Archive for November, 2009

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rent-seeking

Tuesday, November 17th, 2009

I am a great fan of John Kay, so I am sad to report that his column in last week’s Financial Times is a disaster. Perhaps even a gifted writer is entitled to an off-day.

The column begins with an inaccurate and unhelpful definition of the economic term ‘rent-seeking’:

You can become wealthy by creating wealth or by appropriating wealth created by other people. When the appropriation of the wealth of others is illegal it is called theft or fraud. When it is legal, economists call it rent-seeking.

John Kay, “Powerful interests are trying to control the market”, Financial Times, 11 November 2009.

This statement is totally wrong. Rent-seeking can be legal or illegal. And it involves not appropriation of wealth created by others, but rather the appropriation of value (‘rents’) that result from government restrictions on economic activity.

The term ‘rent-seeking’ was coined by Anne Krueger in a classic 1974 paper. In the very first paragraph of her paper, Ms Krueger explains that government restrictions give rise to rents, and people often compete for a share of these rents. “Sometimes, such competition is perfectly legal. In other instances, rent seeking takes other forms, such as bribery, corruption, smuggling, and black markets.”

Ms Krueger is a trade economist and was Chief Economist for the World Bank from 1982 to 1986. It is not by accident that she chose import licenses – rather than tariffs – as an example of rent-seeking. Tariffs do not generally give rise to rent-seeking, since the scarcity value (‘rent’) of import restrictions is captured as taxes on imports. Rent-seeking takes place only when producers lobby for for new tariffs or for retention of old ones. The scarcity value of import quotas can also be captured by government if the import licenses are sold by auction to the highest bidder. This is not the case with Ms Krueger’s example.

John Kay’s concern in this column is with concentration of economic power. This is an important subject, but one that has nothing to do with rent-seeking. Rent-seeking can and does take place in a competitive environment.

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the tragedy of means tests

Monday, November 16th, 2009

Greg Mankiw is one of a handful of economists who worry about the effect of means tests on the welfare of the poor. Some time ago, he  posted a quote of “Kennedy School economist Jeff Liebman (via Jeff Frankel’s new blog) [who] tells a sad story about the incentive effects of government programs aimed at helping the poor”:

the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Greg Mankiw, “The Poverty Trap”, 10 February 2008.

Jeffrey Liebman is now Executive Associate Director of Obama’s Office of Management and Budget (OMB).

More recently, Mankiw linked to work by Boston University economists Kotlikoff and Rapson, who give the tax-transfer system of the US very low marks:

America’s tax-transfer system confronts the vast majority of American households with either high, very high, or astronomically high total effective marginal tax rates on labor supply and saving. It also provides very substantial tax arbitrage opportunities to a subset of households, particularly those with high incomes or advanced ages.

The pattern of net marginal tax rates and arbitrage opportunities with respect to age, marital status, and earnings is quite simply all over the map. But this is what one would expect given the amazing complexity of the fiscal system, the fact that the various components of the system are being developed with little or no thought to their interaction, and that the various governmental bodies responsible for the different elements of our tax-transfer system appear to make little or no attempt to understand the overall work and saving disincentives as well as arbitrage opportunities they are producing.

Laurence J. Kotlikoff and David Rapson, “Does It Pay, at the Margin, to Work and Save? — Measuring Effective Marginal Taxes on Americans’ Labor Supply and Saving”, Boston University, October 2006.

For reasons that I do not fully understand, political conservatives like Mankiw frequently fail to draw the obvious conclusion that universal benefits trump targeted transfers. The unwritten implication is the poor would be better off without transfers, but with their work incentives intact. Where are the ‘compassionate conservatives’?

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why fiscal stimulus is needed

Friday, November 13th, 2009

[T]he normal antidote to both an international and a national savings surplus is a reduction in interest rates. But with policy rates already near zero in the major economies, there is little further for them to fall.

Some central banks are trying to reinforce the effects by direct creation of money – so-called “quantitative easing”. Unfortunately, instead of being dropped by helicopter this cash is being injected into the banks that have a thousand and one excuses for not passing it on in loans to businesses or households. ….

Tax cuts and public spending have the great advantage of not adding to private debt. Of course they add to public debt, but for governmental authorities that can print their own money that is not the same thing.

Samuel Brittan, “Simple truths about the economy”, Financial Times, 13 November 2009.

The full column will be posted here in a week or so.

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Who should go to college?

Thursday, November 12th, 2009

There is growing sentiment in the United States that college may not be worth its cost for everyone. At the same time, President Obama has called on every American to receive at least one year of post-secondary education or vocational training. The Chronicle Review asked 11 experts for short respones to a number of questions, beginning with “Who should and shouldn’t go to college?”

The 11 experts include W. Norton Grubb, author of Honored but invisible: An inside look at teaching in community colleges (1999); Charles Murray, co-author of The bell curve: Intelligence and class structure in American life (1994); and Alison Wolf, author of Does education matter? (2002).

My favourite response was that of George Mason University economist Bryan Caplan, author of The myth of the rational voter: Why democracies choose bad policies (2007):

There are two ways to read this question. One is: “Who gets a good financial and/or personal return from college?” My answer: people in the top 25 percent of academic ability who also have the work ethic to actually finish college. The other way to read this is: “For whom is college attendance socially beneficial?” My answer: no more than 5 percent of high-school graduates, because college is mostly what economists call a “signaling game”. Most college courses teach few useful job skills; their main function is to signal to employers that students are smart, hard-working, and conformist. The upshot: Going to college is a lot like standing up at a concert to see better. Selfishly speaking, it works, but from a social point of view, we shouldn’t encourage it.

College attendance, in my view, is usually a drain on our economy and society. Encouraging talented people to spend many years in wasteful status contests deprives the economy of millions of man-years of output. If this were really an “investment”, of course, it might be worth it. But I see little connection between the skills that students acquire in college and the skills they’ll need later in life.

Bryan Caplan, in “Are Too Many Students Going to College?”, The Chronicle Review, 8 November 2009.

Thanks to Alex Tabarrok for the link.

An interesting bit of trivia: John Stuart Mill (1806-1873), author of Principles of Political Economy (1848), refused to study at Oxford or Cambridge, and went to work for the East India Company instead. He was home-schooled from an early age and never attended formal classes.

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state socialism

Wednesday, November 11th, 2009

I am never sure if Martin Wolf is an optimist, a pessimist, or simply a realist. In today’s column he embraces “piecemeal social engineering” of philosopher Karl Popper as a way to save capitalism from its excesses.

A year ago, capitalism careered over a cliff. With vast effort, states have put it back on the road. According to Piergiorgio Alessandri and Andrew Haldane of the Bank of England, in a superb new paper, the total gross value of interventions on behalf of banks has been $14,000bn. This is state socialism. ….

To put it bluntly, the banking system has been gaming the taxpayer on an intolerable scale. This must end, in one of two ways: the sector must be made subject to the market or become a heavily regulated ward of the state. Again, the curbing of huge credit bubbles must be an integral element in the formation of regulatory and monetary policies. Finally, the dependence of the global monetary system on the currency of an over-indebted superpower is neither desirable nor sustainable.

Martin Wolf, “Victory in the cold war was a start as well as an ending”, Financial Times, 11 November 2009.

Didn’t the Nazis refer to state socialism as national socialism? The paper by Alessandri and Haldane – “Banking on the State” – is posted here.

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means-tested benefits

Tuesday, November 10th, 2009

Here is yet another illustration of the fact that means-tested benefits are implicit taxes on income.

To say that antipoverty programs in the United States are perverted may be an understatement. When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.

For many of the working poor, the implicit marginal tax rate is greater than 100 percent.

Clifford F. Thies, “The Dead Zone: The Implicit Marginal Tax Rate”, Mises Daily, 9 November 2009.

The author shows, in considerable detail, for a hypothetical Virginia family of one adult and two minor children, “the relationship between earned income and after-tax income plus subsidies”, which is “essentially flat from $0 to about $40,000 in earned income”.

Universal transfers do not punish the working poor in this way.

HT to Tyler Cowen for the pointer.

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the Chinese hukou system

Tuesday, November 10th, 2009

University of Washington geographer Kam Wing Chan has written a superb overview of China’s hukou (household registration) system that was promulgated in January 1958 and is still in effect. The system took away a basic right of Chinese citizens, the freedom to choose one’s place of residence. It discriminates against 800 million rural residents and allows the State to treat 150 million internal migrants as ‘guest workers’ in their own country.

The hukou system is often considered as unique to China. Although China’s system of controlling and regulating internal movements of its citizens is indeed far more elaborate than that in almost all other countries in the world, a broader survey reveals that a similar system existed or still exists in other (former) communist countries, such as the ho khau system in Vietnam and the hoju system in present-day North Korea. In fact, these migration control systems, the Chinese one included, owe much of their common origin to the propiska (internal passport) system utilized in the former USSR ….

What is unique about migration in China is that the two aspects of internal migration (movement and citizenship) can be totally disparate; i.e., one can move to a new place (for example, because of a job change) but can be permanently barred access to community membership-based services and welfare. People who have moved to a new place but do not possess local citizenship (hukou) are referred to as the non-hukou population, meaning that they are not de jure residents even though they are de facto residents. Conceptually, this is the group that has moved away from the location where their hukou is registered. The situation of Chinese migrants without citizenship, of course, is not unique in the international context of migration. Many so-called “guest laborers” working in foreign countries, sometimes for years, without local citizenship, fall into this category. But few countries have applied such a system to their own citizens in modern times. In China, this group is commonly called the “floating population” or “mobile population” (liudong renkou). Its size has grown rapidly from a few million in the early 1980s to the present level of about 150 million. ….

As I finish this retrospective on the Chinese hukou system at its semicentenary, it is my earnest wish that no one will have occasion to write on its centennial. The present version of the system is not deserving of such longevity.

Kam Wing Chan, “The Chinese Hukou System at 50″, Eurasian Geography and Economics 50:2 (March 2009), pp. 197-221.

Professor Chan is author of Cities with Invisible Walls: Reinterpreting Urbanization in Post-1949 China (Oxford University Press, New York, 1994).

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basic education and human rights

Monday, November 9th, 2009

Some time ago I drafted a paper on education and presented it to a conference in Ljubljana, Slovenia. The full paper can now be downloaded from SSRN (Social Science Research Network). Here is an abstract:

The Universal Declaration of Human Rights promises free elementary education and free choice of schools to children and their parents. International fora emphasise the first right while neglecting the second. This essay examines arguments for limiting school choice and finds each of them to be unconvincing. It then describes three school systems: India, with free choice, but only for those who can afford to pay; Sweden, with taxpayer-funded free choice for everyone; and Finland, which allows parents almost no choice at all in basic education.

Larry Willmore, “Basic Education as a Human Right Redux”, 26 July 2008.

I included ‘redux’ in the title because I revisit the theme of an earlier essay that was published in Economic Affairs (December 2004).

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early warning systems

Monday, November 9th, 2009

Economists have come under a lot of criticism lately for failing to predict the 2008 financial crisis. Perhaps we should humbly admit the limits of economics, even if many ask “What is economics for?”. This is the implication of recent research by Andrew Rose of the University of California (Berkeley) and Mark Spiegel of the Federal Reserve Bank of San Francisco. They looked at economic indicators in the year 2006 for 107 countries and find none of them to be related to the severity of the 2008 crisis. They conclude that it is impossible to construct a useful ‘early warning system’ for financial crisis.

We examine a large number of potential explanatory variables for the crisis that have been discussed in the literature; these cover a host of “fundamentals” including the regulatory framework, financial conditions, and the macroeconomic, institutional, and geographic features of a country. However, we found almost none of our posited variables seem to be statistically significant determinants of crisis severity ….

Negative results like ours in a cross-section make us dubious about the accuracy of an early warning model that will have all the problems we have encountered and, in addition, the problem of predicting the timing of future crises.

Andrew K. Rose and Mark M. Spiegel, “Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning”, Federal Reserve Bank of San Francisco Working Paper 2009-17, July 2009.

An important caveat is that data on housing prices are available for only 44 of the 107 countries in Rose and Spiegel’s cross-section. The authors confess, in footnote 33 of their paper, “Since real estate prices are available for a smaller set of countries, the inclusion of our real estate variable does cut down our sample and it may be the sample truncation that is precluding statistical significance for real estate appreciation.” Housing bubbles have accompanied the financial crisis in more than a few countries, so this is a serious limitation of the study.

An alternative explanation for the negative results is that the financial crisis could have been transmitted contagiously across counties, like an infectious disease, infecting ‘healthy’ and ‘unhealthy’ countries alike. Rose and Spiegel test this hypothesis in a subsequent paper, and are unable to confirm it.

Indeed, countries that were more exposed to the United States — those that held disproportionate amounts of American securities or depended heavily on exports to the United States – seem if anything to have experienced smaller crises, holding other factors constant. Overall though, we find remarkably little evidence that the intensity of the crisis across countries can be easily modeled using quantitative techniques and standard data that is either country-specific or links countries to the source of the crisis. This negative finding in the cross-section is powerful since we know, with the benefit of hindsight, both the approximate timing and the epicenter of the 2008 crisis. It makes us skeptical of the ability of “early warning systems” which must be able to predict the incidence of future crises across both countries and time.

Andrew K. Rose and Mark M. Spiegel, “Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure”, Federal Reserve Bank of San Francisco Working Paper 2009-18, September 2009.

A tip of the hat to William Watson for the pointer.

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non-governance as an art

Sunday, November 8th, 2009

Über active Tyler Cowen reports that Yale University anthropologist James C. Scott has a new book out, titled The art of not being governed: an anarchist history of Upland Southeast Asia (Yale University Press, 2009).

Years ago I read with great pleasure Scott’s earlier book, Seeing like a State. Here is a short excerpt that I circulated at that time to the Thought du Jour list:

If the state’s goals are minimal, it may not need to know much about the society. Just as a woodsman who takes only an occasional load of firewood from a large forest need have no detailed knowledge of that forest, so a state whose demands are confined to grabbing a few carts of grain and the odd conscript may not require a very accurate or detailed map of the society. If, however, the state is ambitious–if it wants to extract as much grain and manpower as it can, short of provoking a famine or a rebellion, if it wants to create a literate, skilled, and healthy population, if it wants everyone to speak the same language or worship the same god– then it will have to become both far more knowledgeable and far more intrusive.

James C. Scott, Seeing like a State: how certain schemes to improve the human condition have failed (Yale University Press, 1998), p. 184.

Recycled from the Thought du Jour 2003 archive.

Seeing like a State is one of the best social science books I have ever read. The book is as enjoyable as it is informative. I look forward to reading also Professor Scott’s latest book.

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