Drawing electoral district borders is difficult to think of as an optimal outcome in the mechanism design of elections. It has all the ingredients that lead to manipulation by the incumbent majority, leading to suboptimal persistence of power. On the surface of it, it would much simpler and less strategic to just have everyone elect as many people as there are openings within a jurisdiction (say, a US state for federal elections), which has the advantage of giving smaller parties a fighting chance, and forget about districts and especially that ludicrous gerrymandering.
Yet, Emanuele Bracco think one can optimize the districting process. The key aspect here is that the parties platform is endogenous, that is, they are responsive to the electorate's wishes, as all the parties care about is getting elected. Parties tries to match the preferences of the median district- While this seems to be a rather romanticized view of elections in some countries, an interesting result is that if the electorate is risk averse, the majority party actually suffers from redistricting, while it would have benefited under exogenous platforms. So there is some hope that the US electoral system is not beyond repair. I still wish there would be a few viable small parties, though.
Showing posts with label politics. Show all posts
Showing posts with label politics. Show all posts
What is wrong with European central banking: the view from Cyprus
These are times where policy coordination between central banks and fiscal authorities seems to be particularly welcome. For one, monetary policy, which seems to be the only sustained and coherent policy, cannot right the ship beyond the short term, and the short term is shorter than the current crisis. For two, fiscal authorities are completely stuck in political wars exactly at the wrong moment. Upcoming elections in Europe and the United States certainly do not help in that. Central bankers have been rather frustrated with the political climate, yet they are still willing scape goats to deflect the furor of the public about unpopular policies.
But sometimes, enough is enough. One such case has been the open criticism of the central banker of Cyprus, who railed against the ineptitude of its government which has completely ignored his advice. Cyprus may not seem a big deal, yet it is a major banking center that may go down with Greece depending on how things unravel there. And this central banker, whose mandate was not renewed, is also not a nobody, as he was previously a senior official at the Board of Governors of the US Fed.
In probably his last paper while in Cyprus, Athanasios Orphanides summarizes all what is wrong with central banking in Europe (Cyprus is part of the monetary union). He recognizes that banking supervision must be taken much more seriously by central bankers, as the stability mandate that was typically meant for prices and sometimes employment or output is now interpreted to include the financial sector as well. Of course, this implies that central banks need to take more responsibilities in supervising the financial all the way to regulating individual institutions, an authority they do not always have at this point. But foremost, Orphanides argues that the biggest liability is economic governance. This is especially important within a monetary union where several governments need to agree. A more uniform fiscal policy would help tremendously, especially when monetary policy, in its more rudimentary form, is applied uniformly across the union. Worse, problems from fiscal policies that are not sustainable in the long term are magnified in a monetary union. You need rules and you need to adhere to them. Politicians are rather bad at this. Central bankers much better.
But sometimes, enough is enough. One such case has been the open criticism of the central banker of Cyprus, who railed against the ineptitude of its government which has completely ignored his advice. Cyprus may not seem a big deal, yet it is a major banking center that may go down with Greece depending on how things unravel there. And this central banker, whose mandate was not renewed, is also not a nobody, as he was previously a senior official at the Board of Governors of the US Fed.
In probably his last paper while in Cyprus, Athanasios Orphanides summarizes all what is wrong with central banking in Europe (Cyprus is part of the monetary union). He recognizes that banking supervision must be taken much more seriously by central bankers, as the stability mandate that was typically meant for prices and sometimes employment or output is now interpreted to include the financial sector as well. Of course, this implies that central banks need to take more responsibilities in supervising the financial all the way to regulating individual institutions, an authority they do not always have at this point. But foremost, Orphanides argues that the biggest liability is economic governance. This is especially important within a monetary union where several governments need to agree. A more uniform fiscal policy would help tremendously, especially when monetary policy, in its more rudimentary form, is applied uniformly across the union. Worse, problems from fiscal policies that are not sustainable in the long term are magnified in a monetary union. You need rules and you need to adhere to them. Politicians are rather bad at this. Central bankers much better.
On democracy and tuition hikes
Some students in Quebec have now been on strike for over three months over a law that would increase the tuition in all universities (they are all public) by a total of about US$1500 over five years. This seems a rather trivial amount for a US student, but in countries where tuition is free or almost free, this is not trivial. The apparent violence of the protests, which have gone all the way to sabotaging the subway system, and the daily protest marches show there is some deep issue at play. Let me add my grain of salt on two points.
The first is about democracy. I am all for popular uprisings, demonstrations and marches when there is a failure in the democratic process that leads the government to take decisions that are against the public good. Frankly, I do not see where the failure of democracy is in this case. The law was adopted by a democratically elected government. While Quebec is a province with severe corruption issues (for Western standards), the electoral process seems clean. Polls appear to show wide support for the government's policies. Even the striking students are a minority in the student population. The street should not hold the democratic process and sound policy making hostages.
Which brings me to the second point. Apparent popular support in the polls may be a reaction to the violence and radicalization of the student movement. It may not be about sound policy. But it should. Indeed, the main argument for low tuition is that it makes university access affordable to everyone. That is right, but it is also a gigantic gift to the rich, who send their children much more frequently and much longer to university. If you add the costs and the taxes, giving free tuition is equivalent to a very regressive taxation. I do not think that this is the goal. The goal is to get everyone to pay their fair share in education, for which the future personal benefits in present value are very large. Tuition should be subsidized because of the positive externalities of education, but those that benefit the most from it should also pay the most for it. If students cannot afford studies right now, then grants and loans can overcome that. But the fact that some students cannot afford to study should not lead to a policy where higher education is free, or almost free, for everyone.
The Quebec government is right on this one, and the street is wrong.
The first is about democracy. I am all for popular uprisings, demonstrations and marches when there is a failure in the democratic process that leads the government to take decisions that are against the public good. Frankly, I do not see where the failure of democracy is in this case. The law was adopted by a democratically elected government. While Quebec is a province with severe corruption issues (for Western standards), the electoral process seems clean. Polls appear to show wide support for the government's policies. Even the striking students are a minority in the student population. The street should not hold the democratic process and sound policy making hostages.
Which brings me to the second point. Apparent popular support in the polls may be a reaction to the violence and radicalization of the student movement. It may not be about sound policy. But it should. Indeed, the main argument for low tuition is that it makes university access affordable to everyone. That is right, but it is also a gigantic gift to the rich, who send their children much more frequently and much longer to university. If you add the costs and the taxes, giving free tuition is equivalent to a very regressive taxation. I do not think that this is the goal. The goal is to get everyone to pay their fair share in education, for which the future personal benefits in present value are very large. Tuition should be subsidized because of the positive externalities of education, but those that benefit the most from it should also pay the most for it. If students cannot afford studies right now, then grants and loans can overcome that. But the fact that some students cannot afford to study should not lead to a policy where higher education is free, or almost free, for everyone.
The Quebec government is right on this one, and the street is wrong.
Are poor American voters disenfranchised to improve long term growth?
Now that the election process is in full gear in the United States, it is of interest to reflect on its peculiarities. Of course, the process is convoluted, money and marketing are the dominating factors, and catering to outrageous viewpoints brings points. But one aspect that distinguish US politics from other countries is the surprisingly low voter participation, especially among the poor.
Ranjan Sreedharan sees this as an advantage that the United States has over other countries. As the rich can rule, they put forward policies that can enrich them and then rein in welfare. The outcome are policies that favor long term development. And why do so few poor people vote? For one, many are outright excluded from voting: no fixed address, past felon. Also, voting days are not holidays and the poor, who typically hold jobs with hourly pay, find it difficult or costly to vote.
While I may not like the rhetoric of the paper, the author has a point. The Unites States has a long history of disenfranchising the poor, right from its first days where only white male land holders could vote. Slavery and segregation and gerrymandering have provided additional opportunities for rigging the relevance of votes. Corporations have always had a strong influence in the nation's capitols, with courts increasingly allowing legal bribing of elected officials. Republicans have been the leaders in disenfranchising (previous post on this), yet Democrats have not done much to prevent it. In the end, the poor voter does not matter anymore.
Ranjan Sreedharan sees this as an advantage that the United States has over other countries. As the rich can rule, they put forward policies that can enrich them and then rein in welfare. The outcome are policies that favor long term development. And why do so few poor people vote? For one, many are outright excluded from voting: no fixed address, past felon. Also, voting days are not holidays and the poor, who typically hold jobs with hourly pay, find it difficult or costly to vote.
While I may not like the rhetoric of the paper, the author has a point. The Unites States has a long history of disenfranchising the poor, right from its first days where only white male land holders could vote. Slavery and segregation and gerrymandering have provided additional opportunities for rigging the relevance of votes. Corporations have always had a strong influence in the nation's capitols, with courts increasingly allowing legal bribing of elected officials. Republicans have been the leaders in disenfranchising (previous post on this), yet Democrats have not done much to prevent it. In the end, the poor voter does not matter anymore.
How thieving elites can prevent rebellions
The Arab Spring and to a lesser extend the Occupy movement have renewed the interest in political or economic elites and how they manage to stay in power (or not). An extensive literature has already highlighted that elites need to give just enough to the plebs to prevent a rebellion, which can be quite low especially if you have a strong policy or military that is widely represented in the general population yet enjoys significant privileges. But the literature has always concentrated on a model of the elite against the people. What if there could be a potential elite that could try to overthrow the incumbent one?
Bernardo Guimaraes and Kevin Sheedy look at such an eventuality. It should not surprise anyone that an incumbent elite will design institutions that share power to some degree. More interesting is the result that institutions need to guarantee property, and elites need to show restraint in their expropriations. And that is especially good, as plenty of empirical evidence shows that better property rights lead to better aggregate outcomes. Yet, the existence of the elite still leads to too little power sharing and property rights, but more than if others could not overthrow it. According to this theory, Arab leaders went to far in their kleptomania and thereby encouraged rebellions. Let us hope their successors do better.
Bernardo Guimaraes and Kevin Sheedy look at such an eventuality. It should not surprise anyone that an incumbent elite will design institutions that share power to some degree. More interesting is the result that institutions need to guarantee property, and elites need to show restraint in their expropriations. And that is especially good, as plenty of empirical evidence shows that better property rights lead to better aggregate outcomes. Yet, the existence of the elite still leads to too little power sharing and property rights, but more than if others could not overthrow it. According to this theory, Arab leaders went to far in their kleptomania and thereby encouraged rebellions. Let us hope their successors do better.
Fiscal policy and climate change
It becomes more and more difficult to deny that something is happening to the weather and that climate change is a reality. From the point of view of the economist, this implies that there is more scope for distortionary taxation to mitigate climate change, and this brings a series of opportunities to improve the economy in indirect ways. The big fear of business is that sin taxes on pollution will curtail their production and profits. Of course, this is the whole point of these taxes, that is to internalize the effect of pollution, and that often means either reducing production or increasing production costs.
But as Benjamin Jones, Michael Keen and Jon Strand point out, this has also important benefits for businesses: the added tax revenue allows to reduce other taxes, in particular the ones that are bad for business: corporate taxes or income taxes could even be eliminated in a so-called greening of the tax code. This is one important reason one should tax polluting production or energy instead of subsidizing energy-efficient production or alternative energy, as I have already repeated at great lengths on this blog. But this is easier said than done, as the public will surely call for public expenses to cope with climate change. Politically, it is much easier to give firms technology to pollute less than have them buy it because polluting alternatives have become too expensive. But because it is easier politically does not mean it is right.
But as Benjamin Jones, Michael Keen and Jon Strand point out, this has also important benefits for businesses: the added tax revenue allows to reduce other taxes, in particular the ones that are bad for business: corporate taxes or income taxes could even be eliminated in a so-called greening of the tax code. This is one important reason one should tax polluting production or energy instead of subsidizing energy-efficient production or alternative energy, as I have already repeated at great lengths on this blog. But this is easier said than done, as the public will surely call for public expenses to cope with climate change. Politically, it is much easier to give firms technology to pollute less than have them buy it because polluting alternatives have become too expensive. But because it is easier politically does not mean it is right.
How to fight corruption
Conventional wisdom tells us corruption is bad (except for a few people). The evidence is surprisingly mixed (see old post), but that has not deterred every government or international agency to at least pretend to do something about it. Eradicating or attenuating corruption rarely works, maybe it is because the approach is wrong.
Martin Dufwenberg and Giancarlo Spagnolo verify an innovative angle to attack bribing, as proposed by Kaushik Basu and widely discussed in the Indian press: make bribing legal, but levy heavy fines on accepting bribes. That is somehow similar to the situation in some countries where consuming some drugs is legal, but their commerce is not. The conundrum the proposal tries to resolve is that briber and bribe-taker are usually partners in crime and unlikely to report the activity. By guaranteeing immunity to one party with return of the bribe, it is more likely that the corruptive transaction will be reported. But it turns out to optimize it, immunity should only be granted to those who report a bribe. Indeed, this gives stronger incentives to report. Also, granting immunity to any briber would have made it morally acceptable to bribe. To this I would have added that one also offer the repented briber a commission on top of the returned bribe. Then it would become profitable to report bribes, even when the requested service is ultimately not provided.
Martin Dufwenberg and Giancarlo Spagnolo verify an innovative angle to attack bribing, as proposed by Kaushik Basu and widely discussed in the Indian press: make bribing legal, but levy heavy fines on accepting bribes. That is somehow similar to the situation in some countries where consuming some drugs is legal, but their commerce is not. The conundrum the proposal tries to resolve is that briber and bribe-taker are usually partners in crime and unlikely to report the activity. By guaranteeing immunity to one party with return of the bribe, it is more likely that the corruptive transaction will be reported. But it turns out to optimize it, immunity should only be granted to those who report a bribe. Indeed, this gives stronger incentives to report. Also, granting immunity to any briber would have made it morally acceptable to bribe. To this I would have added that one also offer the repented briber a commission on top of the returned bribe. Then it would become profitable to report bribes, even when the requested service is ultimately not provided.
The tyranny of the (secessionist) minority
When we mention majority voting, we think about the rule of the median voter and how majorities can oppress minorities. There are plenty of example of the latter, especially in countries where ethnicity matters and people foremost vote along those lines. But there are also substantial counterexamples, countries where a minority manages to extract substantial rents from the majority. Prime examples are Spain, Canada, Belgium, Bolivian and the United Kingdom. What they have in common is that some part of the country is threatening secession, and the rest of the country makes concessions to appease the secessionists.
Vincent Anesi and Philippe De Donder do a formal analysis of such secessionist movements. There starting point is that a majority that wants to prevent secession will make concessions. That is obvious. What is more interesting is that they analyze what the remaining risk of secession is in such an equilibrium. It depends on a numbers of variables, like the strength of the secessionist drive, as measured by cultural divides and the region size for example, the amplitude of the accommodation, and institutional factors that make a secession possible. The next step is naturally to find a way to either estimate such a formula, or to calibrate it.
Vincent Anesi and Philippe De Donder do a formal analysis of such secessionist movements. There starting point is that a majority that wants to prevent secession will make concessions. That is obvious. What is more interesting is that they analyze what the remaining risk of secession is in such an equilibrium. It depends on a numbers of variables, like the strength of the secessionist drive, as measured by cultural divides and the region size for example, the amplitude of the accommodation, and institutional factors that make a secession possible. The next step is naturally to find a way to either estimate such a formula, or to calibrate it.
On the superiority of secularism
The US presidential election season in upon us, and of course religion will again be a major factor. While this is rather unique in the Western world that the religion of a candidate would matter, this fact seems very natural to Americans. The basic logic is that a god-fearing politician is less likely to abuse his power, especially in the position of president, where he cannot vie for a better position through exemplary behavior. That seems to be a slam-dunk for religious candidates, yet experience from the rest of the Western world seems to contradict this. In fact in many other countries, overtly religious candidates are suspected of having allegiances primarily with the religion, not the country.
Pavel Ciaian, Jan Pokrivcak and d'Artis Kancs go one step further and try to compare developed economies, that generally rely on secular institutions to enforce laws and rules, to developing economies, that more frequently draw on informal institutions, in particular religious ones. They find that religion-based institutions are weaker because thy hinge on credibility which is difficult to build and easily lost. Secular ones have an explicit and formal legal enforcement mechanism that can also adapt to changing circumstances. The latter means also that religious enforcement systems are best for static societies, while dynamic and growing economies should adopt secular systems. I am not quite sure causality goes this way, but correlations certainly support this.
Pavel Ciaian, Jan Pokrivcak and d'Artis Kancs go one step further and try to compare developed economies, that generally rely on secular institutions to enforce laws and rules, to developing economies, that more frequently draw on informal institutions, in particular religious ones. They find that religion-based institutions are weaker because thy hinge on credibility which is difficult to build and easily lost. Secular ones have an explicit and formal legal enforcement mechanism that can also adapt to changing circumstances. The latter means also that religious enforcement systems are best for static societies, while dynamic and growing economies should adopt secular systems. I am not quite sure causality goes this way, but correlations certainly support this.
Corruption and the exchange rate regime
A fixed exchange rate regime is a sign of an authoritarian and weaselly government nowadays. Letting your currency float lets markets freely show when policies are weak. Governments who are afraid of showing such weakness either get a fixed exchange rate regime or announce a floating one and in practice manage it to make it look stable as a fixed one. This is the so-called fear of floating, common among corrupt governments. This would indicate that the choice of the exchange rate regime could be determined by the political regime. Could the causality run the other way?
Katherina Popkova studies this question and finds the rather striking result that it makes sense to have an fixed exchange rate when you are corrupt and corruption has a strongly positive impact on output. The logic is that in such circumstances taxation is not that much distorting, thus seigniorage can be efficiently replaced by taxes. That said, some may argue that it is a silly idea to mention that corruption may have a positive impact on output. Yet, it is far from empirically settled whether corruption has a positive or negative impact.
Katherina Popkova studies this question and finds the rather striking result that it makes sense to have an fixed exchange rate when you are corrupt and corruption has a strongly positive impact on output. The logic is that in such circumstances taxation is not that much distorting, thus seigniorage can be efficiently replaced by taxes. That said, some may argue that it is a silly idea to mention that corruption may have a positive impact on output. Yet, it is far from empirically settled whether corruption has a positive or negative impact.
How to get fair elections in new democracies
There are several opportunities for new democracies in the Middle East, and if it is done well, democracies could actually establish themselves for good. This can only happen if politicians respect electoral results and the voters can trust the results as well. How do you get this to work?
Takeshi Kawanaka and Yuki Asaba offer some suggestion looking at electoral administration systems. But how do you get an independent and competent electoral commission? This is not just a matter of resources, the incentives for politicians need to be right. The critical layer is the party in power, which can change statutes, allocate funds and appoint commission members. Having a fraudulent electoral commission makes it easy to get reelected, but it can become costly if election results are challenged in the street. Rather, the ruler may want to have a credibly independent and competent electoral commission, as a win would then remain unchallenged. The ruler may also be motivated by avoiding costly bribes.
One aspect the paper ignores is that politicians are careers driven. A politician that turned out to be competent and honest in local government may have a shot at higher office. This is why he should not be corrupt, and the electorate will only promote the non-corrupt ones. Thus, to build a democracy you ned to work from the bottom up, so that proven incorruptibles end up ruling the country. Sadly, American nation building does the exact opposite, and it fails, the latest example being Iraq. By choosing to first hold national elections, the corrupt politicians got a free pass to power, and they have not looked bad since.
Takeshi Kawanaka and Yuki Asaba offer some suggestion looking at electoral administration systems. But how do you get an independent and competent electoral commission? This is not just a matter of resources, the incentives for politicians need to be right. The critical layer is the party in power, which can change statutes, allocate funds and appoint commission members. Having a fraudulent electoral commission makes it easy to get reelected, but it can become costly if election results are challenged in the street. Rather, the ruler may want to have a credibly independent and competent electoral commission, as a win would then remain unchallenged. The ruler may also be motivated by avoiding costly bribes.
One aspect the paper ignores is that politicians are careers driven. A politician that turned out to be competent and honest in local government may have a shot at higher office. This is why he should not be corrupt, and the electorate will only promote the non-corrupt ones. Thus, to build a democracy you ned to work from the bottom up, so that proven incorruptibles end up ruling the country. Sadly, American nation building does the exact opposite, and it fails, the latest example being Iraq. By choosing to first hold national elections, the corrupt politicians got a free pass to power, and they have not looked bad since.
Is this what Republicans are really about?
Europeans have struggled for some time to understand the philosophy of the US Republican party, and especially how it manages to get such popular support in the electorate. On the surface, indeed, it all appears to be a platform that favors the rich at the expense of the more numerous poor, the latter having been indoctrinated for many years that governments are bad and, at the extreme, robber barons are better than a benevolent government. The consequence is a drive to increase inequalities in income and wealth.
John Roemer offers a glimpse into the American ideology for inequality. He says that "American philosophy" sees inequality as ethical, as it gives everyone what nature endows him with. That seems like a very fatalist argument (as in some religions) that ignores that redistribution is about the ex-post insurance of where someone is born. having the luck to be born in a good family and in a good country ought to be taxed to some degree to benefit the unlucky. A second argument is the old trickle-down one: if the most talented can keep all the fruits of their labor, they will work more (never mind decreasing marginal utility of consumption and how redistribution can improve global well-being). The third argument is that the government is good at nothing, and should thus be largely absent.
All these arguments are largely shared in the United States, and especially among Republicans. In fact, the latter are now going much farther in reversing redistribution than ever before. Just see how they they are vehemently opposed to any risk sharing through public health insurance, how they limit school funding and public goods in general. In fact, I am starting to wonder whether the hidden goal is to create a new underclass that would be in some ways reminiscent of the old slavery days. That would be consistent with the opposition to minimum wages, with the large prison population, and with keeping the poor uneducated. That would also be coherent with the Republicans willingness to increase the payroll tax (a flat tax applicable to everyone) while calling for a reduction in the income tax (a progressive tax). I hope I am wrong, though.
John Roemer offers a glimpse into the American ideology for inequality. He says that "American philosophy" sees inequality as ethical, as it gives everyone what nature endows him with. That seems like a very fatalist argument (as in some religions) that ignores that redistribution is about the ex-post insurance of where someone is born. having the luck to be born in a good family and in a good country ought to be taxed to some degree to benefit the unlucky. A second argument is the old trickle-down one: if the most talented can keep all the fruits of their labor, they will work more (never mind decreasing marginal utility of consumption and how redistribution can improve global well-being). The third argument is that the government is good at nothing, and should thus be largely absent.
All these arguments are largely shared in the United States, and especially among Republicans. In fact, the latter are now going much farther in reversing redistribution than ever before. Just see how they they are vehemently opposed to any risk sharing through public health insurance, how they limit school funding and public goods in general. In fact, I am starting to wonder whether the hidden goal is to create a new underclass that would be in some ways reminiscent of the old slavery days. That would be consistent with the opposition to minimum wages, with the large prison population, and with keeping the poor uneducated. That would also be coherent with the Republicans willingness to increase the payroll tax (a flat tax applicable to everyone) while calling for a reduction in the income tax (a progressive tax). I hope I am wrong, though.
Politicians and leisure
When you think about leisure in the utility function, for most applications you need to take a stand on some properties: is the income effect larger than the substitution effect? Is leisure a normal good in the first place? Convincing empirical evidence is surprisingly difficult to find: read the endless debate between microeconomists and macroeconomists about the size of the wage elasticity. This may be an aggregation issue, but maybe we are lacking a clear natural experiment.
Naci Mocan and Duha Altindag report on an interesting change in the way members are paid in the European parliament. Whereas previously they were compensated at wildly different levels by there home countries, since July 2009 they get money according to a uniform rule: 38.5% of a European judge's salary as a base, plus a per diem when present. Mocan and Altindag then use the difference between and with the previous schemes to highlight that an increase in the base reduces attendance (yes, the income effect! Leisure is normal!) and an increase in the per diem increases attendance (the substitution effect is larger than the income effect). Politicians are rational after all.
Naci Mocan and Duha Altindag report on an interesting change in the way members are paid in the European parliament. Whereas previously they were compensated at wildly different levels by there home countries, since July 2009 they get money according to a uniform rule: 38.5% of a European judge's salary as a base, plus a per diem when present. Mocan and Altindag then use the difference between and with the previous schemes to highlight that an increase in the base reduces attendance (yes, the income effect! Leisure is normal!) and an increase in the per diem increases attendance (the substitution effect is larger than the income effect). Politicians are rational after all.
Economic freedom and prisons
Americans are proud of their freedoms, political or economic ones. Yet, they are very trigger happy when it comes to takes one's freedoms, say by taking voting rights from felons, throwing people into prison or even executing them. How could such an apparent disconnect be explained? Why is the US different from Europe, where there is less economic freedom, but also much less punishment?
Rafael di Tella and Juan Dubra note that this apparent paradox does not only appear across countries, but also over time within the United States. For example, over the 30 years including the "Reagan Revolution" that considerably deregulated the economy, incarceration rates were multiplied by seven. They explain this with a theory that states the following. People view that when there are ample opportunities for legal activities in a system where there are many economic freedoms, people who still commit illegal acts must be "meaner" than the average criminal in a world with fewer economic freedoms. This can be supported with some limited empirics, but this is quite an appealing explanation. Indeed, Americans strongly believe that effort, not luck, is the root of success, and thus offer few excuses to those who become criminals out of necessity, an opinion that interestingly more and more African-Americans share.
Rafael di Tella and Juan Dubra note that this apparent paradox does not only appear across countries, but also over time within the United States. For example, over the 30 years including the "Reagan Revolution" that considerably deregulated the economy, incarceration rates were multiplied by seven. They explain this with a theory that states the following. People view that when there are ample opportunities for legal activities in a system where there are many economic freedoms, people who still commit illegal acts must be "meaner" than the average criminal in a world with fewer economic freedoms. This can be supported with some limited empirics, but this is quite an appealing explanation. Indeed, Americans strongly believe that effort, not luck, is the root of success, and thus offer few excuses to those who become criminals out of necessity, an opinion that interestingly more and more African-Americans share.
Why September 11 is remarkable
Amid the commemoration of the 10th anniversary of the terrorist attacks of September 11, 2001, I cannot help thinking how successful theses attacks have been. For an organization that wanted the United States to pay for sending troops to Saudi Arabia during the first Gulf war, a relatively little investment paid huge dividends. Indeed the cost of the operation, including training, must have cost only something to be measured in millions of dollars and the lives of 19 volunteers. The return was getting the United States involved in two wars that have costs amounting to trillions, brought the federal government in major financial difficulties, have lead authorities to neglect essential infrastructure investment for a decade, has kept the population in a nevrotic state for a decade, has given us higher oil prices (with revenue going you-know-where) and has lead to major setbacks in civil liberties. And that is just for the United States, as Europe has also been affected. And the costs will continue to mount, as the US is none the wiser and will have to face in addition the costs of care for veterans.
The impact of fiscal uncertainty
Current US fiscal policy is absolutely frustrating. There does seem to be a clear direction, in particular because policy making is rather irrational due to a set of unduly influential and crazy lawmakers. In the end, this means considerable uncertainty about future fiscal policy, in particular because it may not react to economic events in ways that make economic or historic sense. What is the impact of such uncertainty?
Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Keith Kuester and Juan Rubio-Ramirez address this with a New Keynesian business cycle model that feature variable volatility in fiscal policy. Their conclusion is that the current uncertainty lowers activity and has the policy equivalent of a 25 basis point increase in the federal funds rate, which I find rather minor. The model rightfully yields that the main mechanism is through investment and the uncertainty on capital return taxation. I find it interesting that it leads to stagflation, as firm opt for higher prices to reduce miss-pricing costs. In the end, the authors show that if one removes the usual automatic stabilizers and assume very persistent fiscal shocks, which may be a good characterization of the current situation, the prediction is a 0.5% reduction in output, which I am ready to believe.
Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Keith Kuester and Juan Rubio-Ramirez address this with a New Keynesian business cycle model that feature variable volatility in fiscal policy. Their conclusion is that the current uncertainty lowers activity and has the policy equivalent of a 25 basis point increase in the federal funds rate, which I find rather minor. The model rightfully yields that the main mechanism is through investment and the uncertainty on capital return taxation. I find it interesting that it leads to stagflation, as firm opt for higher prices to reduce miss-pricing costs. In the end, the authors show that if one removes the usual automatic stabilizers and assume very persistent fiscal shocks, which may be a good characterization of the current situation, the prediction is a 0.5% reduction in output, which I am ready to believe.
Tax reform: Politics has more weight than Economics
One of the great frustration as an economist is to know what is best and being told it is "politically unfeasible." And why is it typically unfeasible? Because the "right" people do not like it, because it sounds complicated, and because populists would have a feast opposing it, or a combination of the three. How much is this frustration really justified?
Micael Castanheira, Gaëtan Nicodème and Paola Profeta look at the reform of labor income taxation in Europe and find that it is very consistent with the theory that politics shapes taxes more than economists. Indeed, the size of the ruling party or coalition is the main factor: instead of a compromise, which would likely be close to the outcome a social planner to choose, the rulers select what is best for them without regard for the others, or just enough regard to prevent a revolt (that is my interpretation). And then people blame economists when things do not go right.
I'll go weep in a corner now.
Micael Castanheira, Gaëtan Nicodème and Paola Profeta look at the reform of labor income taxation in Europe and find that it is very consistent with the theory that politics shapes taxes more than economists. Indeed, the size of the ruling party or coalition is the main factor: instead of a compromise, which would likely be close to the outcome a social planner to choose, the rulers select what is best for them without regard for the others, or just enough regard to prevent a revolt (that is my interpretation). And then people blame economists when things do not go right.
I'll go weep in a corner now.
Market failure and political outcomes
In a perfect economic world, perfect competition and the lack of frictions or externalities make it possible to obtain the most efficient outcome. But once any of those assumptions is lost, outcomes are going to be worse than the first best. In particular, once there are rents to be obtained, from frictions or imperfect competition, the beneficiaries of those rents will try to protect them. And they will try to influence political outcomes in their favor.
Madhav Aney, Maitreesh Ghatak and Massimo Morelli argues that this influence peddling reinforces the market failures. As an example, they take a model of misallocation of entrepreneurial talent due to the imperfect observability of that talent. The resulting power structure then votes on institutions that reinforce such a class structure and thus amplify misallocations and market failures.
Now think about the apparently ever-increasing proportion of lawyers in the political class.
Madhav Aney, Maitreesh Ghatak and Massimo Morelli argues that this influence peddling reinforces the market failures. As an example, they take a model of misallocation of entrepreneurial talent due to the imperfect observability of that talent. The resulting power structure then votes on institutions that reinforce such a class structure and thus amplify misallocations and market failures.
Now think about the apparently ever-increasing proportion of lawyers in the political class.
Procrastination in team work
Teamwork can turn out very bad when moral hazard is present: if people do not trust each other or care about each other, nothing gets done. When doing research, we are lucky to be able to choose our co-authors, but even then things can turn for the worse if a team member looses interest. And we remember how bad it is when a team is forced upon you during our studies. Now, this is all very loose reasoning, let us get on firmer ground.
Philipp Weinscheink studies team production in a dynamic game with moral hazard. If all players are rewarded equally, they will all wait until the last moment to participate. This is very like what we often see in political negotiations with a deadline, where nothing happens until the last moment, and player consciously wait for the last moment. The same often happens at collective agreement bargaining. And of course, the outcomes are far from optimal, as the debt ceiling mess in the US has recently shown.
If the rewards are not equally distributed, the outlook is better. Quite obviously, those who are rewarded better will tend to procrastinate less. But they are not necessarily better off that those less rewarded, as they put more effort. Thus, second-best contracts are unequal ones. But all this falls apart if some players have limited liability (which means they have better outside options) or if some can sabotage. Then everyone will wait until the last moment and very little gets done. Think about the US situation again...
Philipp Weinscheink studies team production in a dynamic game with moral hazard. If all players are rewarded equally, they will all wait until the last moment to participate. This is very like what we often see in political negotiations with a deadline, where nothing happens until the last moment, and player consciously wait for the last moment. The same often happens at collective agreement bargaining. And of course, the outcomes are far from optimal, as the debt ceiling mess in the US has recently shown.
If the rewards are not equally distributed, the outlook is better. Quite obviously, those who are rewarded better will tend to procrastinate less. But they are not necessarily better off that those less rewarded, as they put more effort. Thus, second-best contracts are unequal ones. But all this falls apart if some players have limited liability (which means they have better outside options) or if some can sabotage. Then everyone will wait until the last moment and very little gets done. Think about the US situation again...
Policy risk and the business cycle
The US economy seems stuck in its tracks, and many blame uncertainty about future public policy, including me. Indeed, private firms are currently sitting on a lot of cash and are making very good profits, yet they are not investing or hiring. This really looks like a wait-and-see game. But it this justification well-founded or is it just a cheap excuse to justify higher than usual profits in the face of high unemployment?
Benjamin Born and Johannes Pfeifer put some structure into these arguments by taking a standard New Keynesian model and adding uncertainty about monetary and fiscal policy. They measure this by looking at tax rates and monetary policy shocks with time-varying volatility. Previous literature already looked at the impact of aggregate uncertainty, which policy makers can do little about. But policy uncertainty is another matter. And there is hope, as Born and Pfeifer show that the impact of policy uncertainty is not that important (but much larger than uncertainty about productivity shocks) thanks to monetary policy reaction through a Taylor Rule. So that is somewhat reassuring, but then the size of the current policy uncertainty is an order of magnitude larger than when this paper was written, and monetary policy is bound by non-negative nominal interest rates.
Benjamin Born and Johannes Pfeifer put some structure into these arguments by taking a standard New Keynesian model and adding uncertainty about monetary and fiscal policy. They measure this by looking at tax rates and monetary policy shocks with time-varying volatility. Previous literature already looked at the impact of aggregate uncertainty, which policy makers can do little about. But policy uncertainty is another matter. And there is hope, as Born and Pfeifer show that the impact of policy uncertainty is not that important (but much larger than uncertainty about productivity shocks) thanks to monetary policy reaction through a Taylor Rule. So that is somewhat reassuring, but then the size of the current policy uncertainty is an order of magnitude larger than when this paper was written, and monetary policy is bound by non-negative nominal interest rates.
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