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April 1, 2010

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Latest Posts from Economist's View


"Norms as a Substitute for Laws"

Posted: 01 Apr 2010 01:35 AM PDT

What's the the right balance between norms and laws? Rajiv Sethi argues that the optimal balance is difficult to determine, and that economists need to devote more attention to this question:

Norms as a Substitute for Laws, by Rajiv Sethi: In a fascinating post on joke-theft in the world of stand-up comedy, Kal Raustiala and Chris Sprigman describe the manner in which social norms backed by informal sanctions can accomplish what copyright laws cannot:

...Comedians have rules of their own about joke-stealing. And they impose their own punishments on thieves... Why do comedians do this? In part, because they live in a world where intellectual property law – in particular, copyright – does not help them much when a rival comedian steals a joke... lawsuits are simply too expensive and uncertain to work as an effective response... Today's comics are intent on enforcing ownership rights. Yet they do so via social norms – informal but nonetheless powerful rules enforced by comedians on their peers... Comedians maintain a small list of commandments that every comic must follow – or risk being ostracized, boycotted, and sometimes worse. These norms track copyright law at times... More often than not, however, the norms deviate from copyright: for example, copyright protects expression but not ideas, but comedians' norms protect expression as well as ideas...
Importantly, comedians' norms... include informal but powerful punishments. These start with simple badmouthing and ostracism. If that doesn't work, punishments may escalate to a refusal to work with the offending comedian – which can keep the accused joke-thief off of comedy club rosters. Occasionally, punishments turn violent. None of these sanctions depend on the law – indeed, when comedians resort to threatening or beating up joke thieves, that's against the law. That said, although both the rules and the punishments are informal, they are effective. Within the community of comedians, it hurts to be accused of stealing a joke. In some cases, repeat accusations may destroy a showbiz career.

Raustiala and Sprigman recognize that the prevalence of such phenomena undermines one of the standard arguments for copyright protection:

What does this all mean? The story of stand-up tells us that... the law is not always necessary to foster creativity. Using informal group norms and sanctions, comedians are able to control joke-stealing. Without the intervention of copyright law, comedians are able to assert ownership of jokes, regulate their use and transfer, impose sanctions on joke-thieves, and maintain substantial incentives to invest in new material.
This presents a challenge to the conventional economic rationale for intellectual property rights. Absent legal protection, the usual theory goes, there will be too few creative works produced — authors and inventors would be unlikely to recoup their cost of creation, so they won't bother creating in the first place. As we have described, there is no effective legal protection against joke theft. Yet thousands of stand-ups keep cranking out new material night after night. In the absence of law, we find anti-theft norms providing comedians with a substantial incentive to innovate. Which leads to an important and fascinating question: Where else might creativity norms effectively stand in for legal rules?

In fact, one could ask an even broader question: in which other areas of economic and social life might norms (backed by decentralized sanctions) operate as effective substitutes for legal institutions?

This question lies at the heart of the lifelong work of Elinor Ostrom, co-recipient of the 2009 Nobel Memorial Prize in Economics, whose contributions I discussed in in a couple of earlier posts. Using an eclectic mix of methodological approaches, including case studies, laboratory experiments, and game theoretic models, Ostrom managed to overturn conventional wisdom regarding the "tragedy of the commons." She demonstrated the possibility of self-governance when a well-defined group of users with collective rights to an economically valuable resource were at liberty to develop their own rules, and to ostracize, expel, or otherwise sanction each other for violations. 

While Ostrom's focus was on natural resources such as forests, fisheries, and pastures, her basic insights have more general relevance. For instance, institutions of self-governance are critically important in the case of urban communities that lie largely outside the reach of the formal legal system in the United States. There are parts of the country where residents do not have recourse to the courts to adjudicate contractual and other disputes. Given the very high costs of violence as an enforcement mechanism, norms backed by limited community sanctions can therefore play a crucial role.

Sudhir Venkatesh provides a number of vivid examples of this phenomenon in Off the Books, his first-hand account of a Chicago community that functions with limited direct reliance on the police, courts, banks or government agencies. In order to do so, it must draw upon on its own informal substitutes for formal institutions. There is extensive use of barter and in-kind payments for wages and debt settlement, reciprocal lending agreements for insurance, and informal mechanisms for the resolution of disputes and the assignment of property rights. As in the local commons studied by Ostrom, norms sustained by the threat of sanctions allow a broad range of mutually beneficial transactions to occur without formal contracts backed by the power of the state.

The kinds of norms and enforcement mechanisms identified by Ruastiala and Sprigman (and Ostrom and Venkatesh) are pervasive. Many more examples may be found in an extraordinary volume edited by Daniel Bromley. Included among these is a study of sea tenure in Bahia by Cordell and McKean in which the authors describe a system of ethical codes "far more binding on individual conscience than government regulations could ever be." Such codes also crop up in James Acheson's work on the lobster gangs of Maine, E. Somanathan's account of forest resource management in Central Himalaya, and literally hundreds of other studies, enough to fill a two volume bibliography and more.

Norms not only accomplish the goals of laws, they can often do so more efficiently. The erosion of norms (or the prohibition of the sanctions that stabilize them) can therefore be costly, even if formal laws are enacted to take their place. Since laws can sometimes undermine and sometimes reinforce informal codes of conduct, finding the right balance between norms and laws is not an easy task. I suspect that legal scholars are acutely aware of such tensions, but (to my knowledge) these trade-offs have received limited attention in economics.

FRB Dallas: National Economic Update

Posted: 31 Mar 2010 11:34 PM PDT

The Dallas Fed paints a relatively optimistic picture for the future of the economy (though the accompanying text is a bit more qualified):

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Here's the forecast from the SF Fed. It's also relatively optimistic, but not to the same degree.

links for 2010-03-31

Posted: 31 Mar 2010 11:03 PM PDT

"Red States, Blue States and the Distribution of Federal Spending"

Posted: 31 Mar 2010 03:33 PM PDT

Jeff Frankel does some research on behalf of members of the Tea Party. They might not like his results:

Red States, Blue States and the Distribution of Federal Spending, by Jeffrey Frankel: April 1 is Census Day. Evidently Glenn Beck and Michele Bachmann are encouraging Americans to boycott the census — to refuse to fill out the whole form. This protest follows from their small government ideology. ... They say they want a government that intervenes less in the economic sphere. Perhaps they don't like the idea that the census numbers are used, among other things, to determine the allocation of federal spending across states, because they don't think it is the business of the government to redistribute income. That is "socialism." Even "Stalinism."

A virtue of the Tea Party movement is that many of its members are engaging in national politics for the first time. It occurred to me that they might be able to use some help figuring out the lay of the land, and so I thought I would pursue a little research on their behalf. The question is geographical redistribution: which states receive subsidies from the federal government, and which other states are taxed to provide those subsidies. One might be able to sympathize with the feeling of those living in the heartland of the country that they should not have to subsidize the northeastern states or California... Given the big budget deficit problem that we will have to solve in the near future, knowing which states are receiving more than their fair share of handouts should help us know where to cut spending.

The accompanying chart contains 50 data points, one for each state. The data are from 2005, the most recent year available. One axis ranks states by the ratio of income received by that state from the federal government, per dollar of tax revenue paid to the federal government. Personally, I think the "red state / blue state" distinction is overdone. But to capture the widely felt tension between the heartland and the coastal urban centers, I have put on the other axis the ratio of votes for the Republican candidate versus the Democratic candidate in the most recent presidential election.

It will come as a surprise to some, but not to others, that there is a fairly strong statistical relationship, but that the direction is the opposite from what you would think if you were listening to rhetoric from Republican conservatives: The red states ... generally receive more subsidies from the federal government than they pay in taxes; in other words they are further to the right in the graph. It is the other way around with the blue states...

One reason is that the red states on average have lower population; thus their two Senators give them higher per capita representation in Washington than the blue states get, which translates into more federal handouts. The top ten feeders at the federal trough in 2005 were: New Mexico, Mississippi, Alaska, Louisiana, West Virginia, North Dakota, Alabama, South Dakota, Kentucky and Virginia. (Sarah Palin's home state of Alaska ranks number one if measured in terms of federal spending per capita. Alabama Senator Shelby evidently gets goodies for his state, ranked 7, by indiscriminately holding up votes on administration appointments.) The top ten milk cows were: New Jersey, Nevada, Connecticut, Minnesota, Illinois, Delaware, California, New York, and Colorado.

Perhaps in determining how the federal government redistributes income across states one should view its role more expansively than is captured in the budget numbers. ... The four congressional districts that receive the most in farm subsidies are all represented by "conservative" Republicans, located in Nebraska, Kansas, Iowa, and Texas. (Michele Bachmann's family farm apparently received $250,000 in such farm payments between 1995 and 2006.)

The most commonly ignored area of geographical redistribution is the federal government's permanent policy of "universal service" in postal delivery, phone service and other utilities (electricity; perhaps now broadband…). Universal service means subsidizing those who choose to live in remote places like Alaska, where the cost of supplying these services is much higher than in the coastal cities. Perhaps they should move…

If I were cynical, I might suspect that the reason that Glenn Beck, Michele Bachmann, and some Republicans are not enthusiastic about getting the most accurate numbers possible, from the census and otherwise, is that they don't want people to know who is getting federal handouts and who is paying. Probably they don't want to know themselves.

"Prospects for Sustained Recovery and Employment Gains"

Posted: 31 Mar 2010 02:01 PM PDT

I'm encouraged that at least one Federal Reserve policymaker (though not a voting member of the FOMC) is linking increases in the target federal funds rate, i.e. moving away from a zero interest rate policy, to improvements in the labor market. However, if expected inflation begins increasing, all bets are off.

That's the part that concerns me. How quickly will policymakers abandon efforts to stimulate employment by maintaining a zero interest rate policy if they start to get worried about inflation? What, exactly, is the tradeoff here? Will any sign of inflation whatsoever cause policymakers to panic and start aggressively raising interest rates even if unemployment remains elevated, or will concerns over employment cause them to be patient and accept some inflation in the short-run? Again, it's encouraging that employment concerns are coming to the forefront of the policy decision, but will those concerns carry sufficient weight if there are signs that inflation expectations are increasing? I'm worried that they won't:

Prospects for Sustained Recovery and Employment Gains, by Dennis P. Lockhart, President and Chief Executive Officer, Federal Reserve Bank of Atlanta: After the deepest and longest recession in the past half century ... the U.S. economy is now in recovery. Today I want to discuss the prospects that the recovery ... is sustainable—and the implications ... for perhaps the most vexing current problem coming out of the recession: unemployment. ...
The economy remains in a transitional phase from a period that depended on support of public sector programs to a period of resumed growth based on private spending. For the recovery to be sustained, we need consumers to consume and businesses to spend on inventory, investment goods, and human resources. Economic forecasts hinge on how formidable those positive forces will be and on the strength of countervailing headwinds.
Views about the economic outlook fall roughly into two narratives. The more optimistic scenario is a V-shaped bounce back from severe recession. ... By contrast, the second scenario is a relatively modest recovery, with slow reduction of unemployment. ... In ... Atlanta..., our outlook is closer to the second narrative.
Perspective on labor markets
As already suggested, an implication of this slow recovery scenario is the very gradual decline of today's unacceptably high rate of unemployment. ... Today, the rate stands at 9.7 percent, down from a high of more than 10 percent in October.
I view unemployment as a daunting economic challenge—and very likely a dominant political issue—of the period ahead. ... Today, there are about 130 million payroll jobs in the United States, and that number is about 8.4 million lower than at the beginning of the recession. ...
About 15 million people in the United States are unemployed. ... Also, underemployment is prevalent. The underemployed include both discouraged workers...  as well as individuals who are working part-time but want to work full-time. The unemployment rate that combines the fully unemployed and underemployed workers is about 17 percent.
Another indication of underemployment is reduced hours of work. Average hours of work per week are still well below prerecession levels...
Despite the weak state of labor markets, there are signs that the worst may be behind us. The rate of job loss is slowing. The rate of decline in payroll employment has been close to zero in the last couple of months. Also, while initial and continuing unemployment claims are at historically high levels, both have fallen.
Another bright spot is temporary employment. The temporary services sector shed more than 800,000 jobs during the recession but has seen a notable increase since last fall. This improvement is noteworthy as temporary employment is often viewed as a leading indicator.

The normal state of affairs in the country's labor market is a dynamic mix of separations from employment and new job creation. There are two causes of separations—layoffs and voluntarily quitting a job, or so-called quits. ... Today's slow pace of employment gains is due more to the slow pace of job creation, not the high rate of layoffs.

Job gains, as conventionally understood, require two things: a vacancy and a worker able to fill that vacancy. For most of 2009, vacancies were relatively flat while unemployment continued to rise. This condition suggests the existence of what labor economists call "match inefficiencies."

There are two key types of match inefficiency. One is geographic mismatch. In 2008, the percentage of individuals living in a county or state different than the previous year was the lowest recorded in more than 50 years of data. People may be reluctant to relocate for a new job if the value of their house has declined. In addition, many who would like to move are under water in their mortgage or can't sell their homes.
The second inefficiency is skills mismatch. In simple terms, the skills people have don't match the jobs available. Coming out of this recession there may be a more or less permanent change in the composition of jobs. Skill mismatches require new training, and there is evidence that adult education institutions have responded to this need. For instance, officials at Miami-Dade College in Florida, which is the largest college in the country and a grantor of associate and vocational degrees, told us they have recently seen a strong increase in enrollment, especially of men in their 20s.

This evidence of retooling is encouraging, but, to be realistic, structural adjustment takes time. ...

All things considered, labor market trends appear to be headed in the right direction. But it's quite possible the recovery could be well advanced before any significant reduction of unemployment materializes. It's also quite possible circumstances justifying the start of a cycle of policy tightening will develop well before the unemployment rate has found a satisfactory level. ... So let me now comment on how I'm thinking about the relationship between the Fed's employment mandate and monetary policy.

Implications for monetary policy
As you know, monetary policy is highly accommodative. And I think this stance is appropriate at present. I continue to support ... a low federal funds rate target for an extended period. ... As long as inflation remains subdued and inflation expectations anchored, a key factor for me is improvement of employment markets.
Going forward, I will be looking for signs that employment gains are likely to repeat and accumulate and, once achieved, are likely to be durable.
What might such signs be? One indication would be that the process of job creation is improving. In January, we saw a sizable increase of job openings, according to the BLS. I'm looking for that to become a trend. A second sign would be a decline in the measured rate of underemployment. And the third sign would be a string of employment gains large enough to appreciably move the unemployment rate down over time.
There are hopeful, if tentative, signs of improvement in employment markets. We have a long way to go, and for that reason I believe it is premature to assume an imminent reversal of the Fed's accommodative policy. But you can interpret the fact that I am here discussing the conditions under which such a reversal will be appropriate as an indication of my conviction that we are, finally, moving in the right direction.

ADP Report Shows Private Sector Losing Jobs Last Month

Posted: 31 Mar 2010 10:23 AM PDT

A reaction to today's ADP report showing the private sector lost 23,000 jobs in March, and what to expect when the BLS issues its employment report on Friday:

ADP Report Shows Private Sector Losing Jobs Last Month

I'm worried that distortions in the numbers that make conditions in the labor market look better than they actually are will give legislators the excuse they need to avoid taking up the question of what can be done to help with job creation.

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