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September 29, 2015

Latest Posts from Economist's View

Posted: 29 Sep 2015 01:05 AM PDT
Sharun Mukand and Dani Rodrik at Vox EU:
The political economy of liberal democracy, Vox EU: There are more democracies in the world today than non-democracies, according to data from Polity IV.1 Yet, few of those are what we would call liberal democracies – regimes that go beyond electoral competition and protect the rights of minorities, the rule of law, and free speech and practice non-discrimination in the provision of public goods.
Hungary, Ecuador, Mexico, Turkey, and Pakistan, for example, are all classified as electoral democracies by the Freedom House.2 But in these and many other countries, harassment of political opponents, censorship or self-censorship in the media, and discrimination against minority ethnic/religious groups run rampant. Fareed Zakaria coined the term 'illiberal democracy' for political regimes such as these that hold regular elections but routinely violate rights (Zakaria 1997). More recently, political scientists Steve Levitsky and Lucan Way (2010) have used the term 'competitive authoritarianism' to describe what they view as hybrid regimes between democracy and autocracy.
Democracy developed in Western Europe out of a liberal tradition that emphasized individual rights and placed limits on state coercion (Ryan 2012, Fawcett 2014, Fukuyama 2014). In Britain, France, Germany, and even the US, mass enfranchisement arrived only after liberal thought had become entrenched. Most of the world's new democracies, by contrast, emerged in the absence of a liberal tradition and did little to foster one. As the shortcomings of these democracies have become more evident, it has become commonplace to talk about a 'democratic recession' (Diamond 2015). ...
Circumstances supporting civil rights But liberal democracies do exist, and the question is how they can ever be sustained in equilibrium. We discuss several circumstances that can mitigate the bias against civil rights in democracies.
  • First, there may not be a clear, identifiable cleavage – ethnic, religious, or otherwise – that divides the majority from the minority.
In highly homogenous societies, the 'majority' derives few benefits from excluding the 'minority' from public goods and suffers few costs from providing equal access. This may account for the emergence of liberal democracy in Sweden during the early part of the 20th century or in Japan and South Korea more recently.
  • Second, the two cleavages that distinguish the majority from the minority and the elite from the non-elite may be in close alignment.
In such a case, the elite will seek both property and civil rights as part of the political settlement with the majority. Think, for example, of the position of the white minority government in South Africa prior to the transition to democracy in 1994.
  • Third, the majority may be slender and need the support of the minority to mount a serious challenge to the elite.
Or there may be no clear-cut majority, with society characterized by a preponderance of cross-cutting cleavages. In these cases, repeated game incentives may ensure that each group recognizes the rights of others in return for its rights being protected by them. Lebanon's 'consociational' democracy may have been an example of this, before differential population growth and outside intervention upset the pre-existing balance of power among different religious denominations.
The role of societal cleavages As these examples make clear, two societal cleavages play a crucial role in our story.
  • First, there is the divide between the propertied elite and the poor masses.
This is largely an economic divide and is determined by the division of land, capital and other assets in society, as well as access to the opportunities for accumulating those assets. Standard class-based accounts of the dynamics of political regimes emphasize primarily this cleavage.
  • Second, there is a cleavage between what we call a majority and a minority.
This particular divide may be identity based, deriving from ethnic, religious, linguistic, or regional affiliations. Or it may be ideological – as with secular modernizers versus religious conservatives in Turkey, and Western-oriented liberals versus traditionalists in Russia. (We will call this second cleavage an 'identity' cleavage for short, but it should be kept in mind that the relevant majority-minority cleavage will run often on ideological lines.) These two cleavages may align, as they did in South Africa, but more often than not, they will not. Their divergence is what allows us to make an analytical and substantive distinction between electoral and liberal democracy.
In our formal model, the majority-minority split exerts a variety of influences on the prospects for liberal democracy. First, and most crucially, it makes the majority favor electoral over liberal democracy. By discriminating against the minority, the majority can enjoy more public goods for itself. But there are effects that go in the opposite direction too. Under some circumstances, the split can make the elite favor liberal democracy. We identify two such consequences. First, the rate of taxation is generally lower under liberal democracy as the majority reap fewer benefits from redistributive taxation when they have to share public goods with the minority. So the elite may support liberal democracy when the income/class cleavage is very deep. Second, when the elite's identity aligns with that of the minority, the elite have a direct stake in civil rights too. These channels can produce a rich mix of results.
Concluding remarks We suggest that the differential fortunes of liberal democracy in Western Europe and the developing world are related to the nature of dominant cleavages at the time of the social mobilization that ushered in democracy. In the West, the transition to democracy occurred as a consequence of industrialization at a time when the major division in society was the one between capitalists and workers. In most developing nations, on the other hand, mass politics was the product of decolonization and wars of national liberation, with identity cleavages as the main fault line. Our framework suggests that the second kind of transition is particularly inimical to liberal democracy. ...
Posted: 29 Sep 2015 12:06 AM PDT
Posted: 28 Sep 2015 05:54 PM PDT
Advice about selling goods on eBay from the NBER Digest:
Cheap Talk, Round Numbers, and Signaling Behavior: In the marketplace for ordinary goods, buyers and sellers have many characteristics that are hidden from each other. From the seller's perspective, it may be beneficial to reveal some of these characteristics. For example, a patient seller may want to signal unending willingness to wait in order to secure a good deal. At the same time, an impatient seller may want to signal a desire to sell a good quickly, albeit at a lower price.

This insight is at the heart of Cheap Talk, Round Numbers, and the Economics of Negotiation (NBER Working Paper No. 21285) by Matthew Backus, Thomas Blake, and Steven Tadelis. The authors show that sellers on eBay behave in a fashion that is consistent with using round numbers as signals of impatience.
The authors analyze data from eBay's bargaining platform using its collectibles category—coins, antiques, toys, memorabilia, and the like. The process is one of sequential offers not unlike haggling in an open-air market. A seller lists an initial price, to which buyers may make counteroffers, to which sellers may make counteroffers, and so on. If a price is agreed upon, the good sells. The authors analyze 10.5 million listed items, out of which 2.8 million received offers and 2.1 million ultimately sold. Their key finding is that items listed at multiples of $100 receive lower offers on average than items listed at nearby prices, ultimately selling for 5 to 8 percent less.
It is tempting to label such behavior a mistake. However, items listed at these round numbers receive offers 6 to 11 days sooner and are 3 to 5 percent more likely to sell than items listed at "precise" numbers. Furthermore, even experienced sellers frequently list items at round numbers, suggesting it is an equilibrium behavior best modeled by rationality rather than seller error. It appears that impatient sellers are able to signal their impatience and are happy to do it, even though it nets them a lower price.
One concern with the analysis is that round-number pricing might provide a signal about the good being sold, rather than the person or firm selling it. To address this issue, the authors use data on goods originally posted with prices in British pounds. These prices are automatically translated to U.S. dollars for the American market. Hence, the authors can test what happens when goods intended to be sold at round numbers are, in fact, sold at non-round numbers. This removes the round-number signal while holding the good's features constant. In this setting, they find that buyers of goods priced in non-round dollar amounts systematically realize higher prices, though the effect is not as strong as that in their primary sample. This evidence indicates the round numbers themselves have a significant effect on bargaining outcomes.
The authors find additional evidence on the round-number phenomenon in the real estate market in Illinois from 1992 to 2002. This is a wholly different market than that for eBay collectibles, with much higher prices and with sellers typically receiving advice from professional listing agents. But here, too, there is evidence that round-number listings lead to lower sales prices. On average, homes listed at multiples of $50,000 sold for $600 less.
Posted: 28 Sep 2015 04:42 PM PDT
Kevin Williamson at the National Review Online tells Republican candidates to get real:
The Thing about Tax Cut, by Kevin D. Williamson: Every Republican tax-reform plan should be rooted in this reality: If you are going to have federal spending that is 21 percent of GDP, then you can have a.) taxes that are 21 percent of GDP; b.) deficits. There is no c.
If, on the other hand, you have a credible program for reducing spending to 17 or 18 percent of GDP, which is where taxes have been coming in, please do share it.
The problem with the Growth Fairy model of balancing budgets is that while economic growth would certainly reduce federal spending as a share of GDP if spending were kept constant, there is zero evidence that the government of these United States has the will or the inclination to enact serious spending controls when times are good (Uncork the champagne!) or when times are bad (Wicked austerity! We must have stimulus!). So even if we buy Jeb Bush's happy talk about growth, or Donald Trump's, the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional.
There are no tax cuts when the government is running deficits, only tax deferrals.
Remembering that the "math simply does not add up" for Republicans -- partly that's Williamson's point -- let's take a look at the evidence on government spending as a share of potential GDP. This is from Paul Krugman in 2013, but the underlying trends do not change. He explains why this is the best measure to use when looking at this question:
The Non-Surge in Government Spending: The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis... The crucial thing to understand here is that you do need to take the state of the business cycle into account; it's not enough simply to do what Nate Silver, for example, does, and look at spending as a share of GDP — a calculation that can be deeply misleading in the aftermath of a severe recession followed by a slow recovery.
Why does this matter? First, if the economy is depressed — if GDP is low relative to potential — the share of spending in GDP will correspondingly look high. ...
Second, there are some programs — unemployment benefits, food stamps, to some extent Medicaid — that tend to spend more when the economy is depressed and more people are in distress. And rightly so! You don't want to take a temporary spike in UI payments after a deep slump as a sign of runaway spending.
So how can we get a better picture? First, express spending as a share of potential rather than actual GDP; we can use the CBO estimates of potential for that purpose. Second, keep your eye on the business cycle — and, in particular, on how spending is evolving now that a gradual recovery is underway.
So, let's look first at a longish time series of total government spending as a share of potential GDP:
Ratio of government spending to potential GDP.
Ratio of government spending to potential GDP
What you see is not a sustained upward trend: there's actually a considerable fall during the Clinton years, reflecting in part falling defense spending, then a more modest rise in the Bush years, mainly reflecting spending on the War on Terror (TM), and finally a temporary surge associated with the financial crisis — but much of that surge has already been reversed.
Here's a closeup on Bush's last two years and Obama's first four:
That was the spending surge that was. ...
The claim is that "the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional." Here's an updated graph using the latest data:
Fredgraph[1]
Taking away the surge from the crisis, which has been reversed, the trend in the last few decades looks pretty flat to me. To the extent that there is a tendency for the ratio to move upward in recent years, it's hardly the fault of Democrats. There is something delusional here, but it's not that spending as a share of potential GDP -- the right way to look at this question -- always rises when times are good or bad, or that Democratic administrations cannot keep spending under control.
Posted: 28 Sep 2015 12:11 PM PDT
No sense hiding from evidence that works against my support of immigration. This is from George Borjas (if you are unfamiliar with the Mariel boatlift, see here):
The Wage Impact of the Marielitos: A Reappraisal, by George J. Borjas, NBER Working Paper No. 21588 [open link]: This paper brings a new perspective to the analysis of the Mariel supply shock, revisiting the question and the data armed with the accumulated insights from the vast literature on the economic impact of immigration. A crucial lesson from this literature is that any credible attempt to measure the wage impact of immigration must carefully match the skills of the immigrants with those of the pre-existing workforce. The Marielitos were disproportionately low-skill; at least 60 percent were high school dropouts. A reappraisal of the Mariel evidence, specifically examining the evolution of wages in the low-skill group most likely to be affected, quickly overturns the finding that Mariel did not affect Miami's wage structure. The absolute wage of high school dropouts in Miami dropped dramatically, as did the wage of high school dropouts relative to that of either high school graduates or college graduates. The drop in the relative wage of the least educated Miamians was substantial (10 to 30 percent), implying an elasticity of wages with respect to the number of workers between -0.5 and -1.5. In fact, comparing the magnitude of the steep post-Mariel drop in the low-skill wage in Miami with that observed in all other metropolitan areas over an equivalent time span between 1977 and 2001 reveals that the change in the Miami wage structure was a very unusual event. The analysis also documents the sensitivity of the estimated wage impact to the choice of a placebo. The measured impact is much smaller when the placebo consists of cities where pre-Mariel employment growth was weak relative to Miami.
Posted: 28 Sep 2015 11:06 AM PDT
Josh Barro:
Trump Plan Is Tax Cut for the Rich, Even Hedge Fund Managers: Donald Trump's tax plan, released Monday, does not live up to the populist language he has offered on taxes all summer.
When talking about taxes in this campaign, Donald Trump has often sounded like a different kind of Republican. He says he will take on "the hedge fund guys" and their carried interest loophole. He thinks it's "outrageous" how little tax some multimillionaires pay. But his plan calls for major tax cuts not just for the middle class but also for the richest Americans — even the dreaded hedge fund managers. And despite his campaign's assurances that the plan is "fiscally responsible," it would grow budget deficits by trillions of dollars over a decade.
You could call Mr. Trump's plan a higher-energy version of the tax plan Jeb Bush announced earlier this month: similar in structure, but with lower rates and wider tax brackets, meaning individual taxpayers would pay even less than under Mr. Bush, and the government would lose even more tax revenue. ...
A document from the Trump campaign says all these tax cuts would be "fully paid for" by the elimination of deductions and by a one-time tax on foreign profits of American firms held abroad. That math simply does not add up: As discussed above, rich people do not currently take enough tax deductions to offset the tax rate cuts Mr. Trump proposes, and the one-time foreign profits tax might raise $250 billion, not close to the trillions of revenue that would be lost through tax rate cuts.
At a news conference Monday, Mr. Trump offered another way his tax plan would pay for itself: economic growth, perhaps as fast as 6 percent a year, again a higher-energy estimate than the 4 percent Mr. Bush has proposed. But there is no evidence to support the idea that such rapid growth can be produced through tax cuts.
"That math simply does not add up" could be applied to Republican tax plans in general. There's always some sort of magical thinking that makes their plans work (or, perhaps, better described as cunning deception that relies upon the press remaining effectively silent, or playing the "he said she said" game that gives people little information about truth, in the face of absurd claims). Talk like a populist, act like a plutocrat seems to be a winning formula -- somehow many who have been disaffected by the economic system believe Republicans are on their side, and have their best interests at heart, that all the unfairness they see around them (which is not always real, but rather stoked by the closed loop news system they adhere to) will be addressed by a Republican administration. Not gonna happen.

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