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January 11, 2008

Economist's View - 5 new articles

Do Bloggers Threaten Democracy?

Cass Sunstein says the internet generally and those evil bloggers particularly - lefties are specifically identified - ruin the political discourse and threaten democracy:

The rise of the Daily Me threatens democracy, by Cass Sunstein, Commentary, Financial Times: More than a decade ago the technology specialist, Nicholas Negroponte, prophesied the emergence of the Daily Me – a fully personalised newspaper. It would allow you to include topics that interest you and screen out those that bore or annoy you. If you wanted to focus on Iraq and tennis, or exclude Iran and golf, you could do that.

Many people now use the internet to create something like a Daily Me. ... For politics, the phenomenon is especially important in campaigns. Candidates in the US presidential race can construct information cocoons in which readers are deluged with material that is, in their eyes, politically correct. Supporters of Hillary Clinton construct a Daily Me that includes her campaign's perspective but offers nothing from Barack Obama, let alone Mitt Romney.

What is wrong with the emerging situation? We can find a clue in a small experiment in democracy conducted in Colorado in 2005. About 60 US citizens were put into 10 groups. They deliberated on controversial issues, such as whether the US should sign an inter­national treaty to combat global warming and whether states should allow same-sex couples to enter into civil unions. The groups consisted of predominantly either leftwing or rightwing members, with the former drawn from left-of-centre Boulder and the latter from Colorado Springs, which tends to be right of centre. The groups, not mixed, were screened to ensure members conformed to stereotypes. ...

In almost every group, people ended up with more extreme positions. ... Aside from increasing extremism, discussion had another effect: it squelched diversity. Before members talked, many groups displayed internal disagreement. These were greatly reduced: discussion widened the rift between Boulder and Colorado Springs

Countless versions of this experiment are carried out online every day. The result is group polarisation, which occurs when like-minded people speak together and end up in a more extreme position in line with their original inclinations. ...

Group polarisation clearly occurs on the internet. For example, 80 per cent of readers of the leftwing blog Daily Kos are Democrats and fewer than 1 per cent are Republicans. Many popular bloggers link frequently to those who agree with them and to contrary views, if at all, only to ridicule them. To a significant extent, people are learning about supposed facts from narrow niches and like-minded others.

This matters for the electoral process. A high degree of self-sorting leads to more confidence, extremism and increased contempt for those with contrary views. We can already see this in the presidential campaign. It will only intensify when the two parties square off. ...

Polarisation, of course, long preceded the internet. Yet given people's new power to create echo chambers, the result will be serious obstacles not merely to civility but also to mutual understanding and constructive problem solving. The Daily Me leads inexorably also to the Daily Them. That is a real problem for democracy

Would a world with absolutely no polarization be optimal, or is some degree of polarization - diversity of opinion and disagreement - better? If some polarization is healthy, and I don't think one identical mind in every body is optimal, than how much disagreement should there be and how do we know we are past the point of optimal disagreement and polarization? There seems to be this presumption that less polarization would be better, and maybe that's the case, but why is that necessarily true?

His argument, which is based on the Colorado study seems to be that a decline in within group polarization coupled with an increase in polarization between groups - as observed in the study - is bad. But again, why is it necessarily bad? It seems like you could argue the other way as well. Each group meets, brings a variety of ideas to the table, the group discusses the various ideas, some are discarded, and when they are done they have coordinated on a single idea rather than a muddled diversity that is more of a menu than a policy. That single, focused idea can then compete with an idea from the other side to see which idea proves to be the more popular, better idea in the end. It doesn't seem to me, for example, that the lock-step nature of Republicans in recent years has hurt their political cause, and it is the reemergence of diversity and in-fighting between groups within the party that has, to some degree undermined their effectiveness. I will acknowledge that the ideas the GOP brought forward were too much toward the polar extreme, but that may just because I don't agree with them and again, one has to explain why an idea closer to a pole is necessarily worse.

I'm not saying that more polarization is better, or worse, just that I don't see why either outcome is preordained and it seems like their ought to be more justification for a charge that the internet and bloggers are undermining Democracy by creating polarization than is given in the article. I also think we should ask if the internet has any advantages for democracy outside of the narrow frame examined here that might counterbalance any cost from polarization, but those potential benefits are ignored in the analysis.

One final note. It is assumed that blogs and the internet cause increased polarization. But I suppose one could also ask if blogs do, in fact, cause a significant increase in polarization over and above, say, Fox News and the Washington Times and ask for some justification for that assertion beyond a single study of ten groups of six people. But I don't have any additional evidence one way or the other, so I'll leave it at that.

Kenneth Rogoff: Resurgent Unions and the Global Economy

Kenneth Rogoff says that if unions gain more power in rich countries like the U.S., as they appear to be doing, they are likely to be "a major destabilising force in trade and growth":

Resurgent unions and the global economy, by Kenneth Rogoff, Project Syndicate: Will the political resurgence of labour unions throw a wrench into the wheels of globalisation? Or will their growing strength serve to make globalisation more sustainable by fostering greater equality and fairness? One way or the other, unions stand as a major wild card for the evolution of our economic system...

Unions' rising influence is evident in many recent events: German Chancellor Angela Merkel's controversial deal to raise minimum wages for postal employees; several US presidential candidates' open misgivings about trade and immigration; and the Chinese leadership's nascent concerns about labour standards.

Along with their political clout, unions' intellectual respectability is also experiencing a renaissance. After decades of vilification by economists for raising unemployment and strangling growth, the union movement is now receiving backing from thought leaders such as Paul Krugman, who argues stronger unions are needed to counter globalisation's worst excesses. ...

Today, US political leaders such as Congressman Barney Frank want to bring back unions. But there is good reason to be sceptical. For a relatively poor country such as China, real unions could help balance employers' power, bringing quality-of-life benefits that outweigh the growth costs.

But, for the US and rich countries in Europe, the argument that stronger unions would bring more benefits than costs is far more dubious.

Nowadays, most workers already have legal and statutory rights that cover the basic protections that unions originally fought for a century ago. Instead, union influence today all too often serves to promulgate inflexible work practices and flat salary structures that do not adequately reward work effort and skill.

Some of the issues that unions are promoting, such as human rights and environmental quality, are unassailable. When they try to connect these issues with trade, however, their motives become questionable.

A case in point is union lobbying against the US-Colombia free-trade agreement, ratification of which would greatly advance US-Latin American relations. ...[A]nti-pact activists have complained that Colombia is anti-union because it does not protect union members from rebel violence. Yet the Colombian government notes that all Colombians suffer from rebel violence — union members actually experience less of it than the rest of the population.

Unfortunately, this play is being re-enacted across a host of trade issues, including many involving China.

For rich countries, income redistribution is much better handled through taxes and benefits system, rather than by government edicts to strengthen unions. The rich today pay so little in taxes in many countries that it would be a big improvement simply to move to a flat tax, with a very high exemption level so that lower-income families pay nothing.

For middle-income countries, it is a tougher call. But here, too, increasing workers' legal and statutory rights, while allowing most unions to fade away, seems like the right approach.

Unfortunately, we are far more likely to see unions' growing political influence become a major destabilising force in trade and growth, with highly uncertain consequences. When we see political leaders in many rich countries pander to unions by bashing each other on free trade and immigration, there is every reason to worry about trouble ahead. ...

From the archives:

The union question is a hard one for me. I don't believe that the degree of market power workers and firms bring to the bargaining table is in balance. "Superstars" at the upper end of the income distribution have too much market power, and firms have too much market power at the lower end of the income distribution, where the lower end starts at fairly high levels of income.

Unions are one potential answer for workers at the lower end of the income distribution, but is a return to unions the best solution to the market power imbalance? Should we return to the past, or should we try to use the changing political landscape as an opportunity to build better institutions for both workers and firms, institutions that offer workers the same degree of bargaining power that unions provide, and the the same degree of income, health, and retirement security, but do so more efficiently? We already know how unions work, pretty much, but can we do better?

A proposal to implement novel policy has no chance of surviving the political process even if it is well-grounded in economic fundamentals, and even if it looks to be a clear improvement over unionization for everyone involved. There is legislation to change union membership rules under debate in Congress, but the current political battle is about getting people on record for the next presidential election rather than a serious hope of changing the rules on union membership drives. If the next presidential election goes according to plan, then there might be a chance for change, but even then unions may be (and probably will be) the only viable solution within the political process.

"The Gulag as a Worker-Discipline Device"

Can the 'efficiency wage' model help to explain the brutality of Stalin's prison camps?:

Punishment without crime? The Gulag as a worker-discipline device, by Marcus Miller and Jennifer Smith, Vox EU: In the 1930s, when Western economies were laid low by mass unemployment, Stalin could claim to have found a cure: a command economy with ambitious five-year plans to promote rapid industrialisation. Deficient demand was not a problem, but what about supply? Stalin, who was planning for great increases in productivity, faced a problem: how was he to motivate workers with low levels of skill – including millions pouring in from the countryside who were entirely lacking in training or experience of the rigour and rhythms of life in a factory or on a construction site?

A commanding solution

The solution was to extend the command economy yet further, to encompass supply as well as demand. As Stalin warned the Party Congress in 1927 "Our plans are not prognoses, guess-plans, but instructions, which are compulsory". If the labour discipline needed for creating a Socialist Utopia was not to be the threat of unemployment, what else could it be?

How the Gulag grew

Figure 1: Numbers in custody, USSR 1917-1953 Gulag1

For sure, the system of labour camps operated as a dreaded threat in Stalin's time, but its shadowy outlines were not known with certainty. In an 'an exercise in literary investigation', Solzhenitsyn characterised it as the Gulag Archipelago. Now the archival data available, displayed in Figure 1, allow for a statistical account.

Using custodial figures over the Stalin era, 1928-1953 – and taking inflows and outflows (including releases plus escapes and deaths) to be constant proportions of the labour force L and the prison population P respectively – one finds:

Gulag3

where zero-one, step dummies are included to account for extra incarcerations during the Great Terror (1937-1938) and releases to the front-lines during World War II. These crude estimates imply that about half of one percent of the civilian labour force was incarcerated each year, and around one fifth of existing prisoners released (or died in custody) – with these flows averaging just under 400,000 per year. The implied equilibrium for the size of the Gulag during Stalin's rule is about 2 million persons, i.e. almost three percent of the working population in labour camps.

Why work?

In a challenging paper, Shapiro and Stiglitz (1984) argued that – despite imperfect monitoring – work incentives are preserved in Western economies because those caught shirking face the threat of unemployment and loss of income. The 'No Shirking Condition' they derive for wages constitutes the effective labour supply curve for the economy – with labour demand given by its marginal productivity. We apply the same broad logic to the Soviet system in CEPR DP 6621 – but with two significant alterations. First, in deriving the No Shirking Condition for labour supply, custodial sentences replace spells of unemployment-on-benefit as the 'worker-discipline device', so the supply price of labour falls not with the numbers of unemployed but with the population of the Gulag. Second, wages are set below the marginal productivity of labour as the dictator exercises monopsony power in the labour market to maximise investible funds.

What then are key features of Stalin's system? It is a society where everyone works and substantial resources are generated either for investment or for military expenditure – whatever the dictator decides. The state commands a goodly share of national resources, but wages are pushed down to 'efficiency' levels – just high enough to prevent shirking. No-one is unemployed, but many are in labour camps.

Ironically, the outcome for labour is as if it faced a greedy capitalist who wanted to maximise profits and had the market power to do so. More than that, the state employer can also manipulate the living and working conditions for those not in civilian employment to further its own ends. To increase investment, for example, prison conditions can be made harsher – so as to lower the supply price of civilian labour and reduce consumption. Where this may lead is what Solzhenitsyn (1963) describes – from first-hand experience – in One Day in the Life of Ivan Denisovich.

Russian Roulette

Coercion as a discipline device may have helped Russia to industrialise at high speed – and to produce the arms needed to defeat Hitler. But, in the absence of legitimate successors, dictators are prone to paranoia; and the regime of punishment became a monster. The economic rationale for the Gulag does not encompass randomised terror for political ends: by raising the supply price of labour, it is economically counter-productive. So too is random application of coercive labour laws, exemplified by Stalin's 'five per cent rule' for denunciation.[1] Stalin's successors realised this, attenuating the excesses of coercion soon after he died.

Coercion versus capitalism: survival of the fittest?

It is tempting to look beyond Stalin's years of power for clues as to why the command economy finally collapsed. How do the two systems – Western capitalism and Soviet coercion – compare in terms of incentive constraints for labour, criteria for wage determination, and demand management?

Figure 2: Efficiency wage equilibria: Russia and the West Gulag2

Figure 2 provides an overview, with each system represented by two schedules: a downward-sloping marginal productivity of labour schedule, MPL; and an upward-sloping curve showing the effective supply price of labour (labelled NSC to denote the lowest wage consistent with the No Shirking Constraint). In the Russian case, shown in bold, this No Shirking Constraint is based on imprisonment: so those not in civilian employment are in the Gulag, in forced labour camps whose harsh conditions act as a threat to keep wages down for civilian workers). Wages are set so as to maximise the resources available to the state, which restricts civilian employment so wages fall below the marginal product of labour.

Also shown is the Western case, where those not in work are unemployed on benefit; i.e. unemployment is the labour-discipline device. There is a higher supply price of labour (shown by the dotted line NSC'), and higher labour productivity (MPL'): but equilibrium depends on whether or not there is demand deficiency.

Take first the 1930s with the West mired in the Great Depression – diagnosed as demand failure by John Maynard Keynes writing in 1936. With a demand constraint (shown by the dotted vertical line in the figure) limiting the quantity of output that can be sold, let labour market equilibrium be at D, with mass unemployment and wages depressed to the lowest incentive-compatible level.[2]

How does Stalin's contemporaneous experiment in coercion compare with what Western capitalism had to offer? Due to the low level of capital per head in Russia at the beginning of industrialisation, the productivity of labour is below that in the West; and the compression of real wages is a sign of the effort to catch up with the West by rapid capital accumulation. Real wages are not high in either system, but massive investment in Russia carries promises of a brighter future. Compared with the West in Depression, higher employment in Russia is relatively attractive for those in jobs: but for those not in jobs, the Gulag replaces the unemployment queue.

Now let time move forward some fifty years – to 1984 say, when Shapiro and Stiglitz publish their paper. Let the competitive equilibrium they describe represent the West – after it has learnt the art of macroeconomic stabilisation. There is no demand failure, so employment rises until the supply price of labour shown as NSC' matches its marginal productivity (and output is maximised subject to the incentive constraint imposed by asymmetric information) at point B.[3] How does Stalin's system compare now? Assume – as George Orwell had foretold – that Russia remains in equilibrium at C. What does the command economy offer now? Lower wages; lower output ; and higher coercion.

This comparison takes as given that labour productivity in the West continues to run ahead of that in Russia, despite fifty years of squeezing consumption to release resources for investment and growth in the command economy. But this is plausible if, as Skidelsky (1995) maintains, the resources so painfully extracted from the Russian people were not invested efficiently; and if the bureaucratic and centralised system based on fear failed to match the incentives in the West for innovation and continuous 'technical progress', as argued publicly by the Russian physicist Sakharov (1975) and his fellow dissidents.

The coercive system faces yet further challenges. Western spending on an ambitious and expensive arms race gives the Russian government added reason to compress wages – to pay for arms as well as investment. But the spreading doctrine of Human Rights makes repression less and less politically viable. The system is in danger of collapse – not from a shortage of demand, like the West in Depression, but from failure of supply, like an economic heart attack.

Conclusion

Skidelsky (1995) has argued that "the Stalinist command economy was not a technical solution to the economic problem of inadequate saving and investment: it was a device for maximising and perpetuating the power of the state". It has been shown, however, that there is an economic rationale for a Gulag system as a labour-discipline device; and that there were economic incentives to make it harsh. Our analysis is broadly in line with the position taken by Gregory and Harrison (2005, p.740): "The effectiveness of the Politburo accumulation model rested on the dictator's ability to create a gap between the civilian wage as a 'fair' return for effort, and low subsistence in the Gulag as the return to shirking, so that the difference between them was the intended punishment for shirking".

This is the logic of coercion embodied in our efficiency wage analysis. But neither the frenzy of punishment in the late 1930s, nor subsequent randomness in the application of coercive labour laws, can be rationalised on economic grounds. By denying its people their Human Rights, yet failing to catch up with managed capitalism over the longer term, Stalin's system condemned itself to extinction.

References

Gregory, Paul R and Mark Harrison (2005), "Allocation under dictatorship: research in Stalin's archives", Journal of Economic Literature, XLIII (September), 721-761. Gregory, Paul, Philipp Schroder and Konstantin Sonin (2006), "Dictators, repression and the median citizen: an "eliminations model" of Stalin's Terror (Data from the NKVD Archives)", CEPR Working Paper No. 6014, December. Keynes, John Maynard (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Miller, Marcus and Jennifer Smith (2006) "Punishment without Crime? Imprisonment as a worker-discipline device". CEPR Working Paper No. 6621 London: CEPR (December) Sakharov, Andrei (1975), My country and the world, London: Collins and Harvill. Shapiro, Carl and Joseph Stiglitz (1984), "Equilibrium unemployment as a worker discipline device", American Economic Review, 74 (3), 433-444. Skidelsky, Robert (1995), The Road from Serfdom, London: Penguin Books. Solzhenitsyn, Aleksandr (1963), One Day in the Life of Ivan Denisovich, Ralph Parker (trans.), Penguin Modern Classics. Solzhenitsyn, Aleksandr (1974), The Gulag Archipelago 1918-1956: an experiment in literary investigation, New York: Harper and Row.

Footnotes

1 'Your task is to check people at work and if something is not right, you must report it. Every member of the party, honest non-party members, citizen of the Soviet Union not only has the right but is obligated to report the deficiencies he sees. If they are right, maybe only 5 percent of the time, this is nevertheless bread' (Gregory et al, 2006, p.18). 2 Profits are maximised subject to a demand constraint, as would be consistent with weak labour unions. 3 The use of the same MPL' curve is, of course, simply for convenience.

Volatility of Output, Consumption, and Investment

This is a graph of the standard deviations of the annualized quarterly growth rates for real values of GDP, C, and I for rolling ten year time periods. That is, the first point shown on the diagram for the blue line is the standard deviation of the growth rate of output for the period 1947:Q2 through 1957:Q1. The second point is for the period 1947:Q3 through 1957:Q2, the third for the period 1947:Q4 through 1957:Q3, and so on, and the last point is for the period 1997:Q4 through 2007:Q3. Thus, one observation is added and one is dropped as you move from one point to another. The observations are indexed by the last observation in the sample, so the first point is labeled 1957:Q1.

Standard Deviations of the Growth Rates of GDP, C, and I Ten Year Rolling Window Stddevrolling [Excel File with the raw data (from the St. Louis Fed) and calculations.]

The left-hand vertical axis shows the annualized values for output and consumption. The right-hand scale, which is on the order of five times larger, shows the values for investment (yellow line). Interestingly, the pattern for I is very similar to the pattern for GDP. This reflects the large influence of the volatility of investment on the volatility of output.

As you move from left to right along a line, a new observation is added and one is dropped, so if the line falls that means that the new observation contributes less to the variance than the observation ten years earlier that was dropped (there is a small complication in this interpretation because the measured mean changes as the sample changes).

By this measure, volatility was falling until somewhere near the sample ending in 1970. However, as observations from the 70s are added and observations from the 1960s dropped, the standard deviation increases again reaching a peak around 1984.

The decline in the standard deviations that begins around 1984 is the Great Moderation (podcast on the Great Moderation I did awhile back). This is well known. But I hadn't noticed how constant the variance has been recently. The observation labeled 1994:1 is for the time period 1984:2 through 1994:1, and it's noteworthy how constant the standard deviation has been since that time period (1984:2 is widely regarded as the beginning of the Great Moderation). For the ten year sample ending in 1994:1 until the ten year sample ending in 2007:3, the standard deviation of output hardly moves at all - it's very close to 2.0 - and the measures for C and I and fairly constant as well.

Given recent events in financial markets, it will be interesting to see if the standard deviations for these variables remain this constant, decline further, or increase.

links for 2008-01-10

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