rest the myth that terrorists are attacking us because they are desperately poor," he says. "But this misconception doesn't die."

Less than a year after the Sept. 11, 2001, attacks, President Bush said, "We fight against poverty because hope is an answer to terror." ... Former World Bank President James Wolfensohn has argued, "The war on terrorism will not be won until we have come to grips with the problem of poverty...."

The analysis is plausible. It's appealing because it bolsters the case for the worthy goals of fighting poverty and ignorance. But systematic study -- to the extent possible -- suggests it's wrong.

"As a group, terrorists are better educated and from wealthier families than the typical person in the same age group in the societies from which they originate," Mr. Krueger said at the London School of Economics last year...

There is no evidence of a general tendency for impoverished or uneducated people to be more likely to support terrorism or join terrorist organizations than their higher-income, better-educated countrymen," he said. The Sept. 11 attackers were relatively well-off men from a rich country, Saudi Arabia. ...

Data on which all this relies are hardly perfect: Terrorists don't fill out elaborate questionnaires. Better-off, better-educated individuals could be motivated if not by their own circumstances, then by the conditions of their impoverished countrymen. Interviews of terrorists in Pakistan by Harvard terrorism scholar Jessica Stern reveal recruiters there found the poorest neighborhoods to be the most fertile ground, particularly among those who feel Muslims are humiliated by the West. She says Mr. Krueger and like-minded scholars don't yet have enough evidence to prove anything. "We are only just beginning to do really serious large studies in terrorism," she says.

But the conventional wisdom that poverty breeds terrorism is backed by surprisingly little hard evidence. ... The 9/11 Commission stated flatly: Terrorism is not caused by poverty.

So what is the cause? Suppression of civil liberties and political rights, Mr. Krueger hypothesizes. "When nonviolent means of protest are curtailed," he says, "malcontents appear to be more likely to turn to terrorist tactics." ...

"Economic Policy and the New Century Public Discourse"

Richard Baldwin discusses how blogs and sites like VoxEU and LaVoce are beginning to bridge the gap between research and real-world applications. Comments by Andrew Leonard at Salon follow the essay, and there are interesting related comments from Angus Deaton on hopeful changes he's observed in the profession in recent years:

Economic policy and the New Century public discourse, by Richard Baldwin, VoxEU: Economics is more relevant to policy-making than ever before, but you would never know it from the public discourse. The internet is helping bridge the gap, and www.laVoce.info has led the change. But how will the internet’s role in the public discourse on economics change in the future?

More realistic economics Major advances in theoretical and empirical economics now allow economists to address policy issues with much more realistic tools.

On the theory side, new areas such as economics and psychology, and behavioural economics, experimental economics and the new institutional economics have taken the profession light years beyond the simplistic view of human society that dominated thinking just 15 years ago. When it comes to firms, contract theory has allowed explicit modelling of the firm’s organisation choices and their reactions to changing economic environments. Mechanism design has allowed us to think more clearly about how government rules affect equilibrium outcomes in realistic settings.[1]

On the empirical side, the emergence of enormous new data sets and powerful statistical tools have greatly advanced our understanding of exactly how real-world markets work as well as how people, groups and firms react to incentives. In the 1980s, a ‘large sample’ was one with more than a hundred observations. Now researchers routinely work with tens or hundreds of thousands of observations; sample sizes in the millions are increasingly common. One key aspect of all this new information is that it involves ‘panel data,’ i.e. data that track, over time, workers, firms or whatever.[2] Data that vary both across individuals and over time allow us to filter out much of the heterogeneity that marks individuals and time periods. What emerges is a much clearer picture of how things like tax policy or education actually affect economic outcomes.

The new tools don’t mean that we now have all the answers. We don’t. We still don’t know, for example, how economic development really works, or what determines productivity growth. But the new tools mean that we no longer are forced to rely on theory with crude foundations, e.g. firms as profit functions, consumers as utility functions (although there are still many problems where such assumptions are useful abstractions that permit the research to focus on the key trade-offs).

With all these excellent tools at hand, one might have expected the newspapers and Parliamentary debates to be filled with new insights, new results and new approaches. Alas, with few exceptions, the public debate has not moved much beyond the simplistic pro- vs anti-market exchanges that have dominated Europe since the post-war rise of welfare states. Case in point? The 2007 French Presidential election debate.

In the 1980s, brilliant young economists like Paul Krugman, Larry Summers, Jeff Sachs and Joe Stiglitz felt obliged to write Brookings or Economic Policy articles, to sit on government panels, to write policy reports, and to send Op-Ed pieces to the Financial Times. At the time, it was part of the definition of a being a leading scholar. It helped you get tenure at Harvard. It also bridged the gap between cutting-edge research and the public debate on trade policy, exchange rates, current account dynamics, etc.

Today’s brilliant young economists are much less interested in participating in the public debate in these ways. I have no empirical evidence to back up this opinion, but I think it is shared by many economists involved in economic policy issues and I had first-hand experience of it during my five years as a Managing Editor of Economic Policy. Young people need publications in good anonymously-reviewed journals; everything else is a luxury.

Hypotheses on why abound. My belief is that a major intensification of competition among the top US economic departments has occurred over the past two decades, and this led to an overwhelming emphasis on scholarly output that can be easily quantified – journal articles in particular. Things like sitting on Select Committees, testifying to Parliament, or writing policy-oriented books and reports have impacts that are too hard to measure, so they get excluded from the rankings. Oversimplifying to make the point, what does not matter for the rankings doesn’t matter for academic promotion, prestige or pay. While things have not yet gone this far in most of Europe, the trend is starting. Some European economics departments pay a bonus of thousands of euros to faculty whose work gets published in top journals. Writing an influential analysis of a legislative policy proposal gets a pat on the back.


To outsiders – people in the policy world, but also our fellow social scientists – this trend may appear to be a classic case of ‘blinded by science.’ Like the protagonist in 1983’s pop song “She blinded me with science,” the use of mathematics, Greek letters and econometrics seems to be an attempt to deliberately confuse by giving the impression of highly complex knowledge. That is surely overstating the case, but it captures the flavour of the world’s reactions to the increasing divide between today’s best economic research and real-world policy issues.

Why not do it like the doctors? Medical science faces a similar disconnect between recent advances in hard science – where the big breakthrough may be identification of a particular molecule – and real-world implications, say the concerns of the average family doctor. Medical journals address the problem in a very different way – each article includes the hard science, but it also includes a less formal discussion of what the results mean for medicine and how they fit into the bigger picture – the “Discussion Section.” The International Committee of Medical Journal Editors has called this the “IMRAD” structure (Introduction, Methods, Results, and Discussion) and state that the structure is “not simply an arbitrary publication format, but rather a direct reflection of the process of scientific discovery.”[3]

In the top economic journals, “Policy Implication” sections have fallen out of favour. Including such conjectures in a manuscript is unlikely to raise the probability of publication. Given the natural conservatism of the leading economic journals, there is probably no hope that the journals themselves will encourage authors to draw out the policy implications of their work. In any case, there is a widespread perception that policy analysis is not really the business of scientists. For example, the NBER Working Papers explicitly prohibit policy recommendations. The discussion of research results that does not take place in the journals has spilled over into cyberspace.

The internet as a very public Discussion Section On the bright side, the internet has two features that make it an excellent vehicle for bridging the research-reality gap. Feature No.1: its technology makes publishing very cheap. Feature No.2: its global span makes it possible to find an audience that is both large and homogenous in terms of background knowledge. On the dark side, these two features have produced a cacophony. Bloggers – embracing Feature No.1 and hoping for Feature No.2 – have set up a shocking number of sites. A bewildering mixture of insight and nonsense is spread over literally thousands of sites (technocrati.com lists 1,745 blogs about economics with 281,823 posts). One can spend some pleasant hours browsing the various blogs – and even learn a lot from the big blogs, like “Economist’s View”, “New Economist”, ”Marginal Revolution”, and the sites of Brad DeLong, Greg Mankiw, and Nouriel Roubini. But this is not the profession’s response to the Discussion Sections of medical journals. It is more like the collegial coffee-room discussions we used to have when there was time for such things.

What Tito Boeri, the founder of www.laVoce.info, discovered 5 years ago, was that there is a large demand for high-level public discussion of economic policy, higher than the level in newspapers or blogs. Something much more like the Discussion Section of the British Journal of Medicine: discussion of real-world, policy-relevant issues by researchers that is screened by researchers. Tito also found that there was a large supply of researchers willing to devote time – for free – to such discussion. We would probably need psychology-and-economics experts to understand the motives, but whatever they are, these economists are doing Italy a pubic service.

The Consortium Tito’s idea – gathering research-based policy analysis that is written by researchers and screened by researchers – is spreading fast. A French site – www.telos-eu.info – was set up a couple of years ago and an English-language site – VoxEU.org – was set up four weeks ago. The three sites have formed a consortium for sharing of columns, translating the best ones into the local language. This way the best research-based policy analysis – regardless of its original language – can reach much deeper into the policy-making world (language still matters). A Spanish site is being set up by Juanjo Dolado and a Dutch and a German site are scheduled to launch later this year. The Consortium has opened discussions on a Swedish partner, a Japanese partner and most recently a South African partner. There may be a dozen more by the end of next year.

Happy birthday LaVoce; it has been an inspiring 5 years.

Andrew Leonard at Salon reacts with a bit of disagreement:

Does the econo-blogosphere matter?, by Andrew Leonard, Salon: I haven't kept track of exactly how many National Bureau of Economic Research "working papers" I've read since I started writing How the World Works -- a dozen or two, I'd guess. But I didn't realize until today that NBER specifically forbids its authors from making "explicit policy recommendations." That nugget comes from Richard Baldwin, a professor of international economics at the Graduate Institute in Geneva in an essay commemorating the fifth anniversary of the founding of the Italian economic policy watchdog LaVoce. (Thanks to Trade Diversion for the link.)

Baldwin mentions the NBER policy in the context of outlining a shift in how today's economists connect their work to the "real world." The short version: they don't, or at least, not as much as they used to.

In "Economic policy and the New Century public discourse," he writes:

In the 1980s, brilliant young economists like Paul Krugman, Larry Summers, Jeff Sachs and Joe Stiglitz felt obliged to write Brookings or Economic Policy articles, to sit on government panels, to write policy reports, and to send Op-Ed pieces to the Financial Times. At the time, it was part of the definition of a being a leading scholar. It helped you get tenure at Harvard. It also bridged the gap between cutting-edge research and the public debate on trade policy, exchange rates, current account dynamics, etc.

Today's brilliant young economists are much less interested in participating in the public debate in these ways. I have no empirical evidence to back up this opinion, but I think it is shared by many economists involved in economic policy issues and I had first-hand experience of it during my five years as a Managing Editor of Economic Policy. Young people need publications in good anonymously-reviewed journals; everything else is a luxury.

And in those good journals, adding a section on policy recommendations or implications is unlikely to improve one's chances of getting published, if it isn't actively discouraged. The state of affairs, argues Baldwin, is a shame. In his view, economists have never had more to offer the world, but they have fewer and fewer opportunities to midwife their knowledge into practical application.

With one major exception, which Baldwin grudgingly concedes. The Internet. Economists have taken to the Internet , and in particular, the blogosphere, with a vigor unmatched by any other social science discipline.

On the bright side, the Internet has two features that make it an excellent vehicle for bridging the research-reality gap. Feature No.1: its technology makes publishing very cheap. Feature No.2: its global span makes it possible to find an audience that is both large and homogeneous in terms of background knowledge. On the dark side, these two features have produced a cacophony. Bloggers -- embracing Feature No.1 and hoping for Feature No.2 -- have set up a shocking number of sites. A bewildering mixture of insight and nonsense is spread over literally thousands of sites (technorati.com lists 1,745 blogs about economics with 281,823 posts). One can spend some pleasant hours browsing the various blogs -- and even learn a lot from the big blogs, like "Economist's View," "New Economist," "Marginal Revolution", and the sites of Brad DeLong, Greg Mankiw, and Nouriel Roubini. But this is not the profession's response to the Discussion Sections of medical journals. It is more like the collegial coffee-room discussions we used to have when there was time for such things.

I must disagree with Professor Baldwin. The econo-blogosphere is more than a collegial coffee-room discussion. It's closer to an internationally-distributed graduate seminar, in which the lucky students get to watch -- and participate in -- a round-robin debate featuring scores of professors duking it out. It is also an early-warning system for new academic papers of note and an instant provider of context and analysis for each new blip of economic data. It is, to put it most simply, an education.

Does that mean it has an impact on policy? That's where it gets tricky. Politics, especially as practiced in the United States, appears to care little for the consensus opinion of economists, especially when that runs counter to polling data and focus group results. But maybe it's just too early in the history of the Internet to make a definitive call. We need more data.

And, to end on a promising note, here's Angus Deaton of Princeton by way of "The economics of everything, by Andrew Leigh":

Random walks by young economists, by Angus Deaton, RES Newsletter: As I write, the economics junior job market is winding down. At Princeton, we had the unusually large number of eighteen candidates come visit and present their work... One of the most remarkable features of the market in recent years has been the breadth of topic that currently falls within the ambit of applied economics. ... Among the topics presented on this year's job market were studies of the prison parole system in Georgia, (several) of HIV/AIDS in Africa , of child immunization in India, of the political bias of newspapers, of child soldiering, of racial profiling, of rain and leisure choices, of mosquito nets, of malaria, of treatment for leukemia, of the stages of child development, of special education, of war and democracy, of the effects of TV coverage on democracy, of bilingualism and democracy, and many others. (Among the leading departments, only Stanford’s graduate students appear to be working almost exclusively on traditional topics.) Twenty years ago, there was essentially none of this. Applied theses were mostly applied price theory, using a set of generally agreed-upon (preferably ‘frontier’) econometric methods. Issues that seem central now, like poverty, inequality, national and international health, education, the environment, and much of economic development) were left to other disciplines on the grounds that (standard) economics had no framework for analyzing such ill-defined topics.

Data versus theory So what is it that economics brings to malaria, child soldiering, or the consequences of parole boards? Price theory is certainly no longer our comparative advantage. It is not that it cannot be applied to a wide range of topics, as Gary Becker and others have repeatedly shown. But if current graduate students know anything of price theory, it would have had to have been self-taught, because it is no longer on the curriculum in the ‘best’ American departments. (Except Chicago where it hangs on by a whisker, and where in a last ditch attempt to preserve it from extinction, Becker, Kevin Murphy, and Steve Levitt are running an intensive price theory summer camp for graduate students from outside of Chicago.) The advantage that economists have, if advantage it is, is their data handling skills (most social sciences are far from comfortable with millions of observations, to say the least), as well as their well-developed armoury of econometric techniques. If the typical thesis of the eighties was an elaborate piece of price theory estimated by non-linear maximum likelihood on a very small number of observations, the typical thesis of today uses little or no theory, much simpler econometrics, and hundreds of thousands of observations. (The amount of computing time has remained more or less constant.) The extent to which data can effectively be substituted for theory is clearly a topic that is being actively explored, at least empirically.

And now real experiments In recent years, the dominant econometric method has been instrumental variables; there is much to the jibe that students no longer look for a thesis topic, but for an instrument. As instruments have become ever more baroque, and their justifications ever more strained, and in the face of deeply serious critiques, particularly by Jim Heckman, the popularity of the method seems finally to be on the wane. In its place, there is a fast growing effort to replace econometric methodology, which can be thought of as a set of ex post fixes for non- experimental data, with real experiments, which require no such fix, and whose results are thereby transparent and convincing. There is lively work in laboratory and field experiments, often to test theoretical propositions, fed and encouraged by the growing collaboration between economics and psychology. But nothing has expanded so rapidly as the Poverty Action Lab at MIT, now the Abdul Latif Jamil Poverty Action Lab (J-PAL), founded in 2003 by Esther Duflo, Abhijit Banerjee, and Sendhil Mullainathan (now at Harvard.) Born of a frustration with the inherent unreliability of econometric work, as well as by a perceived failure of the World Bank and other development agencies to evaluate their project work seriously , J-PAL runs an extensive program of randomized controlled trials (RCTs) to evaluate social programs of many kinds, focusing mostly on health and education in poor countries, but with an eclectic overall portfolio of topics. J-PAL has got off to a flying start. It has projects in a dozen or so countries... And the use of RCTs among graduate students and young assistant professors is expanding like wildfire; one Princeton student even persuaded a Mexican city to pave a random selection of its streets.

The movement is not modest in its claims, and it has attracted a good deal of acclaim from outside the profession. Banerjee has argued that the World Bank should cease to fund any activity (including presumably macro policy advice) that has not been previously subject to evaluation by an appropriate RCT. Among other plaudits in the press, The Lancet, noted that ‘The World Bank is finally embracing science’ (if only The Lancet would do the same in its treatment of economic issues!)... There is much to be excited about in this program. J-PAL and other experimental researchers have come up with several surprising results that upset previous beliefs. And by replicating similar experiments in different settings they are beginning to create an impressive and valuable body of evidence. As might be expected in the first flush of enthusiasm, there has to date been less attention to some of the problems..., nor to the extent to which RCTs really do solve the standard problems of econometric analysis. ... And the jury is still out on whether RCTs are any better than large data sets as substitutes for theory.

In the end, it is hard not to think that the quality of research owes more to people than to methods. Certainly, the best of the job market candidates this year made important advances and showed great imagination and skill, irrespective of the unresolved methodological debates that divide the profession. Given this abundant talent, and the new-found (or re-found) commitment of young economists to the great issues of poverty and health around the world, there is surely no fear for the future of economics. And perhaps one day soon, there will once again be a closer dialogue between theory and application.

links for 2007-07-05

Winner-Take-All-Markets and Efficiency

Robert Frank says raising taxes paid by hedge fund managers can improve economic efficiency:

A Career in Hedge Funds and the Price of Overcrowding, by Robert Frank, Economic Scene, NY Times: ...I haven’t seen a formal survey, but a rapidly growing percentage of the best students I teach say they want to manage hedge funds or private equity firms. Little wonder. ... The combined income of the top 25 hedge fund managers exceeded $14 billion in 2006.

These managers also enjoy remarkably favorable tax treatment. For example, even though ... their 20 percent commission on portfolio gains ... has the look and feel of ordinary income, it is taxed at the 15 percent capital gains rate rather than the 35 percent top rate for ordinary income. ...

Congress is now considering a proposal to tax carried interest as ordinary income. To no one’s surprise, private equity lobbyists were quick to insist that doing so would cause grave economic damage. ... Yet..., economic analysis suggests that it would actually increase production in other sectors of the economy by reducing wasteful overcrowding in the market for aspiring portfolio managers.

This market is what economists call a winner-take-all market — essentially a tournament in which a handful of winners are selected from a much larger field of initial contestants. Such markets tend to attract too many contestants for two reasons.

The first is an information bias. An intelligent decision about whether to enter any tournament requires an accurate estimate of the odds of winning. Yet people’s assessments of their relative skill levels are notoriously optimistic. ... When people overestimate their chances of winning, too many forsake productive occupations in traditional markets to compete in winner-take-all markets.

A second reason for persistent overcrowding in winner-take-all markets is a structural problem called “the tragedy of the commons.” This problem helps explain, for instance, why we see too many gold prospectors, an occupation that has much in common with prospecting for corporate deals. In the initial stages of exploiting a newly discovered gold field, adding another prospector may significantly increase the total amount of gold found. Beyond some point, however, additional prospectors contribute little. The gold found by a newcomer to a crowded field is largely gold that would have been found by existing searchers. ...

Beyond some point, adding another highly paid manager produces little increase in industry commissions on managed investments..., the additional manager’s commissions come largely at the expense of commissions that would have been generated by existing managers. So.., private incentives result in wasteful overcrowding. ...

No one denies that the talented people who guide capital to its most highly valued uses perform a vital service for society. But at any given moment, there are only so many deals to be struck. Sending ever larger numbers of our most talented graduates out to prospect for them has a high opportunity cost, yet adds little economic value.

By making the after-tax rewards in the investment industry a little less spectacular, the proposed legislation would raise the attractiveness of other career paths, ones in which extra talent would yield substantial gains. And the additional tax revenue could pay for things that clearly need doing. ...

Opponents of higher taxes often invoke the celebrated trade-off between equity and efficiency. But that objection makes no sense here. Ending preferential tax treatment of portfolio managers’ earnings would serve both goals at once.

July 4, 2007

links for 2007-07-04

Taking a Higher Toll

When E-ZPass electronic toll systems are installed, tolls tend to rise:

Technology Eases the Ride to Higher Tolls, by David Leonhardt, NY Times: ...I spent a good part of my childhood summers at the Jersey Shore, and the tollbooths on the parkway always seemed to be a cruel final obstacle between me and the beach. Every 15 minutes or so, our car would have to stop yet again to drop a measly quarter in a bucket.

The ride is very different today, thanks mostly to the electronic toll system known as E-ZPass. At four of the tolls along the Garden State, the system is so sophisticated that cars barely have to slow down. A little box attached to the car’s windshield sends a message to a computer reader looming over the road, and money is then deducted from an electronic account. ...

As a result of E-ZPass and its ilk, ... many [drivers] don’t notice the cost of a toll. Which raises an interesting question: If you don’t know how much you’re paying for something, will you notice when the price goes up? Or has E-ZPass, for all its benefits, also made it easier for toll collectors to take your money?

A young economist named Amy Finkelstein started thinking about these issues a few years ago... So she collected decades of toll records from around the country and found a clear pattern.

After an electronic system is put in place, tolls start rising sharply. Take two tollbooths that charge the same fee and are in a similar setting... A decade after one of them gets electronic tolls, it will be about 30 percent more expensive on average than a similar tollbooth without it. ...

“You may be less aware you’re paying the toll,” said Ms. Finkelstein, now an associate professor at M.I.T., “but you’re paying a higher toll than you used to.”

The implications of this go well beyond highways. We increasingly live in an E-ZPass economy, in which bills are paid online, corporate cafeterias are going cashless and people take along their debit card, instead of cash, when they leave the house. Last year, 55 percent of consumer spending was done electronically..., while checks accounted for less than 25 percent and cash only 20 percent...

The E-ZPass economy is indisputably more convenient. It saves time and frustration. But the old frustrations that came with cash also brought a hidden benefit: they forced you to notice that you were spending money. With electronic money, it’s much easier to be carefree.

Marketers understand this dynamic well, which is a big reason they promote refillable gift cards and other forms of money that don’t feel like money. Part of what’s so intriguing about Ms. Finkelstein’s work is that it suggests that government officials may be coming to understand the dynamic, too. ...

Ms. Finkelstein obviously can’t prove that electronic tolls cause prices to rise by making drivers less aware of them. ... But she makes a spirited case for her conclusion. She has considered a number of alternate explanations for the increases and says the evidence doesn’t support them. At the very least, electronic systems do seem to make it easier for toll collectors to increase prices. ... Ms. Finkelstein discovered that tolls don’t usually rise as soon as an electronic system arrives. The increases tend to come a number of years later, once electronic payment becomes old hat. ...

Let me try an alternative to the agents don't notice price increases when the payments are electronic story (i.e. that agents are irrational). One thing to note is that after the E-ZPass system is installed, waiting times fall, frustration falls, and the inconvenience of not having correct (or any) change also falls. Thus, the economic cost is lower even if the dollar cost of the toll stays the same, and this would cause the quantity of trips demanded to increase. Over time, with inflation, the real cost of the toll falls further, the number of trips increases further, and eventually the increased congestion could require a return of the toll to its original value (in terms of the full economic cost, and assuming congestion is the reason for the toll), or even a higher value if demand for road trips grows due to economic or population growth.

[Another possibility, though I don't think it quite fits here, is that under the old system changing the price of a toll is costly in terms of transaction and collection costs. That is, a $1.00 toll is much more convenient than a $1.05 toll (more currency and coins are involved in the payment, and making change for, say, two dollars also involves more coins and hence more time), but with an electronic system it doesn't matter. Thus, under the old system, instead of changing tolls in small increments between, say, one dollar and two dollars as would occur with E-ZPass, changes will be larger and more infrequent (perhaps in quarter, fifty cent, or even dollar increments rather than nickel increments). The result will be that E-ZPass tolls that are more flexible and rise sooner than under the old system though with this story, in the long-run, the average toll would be the same (net of differences in transactions and collection costs).]

Happy Fourth of July!

The Declaration of Independence establishes a government based upon individual rights and the rule of law:

Why the Rule of Law?, by Missouri Chief Justice Michael A. Wolff, Law Matters: ...We are a nation first and foremost of laws. ...[O]ur identity has been forged by the rule of law and by our common experience that faithfulness to the law guarantees liberty, equality of opportunity and a functioning civil society even in the face of those who, through ambition for power or wealth, would seek to impose their will on the less powerful. ...

The signers of the Declaration of Independence understood the oppression that occurs when those in power control the law for their own purposes. The signers understood that it was necessary to have a stable justice system – to have rules and laws based on certain fundamental principles and not the arbitrary whims of those holding government power at any moment. Only in this way could we protect ourselves from tyranny.

We all remember learning about "Life, Liberty, and the Pursuit of Happiness," the most memorable phrase of the Declaration of Independence. ... [T]he Declaration of Independence and the Constitution reflect a profound feeling for due process – for fair and impartial application of the law – that is part of the American soul. This feeling is embodied in the Constitution’s Bill of Rights and, following the Civil War, by the Fourteenth Amendment’s guarantee that no state should deprive any person of due process or equal protection of the law.

To be a bit more specific, we might consider some of the grievances listed in 1776 in the Declaration of Independence against King George III, who deprived us "in many cases, of the benefits of trial by jury" and transported us "beyond seas, to be tried for pretended offenses. … [H]e … obstructed the administration of justice, by refusing his assent to laws for establishing judiciary powers. He … made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries."

Our founders were wary of the tyranny not only of a king but also of political majorities. They realized in creating our constitution that a government system needs checks and balances to ensure that the most fundamental principle of our nation – the law – would be protected for the generations to follow. ...

Our system of checks and balances, needed to protect basic human liberties, has been with us since the start of the republic. Another of our founders, Alexander Hamilton, noted in Federalist 78 that "the complete independence of the courts of justice is peculiarly essential in a limited Constitution." ...

Adherence to the rule of law helps to preserve the rights of all people in a democratic society... As reflected in our Declaration of Independence, in the Preamble to our Constitution, and in the immortal words of Abraham Lincoln at Gettysburg: in the United States, the power of government comes from all people, not from those in positions of power or those who control a majority of government posts.

The rule of law is what makes our nation so different, so resilient and so free. The human capacity for justice makes democracy possible, as the theologian Reinhold Niebuhr noted years ago. But the human inclination to do injustice to others makes democracy – and the rule of law – necessary.