Economics and Alaska

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Public vs. Private Polar Expeditions

Is the public sector more, or less, efficient than the private sector? Jon Karpoff at the University of Washington has found that 19th century private Arctic exploration was more effective than similar public activity. Even though government expeditions were larger, and better funded, private expeditions were more productive, and at lower loss of life. Karpoff looked at the records of 92 public and private expeditions. Reasons for this: private planners were more often the men who actually undertook the expeditions. Private persons did more preparation, uncovered and used more crucial information, and used fewer men on their expeditions.

I’m depending on a summary of the article prepared by Daniel Benjamin for the Center for Free Market Environmentalism web site:
Arctic Expeditions of the 19th Century. This is a short piece, about the length of a newspaper op-ed page column, but it elaborates quite a bit on my summary.

For even more detail, go to Karpoff’s original article, “Public versus Private Initiative in Arctic Exploration: The Effects of Incentives and Organizational Structure” which was published in the Journal of Political Economy (JPR) in 2001 (109(11):38-78. The Egan Library JSTOR electronic journal system has the JPE, but, for now, only up through the 2000 volume. The Egan Library interlibrary loan people can give you quick service though.

posted by Ben Muse at 6:18 PM

 

Economics of Public Policy

UAS MPA students interested in the requirements for "Economics of Public Policy" (PADM 625) may want to check the following link: PADM 625 Student Learning Objectives. You'll need Adobe Acrobat to read the pdf file.

I'm drafting a set of learning goals in the form of a set of questions. This is a preliminary draft - expect that it will change before the class is next taught in Fall 2003.
posted by Ben Muse at 6:45 PM

 

Robert Caro's Lyndon Johnson

Robert Caro's new book on Lyndon Johnson, Master of the Senate is as good as, or better than, the reviews I've read said it would be. Not only a great story, but also a systematic analysis of how Johnson acquired and used power in the Senate. Caro frames a series of problems and analyzes Johnson's solution to each.

Overarching everything: Johnson wants to be President, he arrives in the Senate in middle age with only a local and state reputation. If he wants to obtain a national reputation, allies, and money, he will have to do so as a Senator. There are two problems: first, in 1949 there is no strong Senate leadership. The power in the Senate is held by its committee chairmen, and chairmanships are handed out on the basis of seniority - it will take Johnson several six year terms (and take him beyond a plausible age for a Presidential campaign) to get power the normal way.

Let Caro explain the second problem:

"And the Senate was ruled by the South, by that mighty Southern Caucus whose unity - that "oneness found nowhere else in politics" - was rooted in its members' allegiance to a cause almost holy to them [racial segregation, Ben]. Rising to power in the Senate - to a position within the Senate from which a senator could run for President - depended on the support of southern senators,support which would be forthcoming only after they had been thoroughly convinced that their colleague's allegiance to that cause was firm.

"But that allegiance, essential for success within the Senate, would be fatal to success beyond it - would be fatal in pursuing the goal of which Lyndon Johnson had so long dreamed. There were only eleven southern states, and in many of the other thirty-seven, sympathy for that Lost Cause was not a recommendation. In the eight most populous states, all of which were in the North or the West, it was, in fact, a taint. In the Senate, these eight states cast only sixteen of ninety-six votes, but in a presidential election, they accounted for more than 40 percent of the electoral vote.

"Lyndon Johnson was from Texas, one of the eleven states of the Confederacy. The taint of the South was on him. For him to realize his great ambition, that taint would have to be removed. but he could rise to a position from which he could run for President only with the South's enthusiastic, unqualified support." (Caro, pages 124-125)

We know Johnson solved these problems - Caro explains how.
posted by Ben Muse at 10:06 PM

 

Enforcement incentives

Sasha Volokh points out the potentially perverse incentives created by numerical goals in program enforcement:

Bean-Counting at the New York Times

posted by Ben Muse at 4:01 PM

 

What's good about America - its bureaucrats for one thing!

Tom Friedman in the Sunday New York Times reminds us about the high standard set by U.S. public administrators:

"Several years ago an Indian journalist friend of mine, who was working in Indonesia, remarked to me that corruption in the Indonesian bureaucracy was so endemic that when he paid a bribe to renew his residency permit, the Indonesian official he paid off actually gave him a receipt for his bribe so my friend could be reimbursed by his newspaper. For anyone who has worked abroad, such stories are not unusual. But they are also a useful prism for examining the epidemic of corporate cheating now wracking America."

"Here's why: I don't blame President Bush for any accounting fraud at WorldCom or Enron. I blame him for something more important. You see, what really distinguishes American capitalism from most other countries' is not that we don't have C.E.O. crooks, but others do, or that we never have bogus accounting, bribery, corruption or other greedy excesses, but others do. No, we have all the same excesses that other capitalist nations have, because fear and greed are built into capitalism."

"What distinguishes America is our system's ability to consistently expose, punish, regulate and ultimately reform those excesses — better than any other. How often do you hear about such problems being exposed in Mexico or Argentina, Russia or China? They may have all the hardware of capitalism, but they don't have all the software — namely, an uncorrupted bureaucracy to manage the regulatory agencies, licensing offices, property laws and commercial courts."

See the full op-ed piece here: In Oversight We Trust

I learned about this from Brad DeLong's "Semi-daily journal."
posted by Ben Muse at 3:56 PM

 

OMB and rule review

This note is for PADM 696 - Regulation and Rulewriting - students. Remember OMB's responsiiblities for review of proposed Federal rules. The July 22 OMB Watcher newsletter makes a couple of general points in the course of a discussion about OMB and EPA interaction on a Clean Air Act rule.

First - the Bush OMB has tried to make its activities more transparent, partly through the use of "return letters" (posted to its web site) to notify an agency that OMB has problems with a rule. However, no return letter is used if an agency "withdraws" a rule. When an agency "voluntarily" withdraws a rule: "there is no reason provided for the withdrawal, and OIRA’s docket on the rule, and its possible role in the decision to withdraw, is withheld from the public."

Second: "Earlier in his tenure, Graham made use of “return letters,” clearly stating OIRA’s reason for rejecting an agency rule. Between July 20, 2001, and Feb. 12, 2002, Graham issued 17 such letters; since then, however, none have been issued." That is an average of just over 2 letters a month in the seven months from July to February, and none in the last five months.

OMB watch speculates about the reason why: "The last of these letters, on tire-pressure monitoring, proved to be highly controversial and undoubtedly generated political headaches for Graham. It may be that this has discouraged the use of return letters, and instead OIRA has forced EPA to withdraw rules in place of return letters, avoiding public attention and possible embarrassment for the administration."

Third, OMB (through its Office of Information and Regulatory Affairs (OIRA) is going to be involved in the design of a new EPA air quality rule from the ground up. That would be a change from its traditional role of rule review under E.O. 12866: "Meanwhile, in what EPA calls an “unusual collaboration,” OIRA, under the leadership of John Graham, will actually help develop -- from the very beginning -- regulations on air pollution from non-road diesel engines. Since its beginning in the early 1980s, OIRA has reviewed agency regulations, but never before has it actually been in the position of crafting regulation from scratch, which in the case of air emissions, Congress has delegated exclusively to EPA."

The story is here: OMB Watch - OMB Hijacks Clean Air Standards

OMB, and John Graham's OIRA office, do not have the resources to spend a of time devloping a major rule like this. The EPA press release announcing the joint effort says that EPA and OMB will be working together, and specifically, they will "collaborate on the design of an innovative regulatory analysis to support the development of regulatory strategies to reduce emissions from non-road diesel engines." Maybe what's being implied here is general guidance from OMB? The full release is here: EPA AND OMB WORKING TO SPEED THE REDUCTION OF POLLUTION FROM NONROAD DIESEL ENGINES

posted by Ben Muse at 11:10 AM

 

Cost-benefit analysis: "one man, one vote"

In PADM 625 - Economics of Public Policy - I point to one of the ethical foundations of welfare economics - everyone is treated the same. Thus in an analysis of the costs and benefits dealing with crime - economics also treats the costs and benefits accruing to the criminal. The time spent in jail by criminals is a cost, not just to them, but to society. Controversially - the value of something stolen is a cost to the victim, but an offsetting benefit to the person who stole it. But this is the result of a doctrine that everyone should count. The time and resources spent by potential victims protecting their lives and property is a cost, as is the time spent by criminals planning and carrying out their crimes. All of this flows from the utilitarian foundations of cost-benefit analysis.

And all of this is by way of relating the following essay to the class -

"Everyone knows that economics is the dismal science. And almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship."

"While this story is well-known, it is also wrong, so wrong that it is hard to imagine a story that is farther from the truth. At the most trivial level, Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science." "

"Carlyle was not alone in denouncing economics for making its radical claims about the equality of all men. Others who joined him included Charles Dickens and John Ruskin...."

Click here to read the whole essay:

David M. Levy and Sandra J. Peart, "The Secret History of the Dismal Science: Economics, Religion and Race in the 19th Century" Library of Economics and Liberty

Jane Galt's blog (see links to the left) brought this essay to my attention.

posted by Ben Muse at 10:07 AM

 

Teaching economics in high school

I've seen this posted elsewhere (includng Jane Galt's blog), but this is a blog in part about teaching economics, so a link here is appropriate:

"Teaching Anti-Economics" by Joanne Jacobs
posted by Ben Muse at 6:09 PM

 

What happens to dictators after

Instapundit.com reports:

"Ouch! This is embarrassing" at Instapundit
posted by Ben Muse at 6:00 PM

 

Fortunately these practices are out of date

In PADM 625 – Economics of Public Policy – we talked about how our society makes some of its allocation decisions through the market and some through voting and the political process. Robert Caro talks about Lyndon Johnson’s approach to elections in his new book, Master of the Senate -

In 1941 -

“…polls showed him pulling steadily away from his principal opponent, Texas Governor W. Lee (Pappy) O’Daniel…

“And then, in an instant, with one slip, he was stopped.

“…he had planned and intrigued, trying to think of everything, unceasingly careful and wary. But at the very end of that 1941 race – on Election Day itself – he had relaxed. In his euphoria over apparent victory, he violated an old adage of Texas politics by reporting too early in the day the vote totals from the corrupt counties he controlled, thereby letting O’Daniel know how many votes were needed from the corrupt counties he controlled, and giving him the opening necessary to win. (Caro, page 110)

In 1948 -

“Every stage of Lyndon Johnson’s career had been marked…by…the stealing of elections. Even at little Southwest Texas Teachers College in San Marcos, where campus politics had previously been little more than a joke and elections the most casual of affairs, Johnson stole elections. On Capital Hill, the pattern was repeated. Lyndon Johnson cheated not only in the election in which he won the presidency of the Little Congress [a club for Capitol Hill aides – Johnson was a member before he was elected to the House of Representatives, Ben], but in succeeding elections in which his allies won…He had stolen thousands of votes in his first campaign for the Senate. When that number proved insufficient…his reaction was to try to steal still more – by trying to persuade the corrupt border county dictator George Parr to go further than Parr had ever gone before. But even the notorious Parr would not go to the lengths that Johnson wanted. “Lyndon, I’ve been to the federal penitentiary, and I’m not going back for you,” he said…In this 1948 campaign…He stole not thousands but tens of thousands of votes, and when they weren’t sufficient to defeat Stevenson [his Senate opponent, Ben]…he stole still more, and in this later theft, which culminated in the finding of the decisive “votes” (supposedly cast by 202 voters who voted in alphabetical order) six days after the polls closed, he went further than anyone had gone before, violating even the notably loose boundaries of Texas politics.” (Caro, page 116)

posted by Ben Muse at 7:04 PM

 

Robert Caro's LBJ

I'm reading Robert Caro's new book, Master of the Senate, the third volume in his biography of Lyndon Johnson (Alfred A. Knopf, 2002).

Caro's book should interest students in the public administration program. It's about legislative power - how it is acquired and used. In this case it is about the power exercised in a modestly sized legislative body (96 members of the U.S. Senate in the late 1940s and the 1950s). There is a hint that the lessons might be less applicable to larger legislatures - that Johnson's very personal methods were less suitable in the 435-person U.S. House of Representatives.

Public administration students should study legislative power since they are subject to it (depending on legislatures for their authority and budgets, and subject to legislative oversight), and because they will participate in many legislative situations as they sit in on, or provide support to, committees, work groups, Fishery Management Council's, etc.

We talked about the importance of agendas in PADM 625 - Economics of Public Policy, but that was an obviously incomplete analysis of legislative influence. Caro's book is analytical as well as descriptive, provides an important supplement to the incomplete agenda analysis, and is well worth careful study.
posted by Ben Muse at 6:54 AM

 

Mitch Daniels - prospects

The link below reports rumors from the Indiana GOP convention about the possiblity that Mitch Daniels (currently of OMB - see the note below) might return to run for the Indiana senate seat in 2004.

Paul Musgrave - www.paulmusgrave.net - July 13, 2002 entry

Musgrave wonders how the current Bush budget deficits might affect Daniels' chances, since the Indiana GOP plans to make the current state Democratic administration's budget deficits a big issue.
posted by Ben Muse at 10:26 PM

 

Mitch Daniels at OMB

The July/August 2001 issue of Washington Monthly had an article on Mitch Daniels, the head of the Office of Management and Budget (OMB) in the current administration. The Office of Information and Regulatory Affairs in the OMB has an important role in the review of proposed regulations and their supporting analyses. You can find the article here: "Dick Cheney's Dick Cheney" by Nicholas Thompson

Thompson’s character sketch (explaining the title) -

“Daniels is a canny fighter who knows one can best administer the stiletto while in an embrace--a vastly different philosophy from that held by the churlish Republican congressional leaders like Tom DeLay and Trent Lott. Daniels, in fact, bears an uncanny resemblance to Dick Cheney. He's calm, unassuming, likable, self-deprecating, and very smart. Like Cheney, Daniels won the trust of the president through his loyalty, command of the issues, and dry wit. Like Cheney, Daniels is deeply conservative with a moderate demeanor. Like Cheney, Daniels is a major reason that the Bush administration has had success pushing its agenda through, despite the president's failure to win the popular vote. In his New Yorker profile of Cheney, Nicholas Lemann likened him to a serotonin uptake inhibitor. Daniels also has that same calming effect on those around him--an appropriate skill for a man who made a fortune at the company that produces Prozac.”

Biographical details -

Daniels is from Indiana, a graduate of Princeton University. He joined the staff of Indianapolis mayor Richard Lugar in 1971, and went with Lugar to the U.S. Senate in 1976. From 1983 to 1985 he worked as a Republican Party political operative; in 1985 he joined the Reagan administration as a political director. In 1987 he left, ran a conservative think tank in Indiana for a couple years, and then joined the Eli Lilly drug company in government relations, moving on to head North American operations, and later to head strategic planning. The new Bush administration then tapped him to head OMB.

With respect to regulation -

Thompson argues (this was written in the summer of 2001 and has to be somewhat speculative) that Daniels is going to pursue the path of the first Bush administration “Council on Competitiveness” which was run by Vice President Dan Quayle. That Council is widely viewed as an organization set up to hold up or modify regulations that might impose significant costs on business. Thompson’s take is that Daniels' efforts are likely to be more politically sensitive and media-savvy, although pursuing the same goals. This is similar to the argument advanced in the Wall Street Journal article I summarized on July 5. Thompson points to previous Daniels connections with the Council – the Bush operative who recruited him for OMB (Al Hubbard) had been chair of the Council, and Daniels had lobbied the Council on behalf of Eli Lilly. Thompson points to a moratorium on regulation the Bush administration implemented when it took office and compares it to a moratorium the Quayle Council had persuaded the first Bush to administer. He also points to Daniels’ selection of John Graham, an academic advocate of cost-benefit analysis and a consultant to numerous businesses, as head of the OMB’s Office of Information and Regulatory Affairs (OIRA), the OMBs’ office for vetting regulations and their supporting analyses.


posted by Ben Muse at 10:06 PM

 

More Game Theory

New insight into the "prisoners' dilemma" game, reported by Natalie Angier in the New York Times:

"Studying neural activity in young women who were playing a classic laboratory game called the Prisoner's Dilemma, in which participants can select from a number of greedy or cooperative strategies as they pursue financial gain, researchers found that when the women chose mutualism over "me-ism," the mental circuitry normally associated with reward-seeking behavior swelled to life."

"And the longer the women engaged in a cooperative strategy, the more strongly flowed the blood to the pathways of pleasure................"

Link here: Why We're So Nice: We're Wired to Cooperate
posted by Ben Muse at 10:52 PM

 

Game Theory Cases

Mindle Dreck's blog, "More Than Zero Sum" carried this game theoretic analysis of President Bush's 2002 State of the Union speech on January 31: Game Theory and the State of the Union

Nice because it has discussions of, or links to, case applications to boxing, the Cuban Missile Crisis, and two airline hijackings. Also has a link to an explanation of John Nash's great game theory insight by economist Hal Varian in the New York Times.
posted by Ben Muse at 6:49 PM

 

A new classroom experiment for PADM 625?

Alumni of PADM 625 will remember the public goods classroom experiment (how much would you contribute to a public good?). The experiments described in the link below, from Reason Online might also be worth trying:

"Burn the rich" by Ronald Bailey in Reason Online

Bailey starts:

"An old Russian joke tells the story of a peasant with one cow who hates his neighbor because he has two. A sorcerer offers to grant the envious farmer a single wish. "Kill one of my neighbor's cows!" he demands."

"Research by two British economists, Daniel Zizzo of Oxford University and Andrew Oswald of Warwick University, suggests there is a good bit of truth behind that joke. In a recent study, Zizzo and Oswald ask, "Are People Willing to Pay to Reduce Others’ Incomes?" "The short answer to this question is: yes," they report. "Our subjects gave up large amounts of their cash to hurt others in the laboratory.""

Later in his column Bailey describes a second experiment (more like the one we did in class):

"Oswald and Zizzo’s findings may be related to those of a study in which two Swiss economists, Ernst Fehr from the University of Zurich and Simon Gachter from the University of St. Gallen, determined that people will incur substantial costs to punish cheaters. Such subjects engage in what the researchers call "altruistic punishment.""

"Fehr and Gachter set up a public goods game with a common pot in which all the players could invest. After all the players were given an opportunity to invest in the pot, the amount in the pot was increased and then split between all players at the end of each round. The game was set up so that defectors could increase their total winnings by not investing at all, then taking a quarter of whatever was in the pot once the round was over."

"In the games in which players had no opportunity to punish defectors, cooperation soon broke down completely and no one invested. But once the ability to punish--say, by fining cheaters--was added, cooperation became widespread. Even if punishers lost more than the cheaters they punished, they still deterred cheating."

This Swiss experiment is similar to the one we did in class - with the punishment dimension added. The Swiss experiment is descried by Fehr and Gatcher in "Altruistic Punishment in Humans" in the January 10, 2002 issue of Nature. The New York Times had an article on these results in its January 22, 2002 issue: "The urge to Punish Cheats: Not Just Human, but Selfless" by Natalie Angier. I think Angier noted that the act of punishing was a public good since it was non-excludable - no one in the experimental group could be excluded from the benefits of increased cooperation due to punishment and there was a positive cost to inflicting the punishment. So there should have been a tendency to free-ride on punishment as well. Evidently it was overcome by the anger people felt towards free-riders?

posted by Ben Muse at 5:18 PM

 

Regulation and rulewriting

Ian Frazier provides model regulatory language: Laws Concerning Food and Drink; Household Principles; Lamentations of the Father

From The Atlantic. My son Ben let me know about this.
posted by Ben Muse at 4:17 PM

 

Market vs. political allocation

Arnold Kling, at "Great Questions of Economics" provides a link to Jane Galt's blog post on the economics of allowing imports of prescription drugs from Canada (I made a note on her post yesterday - look down the list a bit).
"Killing the Prescription Drug goose"

He draws attention to a question Jane touches on, "How would government allocation of prescription drug funding differ from market allocation?" It's a good question and touches on an important element in PADM 625 - "Economics of Public Policy." Markets and political action provide two different ways of deciding how to allocate our resources. They each have strengths and weaknesses, and it is an important task of PADM 625 to look at these. I think I'll be using this piece by Jane Galt in class next time, since it illustrates so many important topics (last time I mentioned free riding and public goods).




posted by Ben Muse at 12:43 PM

 

PADM 293: Economics for Public Managers

This class brings UAS MPA students up to speed on their economics. While it is not a required class, many students need it to meet the economics prerequiste for "Economics of Public Policy" (PADM 625). I'm developing a clearer description of what is expected of students in this class.

This description is taking the form of a set of questions organized by topic. You can link to the current version of these here:
Draft Teaching objectives for PADM 293 You can expect this list to continue to evolve up until the opening of class (this class will be offered next in the summer of 2003).

I'm glad to be able to tell you that the texts for this class look like they'll be relatively inexpensive. The primary text will be The Economic Way of Thinking, Tenth edition, by Paul Heyne. Prentice Hall, 2000. Most, but not all of the questions below are addressed in this book. While this book sells new on Amazon for about $81, it can also be had used over the Internet for (apparently) as little as $20 plus postage. There is a student guide for this as well, which I’d encourage you to buy and use. Additional texts, also required, are Steven E. Landsburg’s The Armchair Economist. Economics & Everyday Life, the Free Press, 1993 (available for about $10 from Amazon), and Deirdre McCloskey’s, Economical Writing, Waveland Press, 2000 (also available from Amazon for about $10).

I've used the Heyne and Landsberg books before and students like them. The McCloskey book will be new for the class in 2003, but I think students will like it as well.
posted by Ben Muse at 9:14 AM

 

Prescription drug reimportation

Jane Galt has a lively discussion of the economics of legalizing drug reimportation (for example from Canada) in order to cut prescription drug prices in the U.S. in this July 19 blog post: Live from the WTC

This post has a good application of the free rider problem in public goods provision.

posted by Ben Muse at 11:22 PM

 

"Is global inequality really getting worse?"

The July 18 issue of The Economist reports on a new study by Columbia University economist Xavier Sala-i-Martin that says no:

"Convergence, period"

posted by Ben Muse at 10:48 PM

 

African-American poverty rate falls by a third in 1990s

Brad Delong points to a dramatic 33% fall in African-American poverty rates in the 1990s: Semi-Daily Journal: Things Going Right: Falling Poverty in the 1990s

posted by Ben Muse at 5:42 PM

 

Literature and economics

"Everything old is new again." Anthony Trollope's novel about railway fraud in 19th century England, The Way We Live Now, anticipates our current financial problems. See: Amity Shlaes - The Way We Lived Then .

I learned about this article from Lynne Kiesling's blog: The Knowledge Problem

posted by Ben Muse at 4:54 PM

 

Creating the wealth of nations

Mancur Olson was an economist at the University of Maryland. He had important things to say about the economic foundations of group and political behavior - we’ll cover his theory of group behavior when you take “Economics of Public Policy.”

In his book Power and Prosperity. Outgrowing communist and capitalist dictatorships (Basic Books, 2000, $18 in paper and worth it) Olson looked to China, during a period of the 20th Century when the central government was weak, and bandits and warlords were endemic in the countryside. He noted that warlords could be popular in their neighborhoods. “At first, this situation was puzzling: Why should warlords who were simply stationary bandits continuously stealing from a given group of victims be preferred, by those victims, to roving bandits who seen departed? The warlords had no claim to legitimacy and their thefts were distinguished from those of roving bandits only because they took the form of relentless tax theft rather than occasional plunder.” (Power and Prosperity, pg 7.) He finds an answer in the different incentives faced by bandits and warlords.

Bandits

Small-scale bandits (assumed to be operating unchecked in an area without strong government) would prefer to operate in rich countries rather than in poor countries because there is more to steal. But banditry makes communities poorer. Bandit activity takes time and resources on the part of the bandit, and causes victims and potential victims to use up time and resources trying to protect what they have. All of this is taken away from making things and providing services and it reduces the wealth of the community. A bandit considering a theft would only think about his own effort and the potential benefits to himself; the individual bandit would not think about the overall cost to society – only a very small part of that cost would accrue to him. Bandits would therefore steal more than…“socially optimal” seems like the wrong expression – but more than they should from their own point of view as a class.

Warlords

In contrast, suppose that the community is dominated by a warlord, with the power to assert an effective monopoly of theft. This person is just a “large” bandit with no particular interest in the inhabitants; he views them as the bandits do, they’re a source of loot. But the warlord gets all the loot that is generated. Like the bandits, he prefers to exploit a richer community, since there is more wealth. Unlike the bandits, he has the incentive to cultivate the community. He has an incentive to increase thefts (call it taxation) in order to increase revenue; however, he also has an incentive to recognize the disincentives associated with that theft and to balance increased thefts against increased disincentives. As Olson points out, when the warlord reduces thefts from 95% to 90% of the community’s annual product, he doubles the incentives of the community to produce (from 5% to 10%). Olson argues that the warlord would recognize that there was some intermediate level of theft that would maximize his loot. Moreover, Olson also recognizes that the warlord might even have incentives to invest in his community, so long as the increased loot from the investment was greater than the cost of that investment.

Note

It’s nothing new to say that people may prefer a strong man, or an autocrat to anarchy. This is the Hobbsian argument. Olson goes a step further to locate the reason in the incentives faced by bandits and warlords and to draw out the implications in terms of productivity and growth. He generalizes the model to analyze the question, “Which is more likely create a wealthy society – an autocracy or a democracy? A question that’s going to have to wait until a later post.

It’s kind of interesting that Olson’s model is based on a kind of open access, common-property model. This is a model that we could apply to study a fishery or an oil pool. In this case, the people in the community are viewed as a commons by a predatory government:

Fish = Population
Surplus yield=Wealth production
Fishermen=Warlord or bandits
Fishing=Robbery
Common property regime=Bandits
Each fish harvested reduces CPUE for other fishermen=each theft increases costs of further extraction
Single owner=Warlord

Congo/Zaire

Events in the Congo during the last 10 years illustrate Olson’s theory. For many years the Congo (formerly Zaire) was ruled by a tyrant – Mobutu Sese Seko. In 1994, the war and genocide in neighboring Rwanda spread to the Congo. In 1997 Mobutu was overthrown and replaced with a weaker leader. Chaos and civil war followed. Other nations invaded to support different factions or in search of loot. The war, which goes on, was the subject of a special report in The Economist recently: ”Africa’s great war” The Economist estimates three million persons have probably died.

The factions involved appear to be more interested in loot than in ideals. The Economist’s correspondent writes:

“Before long, the war reached a stalemate and the miscellany of armies settled down to the serious business of plunder. Zimbabwe bagged diamond seams in the south. Angola joined the Congolese government in an oil venture. Rwanda and Uganda began digging for diamonds and coltan (a mineral used in mobile telephones), harvested timber and ivory, and even emptied schools of desks and chairs. Though supposedly allies, Rwandan and Ugandan troops have occasionally clashed over the spoils. But in general, the more all the armies plundered, the less willing they became to fight each other (as opposed to unarmed peasants). “

If you’re interested in this topic you might also check out the World Bank’s research project on the economic causes of civil war in developing countries: The Economics of Civil War, Crime, and Violence There is some interesting stuff here, but that also has to be left to a future post.

Here’s a link to a “Great Questions in Economics” posting on: ”Autocracy and economic outcomes”

posted by Ben Muse at 8:31 PM

 
The Costs and Benefits of the Sonny Bono Copyright Act

The U.S. “Sonny Bono Copyright Term Extension Act of 1998” was passed and signed in 1998. This law extended the length of copyright protection from “the life of the author plus 50 years” to “the life of the author plus 70 years.” The copyright for works with multiple authors was extended from 75 to 95 years.

This act not only applied to new works, but to all works with active copyrights on the effective date of the bill (10-27-98). So the bill applies to works that will be created in the future, and to works that have already been created. The distinction between these two classes of works has important implications for economic analysis.

The Act’s constitutionality has been challenged and upheld in District Court and the D.C. Court of Appeals. However, in February 2002, the U.S. Supreme Court agreed to take the case up. Seventeen distinguished economists submitted an amici curiae brief in May 2002, discussing the economic efficiency and the consumer welfare implications of the act. You can find their analysis here: Amici curiae brief
Here is a brief summary of their arguments (ignoring several subtle points).

What are the benefits and costs of extending the copyright?

Benefits

Extending the copyright by 20 years increases the incentives for creation of new original works. Authors and artists can receive income from their work for a further 20 years.

On the other hand, this is not likely to be much of an incentive for additional creative work. A 50 year old, who might expect to live another 25 years, and already has 50 years of protection beyond that, (for a total of 75 years) gets another 20 years, starting in year 76. That additional time is not likely to be very valuable.

To get an idea of how valuable, assume that you expect to receive $5 in royalties on each copy of your book, and expect to sell 1,000 copies of the book each year for the 95-year life of the new copyright. Your expected net benefit from the extension, at a 7% discount rate, would be about $331, or 0.47% of the value of your sales under the older 75-year copyright period. To try out different assumptions, check out this on-line copyright-value calculator at a Harvard Law School site:
http://eon.law.harvard.edu/cgi-bin/opencode/extension.cgi . This is a very small incentive.

The “Sonny Bono Act” protection applies to existing works as well as to new works; these works already exist – protection for them does nothing to encourage new creative work.

In summary, if the value of the copyright extension is the value of the additional works we can expect, the extension is likely to have few benefits. There is little incentive to authors to create new works, and the retroactive extension for existing works has no benefits at all.

And the costs?

There are two costs.

First, copyright gives an author or artist a monopoly over duplication and distribution. A monopolist will exploit this position to increase profits by restricting the level of output in order to drive the price received about the additional (or marginal) costs of making it. This means the authors have an interest in reducing the quantity of books produced (given that the book is written) and in charging higher prices for it. This increases the author’s profits – but that’s a transfer from (and a loss to) the people who have to pay higher prices. The increase and the loss are equal, and cancel each other out. However, people enjoy fewer goods and services and that’s a deadweight loss. The monopoly cost on new works is small because it will be heavily discounted – the additional time doesn’t occur until many years have passed. But the cost because of the retroactive extension to existing works begins immediately and is higher.

Second, the cost of derivative works based on original works is increased (think of anthologies of music or articles). Some of this increase is due to the extension of the monopoly power, some is due to the increased costs authors of the derivative works will face in order to collect permissions from original authors.

Some questions:

It is a common complaint against benefit-cost analysis that it reflects the valuations that poor people have in the market and that their interests would not be adequately reflected in the analysis. Do you think that complaint would apply in this instance? Why not? The analysts did not make any action estimates of costs or benefits; did their conclusion lack force because of this? If you feel it did not, what was it about their analysis that allowed them to reach a meaningful conclusion without estimating dollar costs and benefits? The authors concluded that the net benefits for the nation were likely to be negative in this instance. Assume that this conclusion is correct for the sake of argument. Why do you think Congress passed, and President Clinton signed, this law? How would excluding the retroactive provisions of the law have affected the cost-benefit analysis? The economists also discussed the consumer welfare implications of the copyright law. What do you think is the distinction between consumer welfare and net social benefits? Why would these differ? Do you think the consumer welfare change was greater or less than the total welfare change?

Teaching objectives – provides students a concrete context to think about the workings and impact of discounting; monopoly; cost-benefit analysis. A related piece of testimony by Hal Varian provides information on discounting and present value.

Additional resources

The text of the act is here: Sonny Bono copyright Extension Act of 1998
Descriptions of the act by the General Counsel for the Catholic University of America may be found here: Catholic University General Counsel and a description in the Wikipedia Free Internet Encyclopedia may be found here: Wikipedia Professor Hal Varian, Dean of the School of Information Management and Systems at the University of California at Berkeley, describes how to calculate present values here: Varian on present value.
posted by Ben Muse at 5:45 PM

 

Crime and Punishment

Does punishment deter crime; specifically does the death penalty deter murder? The June 2002 issue of The Region, a journal of the Federal Reserve Bank of Minneapolis, has a handy survey of the literature. You can link to the article here: "A Punishing Debate". This is a short, readable overview.

Are criminals rational in the sense of responding to costs and benefits, even with respect to murder? The research described here suggests that they are. For example, one study suggests, "The prospect of being sentenced to years of horrendous prison life appears to be a strong deterrent to criminal activity."

Does the death penalty have a deterrent effect? The empirical evidence is mixed and not conclusive.

Is there reason to believe it should have? Maybe not: "In the second half of the 20th century, executions were relatively rare and they occurred only after a long lag from the actual commission of the crime; the murders themselves were often perpetrated under the influence of alcohol or drugs. The impact on criminal decision-making of such a low probability, highly time-discounted outcome, suggest the authors, was likely to be minimal."

The article brings home the importance of distinguishing between the direction of an impact that may be suggested by theory, and the size of the impact. The size itself may be signficant as a practical matter, or it may not be. Theory often doesn't give you guidance about that.







posted by Ben Muse at 8:07 PM

 

Parkinson's law

Brad DeLong on "the absolute best serious scholarly study of bureaucracies and their functioning ever written.": Semi-Daily Journal: Still the Frontier of Research into Real-World Bureaucracies

This turns out to be C. Northcote Parkinson's book Parkinson's Law, and Other Studies in Administration. It was Parkinson who posited that "Work expands so as to fill the time available for its completion..." I read DeLong's posting on the same day I read the following extract from Lines in the Water by Ben Orlove. Orlove is apparently an anthropologist who spent a great deal of time among Peru's Lake Titicaca fishermen. The Peruvian navy had a presence on the lake. The navy had an active, and ultimately not completely successful, program to register fishermen on the lake. Orlove couldn't figure it out - there didn't seem to be any policy need driving the registration program - then it occurred to him:

"The navy officials registered boats and fishermen on Lake Titicaca...because they were accustomed to such registrations of marine fishermen on the Pacific Coast, and it just seemed to them the most natural thing to do. These navy officals...were doing what government employees do in many settings: inspecting and registering local activities. The lack of registration struck them as sloppy, a kind of disorder that should be rectified. The officials with whom I spoke mentioned their wish to obtain information about the fishermen who traveled on the waters they were supposed to control. They also knew that their superiors in Lima wanted reports on local conditions, preferably ones filled with numbers, tables, and accounts of official documents."

posted by Ben Muse at 7:23 PM

 

Comparative advantage

We did comparative advantage in PADM 293 - remember? Brad DeLong thinks its the most misunderstood concept in economics:
Semi-Daily Journal: Comparative Advantage
posted by Ben Muse at 7:07 PM

 

10,000 CEOs abandon all pretence

"El Paso, Texas (SatireWire.com) — Unwilling to wait for their eventual indictments, the 10,000 remaining CEOs of public U.S. companies made a break for it yesterday, heading for the Mexican border, plundering towns and villages along the way, and writing the entire rampage off as a marketing expense." Go to SatireWire | REMAINING U.S. CEOs MAKE A BREAK FOR IT for the rest.


posted by Ben Muse at 6:50 PM

 

Benefit-cost analysis and excess burden

In PADM 625 (Economics of Public Policy) I talked about the excess burden from taxes, and about benefit-cost analysis, but I never put them together. I’m going to make more of an effort to do that next time (Fall, 2003).

What is excess burden?

People try and avoid taxes. Sometimes people cheat on their taxes and then this behavior takes criminal forms. Other times, they rearrange their lives to reduce their tax liabilities. A high excise tax in one community might lead residents to consume less of a good or to obtain the good elsewhere. Income taxes cause people to change their working behavior. Corporation taxes can affect location and investment decisions. There are welfare losses associated with this avoidance behavior and these are what is meant by the "excess burden" of the tax. The welfare losses can also be described as the efficiency loss associated with a tax.

Think about a per-unit excise tax paid by suppliers in a model of a competitive market. The standard analysis of supply and demand analysis would show (a) there is an upward shift in the supply curve (because the cost – to the supplier – of supplying any additional unit has risen by the amount of the tax); (b) there is probably a reduction in consumption; (c) there is probably an increase in price; (d) the tax will be shared by the buyers or sellers in different ways depending on the relative elasticities of supply and demand; (e) there will be a welfare loss triangle if the amount bought or sold drops. This welfare loss provides a measure of the excess burden of the tax in this situation. What is important with respect to use in a cost-benefit analysis is the marginal excess burden (MEB) - that is, the excess burden of the marginal taxes.

How large is the marginal excess burden?

The guide I generally use for cost-benefit analysis, Cost-Benefit Analysis. Concepts and Practice. by Boardman, Greenberg, Vining and Weimer, Prentice-Hall, 1996, cites a study done in the 1980s as providing the most comprehensive estimates of marginal excess burden (MEB), or the excess burden associated with the last dollar of taxes raised. "They estimate an overall MEB for the U.S. tax system of between 17 and 56 cents, depending upon assumptions about the elasticities of labor supply and savings. For a less extreme range of assumptions, they find that the MEB for income taxes ranges from 16 to 31 cents, the MEB for capital taxation at the industry level ranges from 18 to 46 cents, and the MEB for taxes on commodities without externalities ranges from 4 to 12 cents." (page 64.) The research that Boardman et al. cite is dated; I'm not currently familiar with more recent estimates of the MEB.

How to use excess burden in a cost-benefit analysis

Quoting Boardman et al. (page 64),

"Which MEB is relevant to CBA? With respect to federal projects, it is probably reasonable to view income taxes as the marginal tax source, suggesting that the approximate MEB would be around 25 cents. With respect to local projects, the marginal tax source is more reasonably viewed as the property tax. Though comparable estimates of the MEB of the property tax are not available, they are probably less distorting than income taxes. Therefore, a lower MEB for locally funded projects would probably be reasonable."

"Assume that you have an acceptable estimate of the MEB for a government for which you are evaluating a proposed project. How would you take the MEB into account? You would apply the shadow price of tax dollars, (1+MEB), to those costs and benefits that represent decrements or increments to the government's financial position, in other words, to the government's expenditures or revenues. At least conceptually, these expenditures or revenues increase or decrease the amount of tax revenue that, other things equal, would be required to achieve the same aggregate financial position."

"Five categories of costs and benefits can be distinguished. First, costs that represent expenditures by the government should be multiplied by the shadow price of tax dollars. Second, benefits that accrue as revenue to the government should also be multiplied by the shadow price of tax dollars. Third, costs that accrue as losses in social surplus exclusive of government expenditures should not be multiplied by the shadow price of tax dollars. Fourth, benefits that accrue as gains in social surplus exclusive of government revenue should not be multiplied by the shadow price of tax dollars. Fifth, transfers, which otherwise either would not be recorded as costs and benefits or would be recorded as exactly offsetting costs and benefits, should be recorded and multiplied by the shadow price of tax dollars if they represent increments or decrements to government cash flow. In other words, project-specific taxes or subsidies must be multiplied by the shadow price of tax dollars; they do not "cancel out." Thus, care should be taken to enumerate all costs and benefits, including transfers."

The Federal Office of Management and Budget (OMB) recommends a somewhat different approach. They suggest (in guidelines) that under certain circumstances, a supplementary analysis of excess burden may be appropriate. The OMB guidelines may be found at: OMB Circular No. A-94

I note that the OMB guidance differs from the Boardman et al. guidance in that it is less comprehensive, but also in that it requests treatment of the excess burden issue as a "supplementary" analysis.

A qualification

I suspect that the OMB recommends the excess burden be treated as a supplementary analysis because of an ambiguity with respect to the marginal nature of the MEB with respect to any specific project. Funding and expenditure are divorced for many or most projects. If we do not push forward with a specific project and its associated public expenditures, the level of taxation in the country will generally not be changed. The same taxes would be imposed, and the same excess burden would occur. Thus, there may not be any MEB associated with the expenditure.

But we run into a "cumulative effects" issue. If a lot of these projects were abandoned, taxes would drop, and the excess burden would also drop. While the impact of one project is very small and could be ignored, the impact of all of them taken together would be substantial. And the money used for any specific project came from somewhere and did create a cost.

I believe that it is this ambiguity that the OMB was trying to resolve by recommending that the costs and benefits be recalculated with an excess burden analysis as a supplementary analysis to the main cost-benefit analysis. This seems like a reasonable compromise to me.

posted by Ben Muse at 6:57 PM

 

Sulfur Dioxide emissions

In class last fall we used a case dealing with the Waxman-Sikorski bill to reduce sulfur dioxide emissions and acid rain in the U.S. and Canada. Some of you may be interested in trends in sulfur dioxide emissions in recent years. Here are some EPA statistics (click below). This is an experiment in posting pictures to this blog.

EPA -- Sulfur Dioxide conccentrations, 1986-1995

EPA - Sulfur dioxide emissions by year, 1986-1995
posted by Ben Muse at 7:25 PM

 

Economic naturalists

When I go out in the woods I see a lot of trees around me. Other people can go in the same woods and see a lot more - evidence of animal activity, of geological and ecological evolution, and of old human disturbance. I don't see all this because I haven't educated myself through study and practice. Some people have trained themselves to "see" what's going on around them in nature, others have not.

It’s the same with economics – one of my favorite economists, Robert Frank of Cornell, writes in his microeconomics textbook - “Studying biology enables people to observe and marvel at many details of life that would otherwise escape them. For the naturalist, a walk in a quiet woods becomes an adventure. In much the same way, studying microeconomics enables someone to become an “economic naturalist,” a person who sees the mundane details of ordinary existence in a sharp new light. Each feature of the manmade landscape is no longer an amorphous mass but the result of an implicit cost-benefit calculation.” (Frank, Microeconomics and Behavior, 4th edition, page 25.)

I ask students in PADM 293 (Economics for Public Managers) to keep economic diaries during the class in order to encourage economic naturalism. Each student is asked to make 30 or 40 short diary entries relating things we’ve talked about in class to daily or work life - to things that are going on around them. I'm trying to help the students get into the habit of "seeing" economic ideas their lives and in public policy debates and conflicts.

Here is a great economics diary: Great Questions of Economics by Arnold Kling. Kling keeps his diary on the Internet, frequently posting short items relating to current events - each of which ends with a pointed question. For example, this item was motivated by Amtrak's money problems in June 2002 -

"Amtrak supporters say that it needs subsidies in order to maintain unprofitable routes. 'Jane Galt' sees this as illogical.

Go figure? We're not giving Amtrak any money because NO ONE IN THE COUNTRY WANTS TO RIDE THE TRAIN! You've probably noticed this, manifested in the lack of passengers on most of your trains.

Discussion Question. What, if anything, makes passenger trains a public good?"

In the original, the "Jane Galt" reference is actually a link to the Internet item that motivated the Kling's posting - the second paragraph is a quote from the Galt piece. If you haven't taken PADM 293 yet, you're likely to see items from Kling's site when you take it. You could go to his site to see what I'm looking for in your diary entries. If you've already had the class - I still think you should check it out, it'll sharpen your wits.




posted by Ben Muse at 8:45 PM

 

Martha at the margin

Michael Kinsley uses marginal analysis and contrasts the results from a hypothetical "Good Enough" (good enough for a regular dinner) cookbook, and the results from a hypothetical cookbook by Martha Stewart, in Slate, "It's Good Enough, Freedom, Justice, and Martha Stewart": "The guiding philosophy of the Good Enough Cookbook is to seek out ways one can, say, put in half the effort and get three-quarters of the desired result. The guiding philosophy of Martha is to seek out ways one can gain a 10 percent better result by doubling the effort put in. It is important to understand that the Martha method is not a complete waste of time. It does make things better. It probably even makes life better. But the Good Enough method is good enough."

An article posted to Slate on July 3, 2002
posted by Ben Muse at 7:47 PM

 

How accurate is the Grapes of Wrath as economic history:

Keith Windschuttle in The New Criterion:

Steinbeck's myth of the Okies by Keith Windschuttle "Although it is about the experiences of the fictional Joad family, The Grapes of Wrath was always meant to be taken literally. Borrowing from John Dos Passos’s U.S.A. trilogy and other works in the realist or documentary genre of the time, Steinbeck interspersed his fictional chapters with passages that gave a running account of the prevailing social, climatic, economic, and political conditions. Steinbeck himself had researched the living conditions of the Okies for a series of newspaper articles he wrote for a San Francisco newspaper, and, soon after his novel appeared, its tale was confirmed by the publication of America’s most famous work of photographic essays, Dorothea Lange and Paul S. Taylor’s American Exodus, which traced every step of the Okie’s tragic journey across the country. In other words, Steinbeck’s book was presented at the time as a work of history as well as fiction, and it has been accepted as such ever since. Unfortunately for the reputation of the author, however, there is now an accumulation of sufficient historical, demographic, and climatic data about the 1930s to show that almost everything about the elaborate picture created in the novel is either outright false or exaggerated beyond belief......................."

See the article for details.
From The New Criterion Vol. 20, No. 10, June 2002.

posted by Ben Muse at 10:51 PM

 

OMB regulatory evaluation in the Bush Administration

In “Regulation and Rulemaking” this spring I described the Federal Office of Management and Budget’s (OMB) responsibility for review of the benefit-cost analyses required by Executive Order 12866. This responsibility is lodged in OMB’s Office of Information and Regulatory Affairs (OIRA). We talked about changes made by the new Bush Administration under the OIRA administrator Dr. John Graham. My take on it was generally technocratic.

A front-page article in the Wall Street Journal (by Stephen Power and Jacob M. Schlesinger) on June 12 paints a different picture. The article talks about the technical changes – for example increased transparency due to postings of meeting logs and letters to agencies on the OIRA website.

But Power and Schlesinger paint a more complex picture than I did. The tone of the article strongly suggests a sophisticated strategy to hide an anti-regulatory agenda under a technocratic and neutral surface. Graham’s calls for “smarter regulation” equal “regulatory relief.” “Smarter regulation” rhetoric accepts that regulation will come – but OIRA involvement in drafting will take the sting out. This approach contrasts with the Reagan administrations more “strident” use of OIRA and benefit-cost criteria to prevent the regulations themselves. The article points to increased transparency, meetings with proponents of regulations, public expressions of the need for evaluation to go beyond benefit-cost analysis to look at issues such as “fairness” and “privacy,” and even OIRA suggestions for new or tougher regulation. Nevertheless, the implied strategy is to look concerned and interested and but to prevent undesired regulation by endless suggestions for better analysis or more alternatives. The final paragraph lists three instances where OIRA calls for tougher regulation haven’t lead to any actual results (presumably stymied by other administration players).

posted by Ben Muse at 10:39 PM

 

Economics of Public Policy - description and textbook

University of Alaska, Southeast (UAS), PADM 625, "Economics of Public Policy," is set to be offered next in the fall of 2003. This is a required class for the Masters in Public Administration at UAS.

I'm preparing course content guidelines at Jonathan Anderson's request. The course description from the first cut of these: "Economics of public policy, primarily in relation to public expenditures. Emphasis on government responses to market failures – particularly public goods and externalities. Introduction to benefit-cost analysis, regional impact analysis, and analysis of income distribution and poverty."

The primary text for this class will be Public Finance and the American Economy, Second edition, by Neil Bruce. Addison Wesley. 2001. While this book sells new on Amazon for $105, it can also be had over the Internet for considerably less ($60-$70).

With respect to prerequisites, Bruce says, “This text is written for students who have taken intermediate microeconomics, or at least a solid principles course that equips them with the requisite analytical tools, such as the indifference curve diagram. Nonetheless, the book should be accessible to students who have more limited backgrounds, provided that they are willing to do some preparation.” PADM 293, "Economics for Public Managers" to be offered in the summer of 2003 is meant to help students meet the prerequisites.

posted by Ben Muse at 5:07 PM