In general, the art of government consists in taking as much money as possible from one party of the citizens to give to the other. Voltaire (1694–1778), Dictionnaire Philosophique, “Money” (1764).
If that is the art of government, how should we think of the government of art? The same way. KGrease Mungowitz, overheard in the men's room at the gym, Jan 1, 2005
Should there be a National Endowment for the Arts? Does public funding for “the arts” make sense from a policy perspective? The budget for NEA is paltry, just over $130 million, a pittance by nearly any standard. (This should terrify you: President Bush is apparently a fan...)
Well, let’s start at the beginning: What would the Framers of the U.S. Constitution have thought about a federal agency for the “promotion” of art? The Framers, remember, were among the most learned and cultured people in the New World. Many had read widely in the classics and English literature, most were fluent in French, the language of civilization. Many had visited Europe and seen collections of art, and seen architecture, that gave them an appreciation for human creativity.
Further, they knew that in Europe – where Goya was enjoying the patronage of Spain’s Charles III and where Luigi Boccherini was being named court composer in Berlin – government support for the arts was taken for granted. Finally, they were aware of the beginning of government patronage of the arts, under Amenemhet I (d. 1970 B.C.), king of Egypt, founder of the XII dynasty that initiated the Middle Kingdom. He centralized the government in a virtually feudal form (the first liberal!). The dynasty enabled the arts and science to flourish.
Well, the question isn’t completely hypothetical. On August 18, 1787, at the Constitutional Convention in Philadelphia, Charles Pinckney of South Carolina rose to urge that Congress be authorized to “establish seminaries for the promotion of literature and the arts and sciences.” His proposal was immediately voted down. In the words of one delegate, the only legitimate role for government in promoting culture and the arts was the “granting of patents,” meaning that we should protect the rights of artists and authors to make money from their creations.
Now, the framers treasured books and music, but they treasured limited government more. A federally approved artist was a repugnant a notion to them as a federally approved church or newspaper. That is why the Constitution makes no mention of subsidizing or formally supporting art and cultural organizations. It is why Americans have always been skeptical about the entangling of art and state. And it is why so many artists have rejected the notion that art depends for its vitality on some bureaucrat in Washington?
(playwright) Thornton Wilder: “There are no Miltons dying mute here today…[even in small towns] anyone who can play scales is rushed off to Vienna to play music.”
(painter) John Sloan: “It would be fine to have a ministry of arts in this country. Then we would know where the enemy is.”
(writer) William Faulkner, on being asked to visit the Kennedy White House: “Too far to go for supper.”
1951: In a poll of the American Symphony Orchestra League, 91% disapproved of federal subsidies of any kind. (Jeff Jacoby, with lots more stuff like this)
John Kennedy himself: “I do not believe federal funds should support symphony orchestras or opera companies, except when they are sent abroad in cultural exchange programs.”
But, in 1965, Congress created the NEA, a gamble overturning the wisdom of two centuries of separation between government power and artistic expression. The gamble has not paid off. Art in the past 30 years has not been improved; it has become more politicized. The support of the NEA has not inspired artists to reach new heights of expressiveness, truth or beauty. Instead, artists are encouraged to be shallow, understandable, shocking. Government-funded art is art that has sunk to noisome depths of coarseness and banality. Like other government handouts, NEA funding has fostered whining claims of entitlement – and hyperbolic forecasts of doom if the entitlement is reduced or cut off. (Again, see the good Jacoby, from whom the above paragraph is largely stolen)
The fact is that American art will not dry up and blow away if public funding is reduced, just as it was not inert before the NEA rescue in 1965. The mainstay of American art is not the NEA. It is the tens of thousands of private Americans who voluntarily give $15 billion a year to the arts, a tidal wave of generosity unparalleled anywhere. And it doesn’t end with philanthropy: add to that $15 billion the vast sums that American spend on theater subscriptions and concert music recordings, on ballet tickets and nights at the opera, on literary magazines and jazz festivals, and then add to that the millions of person-hours donated by volunteer ushers and ticket-takers and docents and fund-raisers. The total is staggering, and it makes the NEA seem about as relevant to America’s artistic splendor as a falling apple is to the law of gravity.
Four myths:
1. Funding the arts is cheap, and helps cities attract tourists.
The argument is sometimes made that cultural funding is good for cities and towns. If it is, the cities and towns should decide that they will pay for them. The basic conservative principle is the benefits and funding should be as closely matched as possible, provided that those receiving the benefits have the financial wherewithal to pay. If the benefits are going to downtown developers and restaurants, then these entities should be willing to pay for the subsidies. If the benefits are for the poor, we are better off giving the money, not the art, to those in poverty.
The argument that it doesn’t cost much is a foolish one. Most programs don’t cost much on their own. But when we add up all the costs, the budget (and the deficit) is enormous.
2. Public funding makes art available to everyone, because ticket prices are lower.
Nonsense. Suppose that it is true that without public funding many arts organizations might cease to exist. This would surely be sad. But the fact is that ticket prices now are calculated to maximize the revenues of the organization, as it is easy to show that lump-sum subsidies don’t change the revenue-maximizing, or profit-maximizing price. Public funding doesn’t affect ticket prices at all, but public funding does affect the viability of dance, opera, or theater companies and spaces for exhibitions. Many such shows exist just for the wealthy, and exist only because of public subsidy.
The only people that can go to the opera now are the wealthy. The subsidies offered out of the public purse are classic political transfers from the poor and the middle class to wealthy people. Middle class people don’t value the opera, and cannot attend anyway because the ticket prices are too high. (NOTE TO FRED HEINEMANN: Middle class is not $180k! More like $36k) The public access argument has it exactly backwards.
3. Public funds would not be replaced by private donations.
There are two possibilities: this argument is correct, or it is not. I do not believe it is correct. National Public Radio, when its funds were cut, found an outpouring of new donations. The fact that contributions to the arts have been declining over the past decade doesn’t mean much, because there has still been public funding available. If public funding were cut off, there would be a similar outpouring of new contributions and energy from volunteers from arts supporters.
But suppose the argument IS correct: that means that there are not enough people who care about the arts to want to pay the costs of artistic performances and shows. If this is true, it means that a legitimate threat to the existence of opera, theater, or dance companies, and to the viability of spaces for shows of visual arts, won’t bring new contributions. This has to make you want to wonder if arts funding is a business that the Federal government should be in!
Remember, taxes are funds taken by threat of force from some people, and then translated into a wide variety of services and transfers, many of which go right back to the people who paid the taxes. Wealthy people pay a lot of taxes, and they wield a lot of political power. The problem with the arts is that a small group of wealthy, educated people want the rest of the public to pay for their enjoyment. This is an enormous amount of money, per performance, which would be better spent spent on highways, mass transit, school children, the poor, the sick, or the aged. But none of these other programs are directly enjoyed by the wealthy patrons of the arts, so arts funding has a privileged status.
4. Great art is not popular art. We need public funding to encourage great art.
I am always confused by this argument. The Soviet Union had public funding for the arts, and (to be fair) their performance arts, of existing works, were nonpareil. Russian ballet and dance companies were among the best in the world, ticket prices were low, and there seemed to be a genuine success for public funding, especially in the larger cities.
But there were some problems with the picture. First, the costs were enormous. Because it was impossible (or at least dangerous) to question spending priorities, there was no problem as long as the totalitarian regime persisted. But with democracy has come a lot of questions about whether this is best use of funds.
Second, public funding in the former USSR did not create good new art. The new art in the Soviet Union was awful! It seems to me there are three kinds of art: Great art (which is great), popular art (some of which is great, and some of which is only good), and politically acceptable art (which is awful).
Now, I don’t know how you create great art. I know that popular art will take care of itself, because that is how you make money. I also know how you create awful, but politically acceptable, art: you have public funding whose allocation is supervised byjudges or critics.
Some say that those who can’t do, teach (I would never say that). But, from this perspective, there is an even lower rung on the ladder: what if you can’t teach? Well, you can become an art critic! If you want to say critics have more taste about what is good art I may agree with you. But critics are notorious in their inability to recognize great art. The main job of critics appears to be preventing great artists from being recognized in their own lifetimes. Juries of critics who enforce standards of taste, fad, or political correctness are actually the bane of great art. Soviet artists, or American artists, who consciously try to win public funding are selling out to the forces of political fadism. Artists should be terrified of enforced public taste, whether that taste belongs to the political left, the right, or the dreary center.
Great art of the late 20th century is the art that will make people laugh, cry, or get mad fifty or one hundred years from now. I am absolutely confident that I don’t know (and today’s juries don’t know) what that great art will be. Contemporaries of Van Gogh dismissed his work; for years after his death, Van Gogh was an oddity, a strange man who used colors and textures in a jarring way. If Van Gogh were alive today, would public funding save him? No, he would be imprisoned in a mental institution, taking lithium and doing finger paints, being patronized by his keepers: “Oooh, nice colors, Vincent? But don’t you think you ought to rest? Here, come watch Price is Right with the rest of the loonies…”
How are we to decide between the market, and the public, as a source of funding for great new art? It is true that Van Gogh sold practically nothing during his lifetime, and that the open market failed to recognize his genius. Those who support public funding for new artists want us to believe the open market is failing now, too. I agree: the open market may fail to recognize greatness, though some great artists do become rich in their own lifetimes. Popular art at least passes the market test: people pay for popular art because they want to, not because government forces them to.
Those who favor public funding want to argue that there are great artists whose works are lost, or never attempted, because the market failed them. I want to know to how many great works of art have been lost because artists have tried to pursue creatively inert, but politically correct, themes in the pursuit of public funding. Public funding, by its very nature, creates new art that is either lifeless and safe, or shocking, but superficial. Unfortunately, then, neither the market nor the public can ensure great art. As is so often the case, the market does really fail, but the situation is not yet so bad that government can’t make it worse.
Conclusion
Could the arts survive without government funding? What a question!! The government doesn’t fund the Van Cliburn competition or the National Book Awards or the MacArthur grants. The government doesn’t organize poetry competitions or produce festivals of plays or commission new string quartets. Public funding does serve a small, vocal group who like to perceive themseleves as rebels, as tellers of truth, whose main job is to confront the public with its own hypocrisy.
The NEA is an experiment that has failed. In 1965, Congress may have that that a federal agency could improve or enliven American art. Now it should know better. I am sure that it makes some in the arts community nuts that more people will read books because of Oprah Winfrey than anything the NEA has done in its 32 years. If the endowment faded away, no one would notice. America’s tens of millions of arts lovers, swept up in the richest, most democratic arts scene the human race has known, would hardly notice it was gone.
Friday, December 31, 2004
Monday, December 27, 2004
Sunday, December 26, 2004
UP AND DOWN YEAR: KGrease's NC Top 10
NC DEMOCRATIC PARTY--Democrats Need to Find aStandard-Bearer. The state Democratic party finds that the cupboard is bare. They have very few legitimate candidates. Mike Easley is not a Democrat, but rather a technocrat.(In spite of what loyal soldier Ed Turlington says about Easley in the N&O). Silent Mike doesn’t do personal appearances, and doesn’t campaign forother Dems above or below him on the ticket. Erskine Bowles does have some important challenges: there are lots of elections he hasn’t lost yet.
2. DOWN: NC POLITICS—IN-STATE. We Don’t Need a Governor,We Need a Beggar in Chief. Federal funds for storms.
3. UP: NC POLITICS—NATIONAL. Say what you want about “Johnny” Edwards; he is a player on the national stage in the Democratic like no one since….well,who? Jesse Helms was able to wield influence, but was not a player.
4. UP:
5. UP: The original Hurricanes, the ones that involve bad weather. NC missed the bruntof the storms, but this was one heck of a hurricane season. (Worst hurricane in NChistory: Hazel, Oct 15, 1954).
6. UP AND DOWN: As the number of troops from Army and Marinebases around North Carolina goes up and stays up, the effect on local businesses pushes the economy down.
7. UP AND DOWN: Video Poker. This isn’t that hard, folks. You either have to give up the betting thing, or recognize that you have to pay off the Highway Patrol, or the legislature, quite a bit more.
8. DOWN: Textile mill employment. One-third of the nation’s textile millemployment has disappeared since 2001. In
9. UP: Judge Howard Manning, Jr. I heard a story that God himself was seenwearing a Howard Manning mask. The wordwas that the angels sometimes humored God by letting him think he was aspowerful as a Superior Court Judge. Ofcourse, the real problem is that if Manning wants to pass laws, he might wantto run for a real office, like statesenate. There is plenty of evidence thatincreased spending does not improve education, but Judge Manning is going tohold everyone in contempt. Unfortunately, the legislature is showing its contempt for him, byignoring his imperious edicts. “Some ofyour high schools are about as sorry as I’ve ever seen,” said the good judge. That “sorry” may be because judges who haveno need to create consensus have taken over the education system. In state after state, the wealthy flee thepublic school system to avoid judge-instigated social engineering with kids asguinea pigs. Is it any surprise thatthose same wealthy people then turn around and vote down spending increases andcapital spending? Social engineering isa political loser, judge. But you are sure winning lots of admirers among the life-arranger set.
10. DOWN AND UP:
Bonus List: An Arresting Year....
Meg Scott Phipps--Who says women can't be politicians? She was so shamelessly corrupt, she could be an honorary man.
Chapel Hill Town Council--How 'bout those cameras at intersections? They put them in, they took them out, the worms play pinochle in your snout...Once again, liberals believe that traffic laws (like taxes) are for other people.
Michael Page, Chair of Durham School Board--Dude, you have to live in the district. It's like a rule, or something.
Keith Cook, Chair of Orange County School Board--Dude, you have to write your own speeches. It's like a rule, or something
Durham City Councilman John Best, Jr--It's the child support, stupid!
Happy New Year! I have been taking the heir to the Mungowitz fortune out for driving practice (he's 15 now). This driving thing...it's hard. So, watch out for a green minivan.
Friday, December 24, 2004
The Cadillac Song
My older son, bless him, likes classic rock. (No, I don't mean "Nirvana." I mean from the 1960's and 1970's.)
I was driving carpool down to RCHS, and we were listening to Led Zeppelin.
One kid says, "I think they played this song at a Renaissance festival." You know, the flutes and stuff. I hate everything.
Five minutes later, another kid says, "Listen! The Cadillac song!" I'm tempted to drive into a bridge abutment.
When Bob Seger let "Like a Rock" (once a terrific song, to me at least, about lost youth) become the Chevy jingle, I guess I could handle that. But now "Rock and Roll" is the Cadillac song? Think about the number of levels on which that is wrong. And then shoot me.
I was driving carpool down to RCHS, and we were listening to Led Zeppelin.
One kid says, "I think they played this song at a Renaissance festival." You know, the flutes and stuff. I hate everything.
Five minutes later, another kid says, "Listen! The Cadillac song!" I'm tempted to drive into a bridge abutment.
When Bob Seger let "Like a Rock" (once a terrific song, to me at least, about lost youth) become the Chevy jingle, I guess I could handle that. But now "Rock and Roll" is the Cadillac song? Think about the number of levels on which that is wrong. And then shoot me.
Coturnix Does Not Quail
My state-mate Coturnix does not quail* from the truth, at least as he sees it. He claims "conservatives are crazy and dangerous." All of them. I'm pretty sure he means, me, too.
As we say in the South, "Bless his heart." (Or, Bless his heart, again)
On the other hand, as a recent ex-Republican myself, there is some truth to the central claim, if not the NCSU birdman's bizarrely aggressive ad hominems. I just finished reading "What's the Matter With Kansas?", which I expected to hate. But Thomas Frank makes some uncomfortably accurate observations, stuff I had never thought of, but recognized immediately.
Ick. I hate it when hateful liberals are right.
I think I'll go read Ann Coulter. She is NEVER right. But apparently she shoots well. (Nothing like an anorexic blonde fascist fondling high muzzle velocity firearms to get KGrease's heart beating fast. Yummy.)
* Yes, that was a gallinaceous joke.
As we say in the South, "Bless his heart." (Or, Bless his heart, again)
On the other hand, as a recent ex-Republican myself, there is some truth to the central claim, if not the NCSU birdman's bizarrely aggressive ad hominems. I just finished reading "What's the Matter With Kansas?", which I expected to hate. But Thomas Frank makes some uncomfortably accurate observations, stuff I had never thought of, but recognized immediately.
Ick. I hate it when hateful liberals are right.
I think I'll go read Ann Coulter. She is NEVER right. But apparently she shoots well. (Nothing like an anorexic blonde fascist fondling high muzzle velocity firearms to get KGrease's heart beating fast. Yummy.)
* Yes, that was a gallinaceous joke.
Wednesday, December 22, 2004
Bigger Picture: Increasing Internet Penetration in India
Oh, golly.
Two crazy kids, a camera phone, and Ebay: recipe for arrest of a top of Indian official of the on-line auction company. Indian Ebay exec Avnish Bajaj got arrested when pictures of oral sex between teenagers got sold on Ebay.
Legal reaction: "Ultimately we have to see bigger picture. We want to increase Internet penetration. This will only happen if you allow service providers the freedom." (Pawan Duggal, Indian cyberlaw expert).
Um...I think pictures, internet penetration, and provision of service are exactly what got those kids in trouble in the first place, man.
Two crazy kids, a camera phone, and Ebay: recipe for arrest of a top of Indian official of the on-line auction company. Indian Ebay exec Avnish Bajaj got arrested when pictures of oral sex between teenagers got sold on Ebay.
Legal reaction: "Ultimately we have to see bigger picture. We want to increase Internet penetration. This will only happen if you allow service providers the freedom." (Pawan Duggal, Indian cyberlaw expert).
Um...I think pictures, internet penetration, and provision of service are exactly what got those kids in trouble in the first place, man.
Monday, December 20, 2004
Living Wage: Job Gentrification
The problem with “Living Wage” proposals is not that they are immoral. They are illogical! See for example, this, or this, which points to living wages that exceed $20/hour.
Government cannot mandate some prices in a market; it’s all or nothing.
Prices have two functions:
· they tell us how much things are worth (static)
· they give signals about the value of investment, effort, and entrepreneurship (dynamic).
The proposal of "living wage" zealots is this: governments, or corporation, would be forced to pay a “living wage,” based on a Living Income Standard, or LIS.
The problem is that economic forces are like hydraulic pressures: you can redirect them, but you can’t make them go away.
There are really two kinds of difficulties--
1. job gentrification
2. budget pressures
1. “Gentrification” happens in poor neighborhoods when an area is more attractive, because of location or amenities. Middle-class people move in, rents are driven up, and poor people have to move out. Demand effect.
Flip side, just as bad, on the supply side for marginal laborers. If you raise pay from $6.00 / hour to $14.00 / hour or more (why not abolish gravity, while we are at it?), poor people are going to be driven out. Right now, if a job opening is announced at a university for housekeepers, there are 10 or more applicants, and that is for a very low rate of pay.
But everyone who applies is economically marginal. History of firings, periods out of the work force, little relevant experience, that sort of thing. How about if the job paid $14 / hour? Hundreds of applicants, and many of them are NOT economically marginal. Over time, all of the economically marginal people, with problems with absenteeism, punctuality, health difficulties, will be squeezed out. “Living Wage” will not be enjoyed by those now working at minimum wage, but by those whose skills can command that wage in the marketplace.
So, if "gentrification" is so bad, for buildings, why is it okay for workers?
2. Budget pressures: schools, universities, local governments all want to provide better services that cost less. Pressures to contract out, substitute away from expensive labor. Problem with contracting out is that it substitutes a temp worker, with no benefits, for a full time worker with decent benefits. Much cheaper to the employer, and they can fire them anytime and sign a new contract.
If Things are so Bad, Why is Everyone Trying to Move Here?
North Carolina has experienced the largest population growth, largely as a result of immigration, legal and illegal. Since 1994, the state population increased 74 percent; Nevada, 60 percent; and Kansas, 54 percent.
Six of the 10 fastest-growing Hispanic populations in the United States are in North Carolina, including Hickory at No. 1. Charlotte is fourth, Rocky Mount sixth, Greenville seventh and the Triangle eighth. Those regions offer jobs in furniture factories, textile mills and farms that immigrants can step right into. ``I think it's just a very opportune place and word has gotten out,'' said Claudia Main, who helps run Hickory's Community Relations Council. Pouring a foundation or working a loom in the Triad is better than selling coffee beans for 15 cents a pound or working for a fruit company making a dime an hour somewhere in Latin America, said Rafael Ruano, who moved to High Point from Costa Rica four years ago. ``The growers live in poverty in those countries,'' Ruano said. ``The life expectancy is very low.''
Not true that we need to pay more because we have so many poor people. In fact, we pay so well that poor people come here from all over the world!
Government cannot mandate some prices in a market; it’s all or nothing.
Prices have two functions:
· they tell us how much things are worth (static)
· they give signals about the value of investment, effort, and entrepreneurship (dynamic).
The proposal of "living wage" zealots is this: governments, or corporation, would be forced to pay a “living wage,” based on a Living Income Standard, or LIS.
The problem is that economic forces are like hydraulic pressures: you can redirect them, but you can’t make them go away.
There are really two kinds of difficulties--
1. job gentrification
2. budget pressures
1. “Gentrification” happens in poor neighborhoods when an area is more attractive, because of location or amenities. Middle-class people move in, rents are driven up, and poor people have to move out. Demand effect.
Flip side, just as bad, on the supply side for marginal laborers. If you raise pay from $6.00 / hour to $14.00 / hour or more (why not abolish gravity, while we are at it?), poor people are going to be driven out. Right now, if a job opening is announced at a university for housekeepers, there are 10 or more applicants, and that is for a very low rate of pay.
But everyone who applies is economically marginal. History of firings, periods out of the work force, little relevant experience, that sort of thing. How about if the job paid $14 / hour? Hundreds of applicants, and many of them are NOT economically marginal. Over time, all of the economically marginal people, with problems with absenteeism, punctuality, health difficulties, will be squeezed out. “Living Wage” will not be enjoyed by those now working at minimum wage, but by those whose skills can command that wage in the marketplace.
So, if "gentrification" is so bad, for buildings, why is it okay for workers?
2. Budget pressures: schools, universities, local governments all want to provide better services that cost less. Pressures to contract out, substitute away from expensive labor. Problem with contracting out is that it substitutes a temp worker, with no benefits, for a full time worker with decent benefits. Much cheaper to the employer, and they can fire them anytime and sign a new contract.
If Things are so Bad, Why is Everyone Trying to Move Here?
North Carolina has experienced the largest population growth, largely as a result of immigration, legal and illegal. Since 1994, the state population increased 74 percent; Nevada, 60 percent; and Kansas, 54 percent.
Six of the 10 fastest-growing Hispanic populations in the United States are in North Carolina, including Hickory at No. 1. Charlotte is fourth, Rocky Mount sixth, Greenville seventh and the Triangle eighth. Those regions offer jobs in furniture factories, textile mills and farms that immigrants can step right into. ``I think it's just a very opportune place and word has gotten out,'' said Claudia Main, who helps run Hickory's Community Relations Council. Pouring a foundation or working a loom in the Triad is better than selling coffee beans for 15 cents a pound or working for a fruit company making a dime an hour somewhere in Latin America, said Rafael Ruano, who moved to High Point from Costa Rica four years ago. ``The growers live in poverty in those countries,'' Ruano said. ``The life expectancy is very low.''
Not true that we need to pay more because we have so many poor people. In fact, we pay so well that poor people come here from all over the world!
Friday, December 17, 2004
Ruminations on Political Science II
(continued from this)
For all the "teaching" activities I discussed yesterday, there are two aspects: the CONTENT of the knowledge being transferred, and the techniques or methods of transferral.
I want to make three particular claims, each a bit stronger and more stark than what I actually believe, for the sake of...well, for fun.
1. There is less agreement on the CONTENT of learning that constitutes mastery of political science than for any other social science discipline, and far less than for any science discipline. This lack of intellectual coherence is a great advantage of the discipline, in that it is ecumenical. But the unwillingness of most departments to confront artificial separations in what we think of as the CONTENT of political science works to the detriment of our teaching, particularly in the way that we teach graduate students (who must choose, and be catechized, in one or another schismatic denomination. Political Science is the BAPTISTS of academic disciplines). If you were to do a survey of political scientists, the disagreement over what is an "interesting question" would differ markedly. The thing that is most surprising to me is the very visceral reaction people have to questions that are NOT interesting. In describing a research program to my colleagues at Duke, describing a research program of a young person I thought was pretty impressive, the reaction of my Duke colleagues (a pretty open place!) is sometimes (I can quote it): "Yuck! That's awful." In other social sciences, it would be more likely, "I don't know much about that," or perhaps, "That's interesting; I wouldn't have thought of that." That yuck reaction is a problem: I would go so far as to claim that there is more interest in "interdisciplinary" work (uniting one branch of political science with an external discipline) than there is in crossing intradisciplinary membranes.
2. There is wide diversity in the method or technique of transferral, and this again is a potential strength. There are many ways that Political Science is taught, and there are many good ways to teach it. Furthermore, at Duke as I'm sure is true at many of your institutions, there is a tradition of commitment to teaching the in Political Science department. But I wonder whether we have substituted form for substance. Teaching, and taking, Political Science classes is fun. But what is that is being accomplished? Our subject is intrinsically more interesting than studying economics, or sociology, or psychology, yet the insights of learning those other approaches, because they are more coherent AS approaches, are more lasting. Are the intellectual rewards of learning what we call Political Science, in your undergraduate classrooms, ephemeral? Is our focus on technique, rather than content, simply described by MacBeth's "tale told by an idiot: full of sound and fury, signifying nothing?" At your universities, is Political Science a ghetto? Your best students are very good, sure. But are your worst students simply refugees from other departments, turned away by those departments because they insisted on learning and long study?
3. The chief schism in political science is between what we might call normative approaches and positivist/empirical approaches. The grand tradition of political science is its normative foundation: what is the nature of the good society? Have we lost sight of these great questions? And why is it that students of normative theory are allowed, and even by many faculty encouraged, to conduct their cultic study off in some windowless room, without reference to the real questions of relation of means to ends, and without study of the engineering principles formal theory and institutional theory could teach them? Why is it that formal theory and empirically oriented students peer through their kaleidescopes into political worlds that are, or that might be, without any interest in asking whether those worlds might be good? As an outsider, trained in another discipline, but now for 20 years a resident of Political Science, I find the magnitude and temper of the split between normative and positive or empirical approaches to be incomprehensible. Not only do normative theorists think formal theorists are wrong, they often think they are evil. Not only do formal theorists think normative theorists are useless, they think they are pre-modern cultists. We are not well served by schism. But from where might come a rejoining, a commitment to a new synthesis, bringing political science back to its roots as both a study of the good society and means of bringing it about?
For all the "teaching" activities I discussed yesterday, there are two aspects: the CONTENT of the knowledge being transferred, and the techniques or methods of transferral.
I want to make three particular claims, each a bit stronger and more stark than what I actually believe, for the sake of...well, for fun.
1. There is less agreement on the CONTENT of learning that constitutes mastery of political science than for any other social science discipline, and far less than for any science discipline. This lack of intellectual coherence is a great advantage of the discipline, in that it is ecumenical. But the unwillingness of most departments to confront artificial separations in what we think of as the CONTENT of political science works to the detriment of our teaching, particularly in the way that we teach graduate students (who must choose, and be catechized, in one or another schismatic denomination. Political Science is the BAPTISTS of academic disciplines). If you were to do a survey of political scientists, the disagreement over what is an "interesting question" would differ markedly. The thing that is most surprising to me is the very visceral reaction people have to questions that are NOT interesting. In describing a research program to my colleagues at Duke, describing a research program of a young person I thought was pretty impressive, the reaction of my Duke colleagues (a pretty open place!) is sometimes (I can quote it): "Yuck! That's awful." In other social sciences, it would be more likely, "I don't know much about that," or perhaps, "That's interesting; I wouldn't have thought of that." That yuck reaction is a problem: I would go so far as to claim that there is more interest in "interdisciplinary" work (uniting one branch of political science with an external discipline) than there is in crossing intradisciplinary membranes.
2. There is wide diversity in the method or technique of transferral, and this again is a potential strength. There are many ways that Political Science is taught, and there are many good ways to teach it. Furthermore, at Duke as I'm sure is true at many of your institutions, there is a tradition of commitment to teaching the in Political Science department. But I wonder whether we have substituted form for substance. Teaching, and taking, Political Science classes is fun. But what is that is being accomplished? Our subject is intrinsically more interesting than studying economics, or sociology, or psychology, yet the insights of learning those other approaches, because they are more coherent AS approaches, are more lasting. Are the intellectual rewards of learning what we call Political Science, in your undergraduate classrooms, ephemeral? Is our focus on technique, rather than content, simply described by MacBeth's "tale told by an idiot: full of sound and fury, signifying nothing?" At your universities, is Political Science a ghetto? Your best students are very good, sure. But are your worst students simply refugees from other departments, turned away by those departments because they insisted on learning and long study?
3. The chief schism in political science is between what we might call normative approaches and positivist/empirical approaches. The grand tradition of political science is its normative foundation: what is the nature of the good society? Have we lost sight of these great questions? And why is it that students of normative theory are allowed, and even by many faculty encouraged, to conduct their cultic study off in some windowless room, without reference to the real questions of relation of means to ends, and without study of the engineering principles formal theory and institutional theory could teach them? Why is it that formal theory and empirically oriented students peer through their kaleidescopes into political worlds that are, or that might be, without any interest in asking whether those worlds might be good? As an outsider, trained in another discipline, but now for 20 years a resident of Political Science, I find the magnitude and temper of the split between normative and positive or empirical approaches to be incomprehensible. Not only do normative theorists think formal theorists are wrong, they often think they are evil. Not only do formal theorists think normative theorists are useless, they think they are pre-modern cultists. We are not well served by schism. But from where might come a rejoining, a commitment to a new synthesis, bringing political science back to its roots as both a study of the good society and means of bringing it about?
Thursday, December 16, 2004
Ruminations on Political Science: Teaching, Learning, and Writing
What do professional political scientists do? We teach. (Sure, there's THAT aspect, darn that Woody Allen).
I tried to think broadly about the forms of teaching that we do. There are four kinds of teaching, very different from each other.
1. Teaching students, who may have little background
2. Training graduate students, who will themselves teach students
3. Teaching ourselves, through research activities create new knowledge about things that are true, or correct old conceptions about truth that turn out to be false. In this case, we are the student, and the world of politics is the teacher. But we are a particular kind of student, one conditioned by what we believe, or what we have been taught, is an "interesting question." Presumably, not all unknown things are equally worth learning, but how would we tell the difference?
4. Teaching our colleagues, and future generations, through publication of research that may influence all of the other aspects of teaching.
Notice the difference between #3 and #4: It trips up most young people, and makes them fail as professors. One way to fail is to study something until you understand it, but then drift to something else without writing it up. This happens all the time: a scholar teaches him/herself until some learning (type #3) has actually taken place, but the "write it and publish it" (type #4) never happens.
The other way to fail is less excruciating to watch, but more painful to read. Since we put so much emphasis on publishing, lots of young people start writing about a subject before they have learned much about it. Learning #3 MUST precede #4. But I often get papers to review for journals where it is clear that the author needs to go think about the subject for a few months, and learn the stuff himself.
About a month ago, I drew a death's head on referee report. Helpful? Constructive? No, but the paper was an insult. Who will teach the teachers?
I tried to think broadly about the forms of teaching that we do. There are four kinds of teaching, very different from each other.
1. Teaching students, who may have little background
2. Training graduate students, who will themselves teach students
3. Teaching ourselves, through research activities create new knowledge about things that are true, or correct old conceptions about truth that turn out to be false. In this case, we are the student, and the world of politics is the teacher. But we are a particular kind of student, one conditioned by what we believe, or what we have been taught, is an "interesting question." Presumably, not all unknown things are equally worth learning, but how would we tell the difference?
4. Teaching our colleagues, and future generations, through publication of research that may influence all of the other aspects of teaching.
Notice the difference between #3 and #4: It trips up most young people, and makes them fail as professors. One way to fail is to study something until you understand it, but then drift to something else without writing it up. This happens all the time: a scholar teaches him/herself until some learning (type #3) has actually taken place, but the "write it and publish it" (type #4) never happens.
The other way to fail is less excruciating to watch, but more painful to read. Since we put so much emphasis on publishing, lots of young people start writing about a subject before they have learned much about it. Learning #3 MUST precede #4. But I often get papers to review for journals where it is clear that the author needs to go think about the subject for a few months, and learn the stuff himself.
About a month ago, I drew a death's head on referee report. Helpful? Constructive? No, but the paper was an insult. Who will teach the teachers?
Wednesday, December 15, 2004
Regulation: Sacrifice of the Intellect
Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world...They wish to be free of a universe of whose order they do not approve.
(Ludwig von Mises, Epistemological Problems of Economics)
The idea of controlling citizens is as old as government. But the notion of “regulating” citizens, and markets, is comparatively recent. The definition of regulation is a set of one or more rules or standards that direct or restrict conduct, with some provisions for enforcing the standards by punishing violators. To be legitimate, regulators must stipulate some utopian benchmark, pinpointing a gap between the real world and the “optimal” activities of private groups. For the libertarian, regulation presents two sets of questions, raised by scholars as diverse as Friedman, Rothbard, Stigler, and von Mises
· First, even if this gap exists, can government close it? Or is regulation likely to make things worse? We would need a theory of “government success,” in addition to “market failure,” before regulation could be justified.
· Second, even if government could, in principle, improve the performance of the economy, should it be given the power to try?
A regulated market economy differs from socialism, where government owns the means of production. Metaphorically, supporters of regulation concede that private activity is the locomotive that moves the economy. But government regulators direct the train and keep it from overheating or breaking down. This raises the key question in understanding regulation: by what right can government use its coercive power to restrict the private activity of some citizens, for the benefit of “society”? To understand the argument regulation supporters make for this right, we need to examine the utopian point of reference, perfect competition.
Perfect Competition: The Nonexistent Benchmark
In “perfectly competitive” markets, prices accurately signal the relative scarcity of all valuable resources, including inputs such as labor and capital, and outputs such as consumer goods and services. Wherever price exceeds marginal cost (what it costs to produce the last unit) of production, resources flow frictionlessly into that industry, until the price is driven down, and all producers are earning zero profits at the margin. “Price equals production cost” is the hallmark of perfectly competitive markets, because it means all parties accept the pattern of transactions.
The perfect competition outcome is called “efficient,” because it implies zero waste. More technically, for the advocate of regulation, an efficient outcome is the idealized benchmark where there is no feasible reallocation of resources that could result in higher total output of goods and services. The comparison to perfect competition, and the associated concept of efficiency, is at the core of the rationale behind support for regulation. Inefficiency, or “market failure,” implies that regulation is needed, even when the ideal of efficiency is actually unattainable.
Market Failures
There are three main categories of market failure: (I) Information Asymmetry, (II) Natural Monopoly, and (III) Externalities.
I. Information Asymmetry: Citizens often don’t know much about products or services in advance. There are many examples of regulation in this setting. Licensing requirements, for example, ensure that airplane pilots can fly (and land!) planes. Likewise, drug regulations require that products are safe and effective before they can be marketed.
But where should draw the line? Why not regulate all activities where quality is unknown? Some restaurants are not very good, after all. Why not establish a “Federal Bureau of Indian Buffets,” and close down restaurants that serve bad vindaloo? Because the “problem” of information asymmetry is not really a market failure at all. Markets can handle this problem quite well. If you go to a restaurant, and gag on the vindaloo, you don’t go back. You tell your friends, or write a newspaper review. People stay away, and the restaurant closes.
Reputation and brand names are powerful, and general, spontaneous (market-generated) answers to information asymmetry. If you are traveling in another city, or even another country, and see a chain restaurant you recognize, you may eat there, because you know that the quality will be of a certain level: not great, but not terrible. Natives may not eat there, because they have local knowledge of even better restaurants, but brand names can solve the information problem fairly well for people who lack such knowledge.
II. Natural Monopoly Perfect competition means that all market participants are “price takers,” whose activities are so small that their impact on price is negligible. But what if some market participants are not price takers? The problem of “natural monopoly” occurs when an activity, such as the supply of electricity or sewer services, requires enormous up-front costs. The result is that only one producer can supply the “efficient” level of the good or service.
A common example of the up-front costs problem is electrical generation facilities, with the associated delivery infrastructure that includes wires, switches, and transformers. What prices should be charged by such enterprises? If they charge at marginal cost, or the cost of generating the electricity once the infrastructure is in place, they can’t pay for the infrastructure. But if they divide the cost over all the units of output, then price greatly exceeds marginal cost. Further, the cost per unit actually falls as production goes up, meaning that one large firm can produce at half the cost of two smaller firms with the same total capacity.
Local governments can either accept the higher costs of many inefficient firms competing, or suffer the higher costs of monopoly overpricing. The third way out is to regulate the monopoly, by mandating rates to be charged and the return that can be earned on investment.
But there have been arguments that regulation of utilities, though pervasive, is unnecessary and costly. If long-term contracts with private firms are bid competitively, the terms of the contract can easily include price and performance criteria. If the firm violates the contract, it forfeits the value of investments it has made in the long-term arrangement. The most important argument for this position is Demsetz, 1968, but this view has lately been given more credence by a number of states public utilities commissions.
III. Public Goods/Externalities The perfect competition model assumes that all consequences of consumption and production choices are internal, meaning they only affect those involved in the exchange. If there are other effects, for which no compensation is made, then the individual incentives may be distorted.
Suppose, for example, someone dumps raw toxic wastes into a river. This is an example of an externality, where one’s action affects others, but those affected have no say. The dumper considers only the small costs he incurs (just tip the barrels into the river). But he ignores the “social” costs of his actions (downstream poisoning and cancer), causing a market failure.
This is a good point to step back, and ask again why it is that government action is necessary. What, in the case of the toxic waste dumper, is the source of the “externality”? Is it really a failure of the market, or is it (as Coase 1960 would suggest) a failure to specify property rights and a system of legal recourse based on torts, class action suits, and compensation for damages?
In fact, the libertarian answer to most market failures is to specify property rights more clearly, and make it less costly for people to arrive at accurate prices on their own.
As Ludwig von Mises noted in Human Action:
It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in the system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.
Regulation often makes the problem of market failure worse, because regulated markets always, by design, transmit biased or noisy price signals. Robbed of the organizing principle of accurate prices directing resource allocation, some other kind of judgment (in this case, that of a bureaucrat or regulator) must be substituted for private investment. Regulated markets generally beget more regulation, but perform no better (and often worse) than the “failed” market process that regulation was designed to correct in the first place.
Real Markets, Real Regulation
Prices give signals about the value of resources, commodities, and activities. The unregulated market is the most efficient, and the most impartial, animating principle the world has ever known. It doesn’t discriminate, and it directs resources to their highest valued use. The problem with regulation as a response to market failures, even with the best of intentions, is that government rarely “gets prices right.”
Without the “best of intentions,” regulation may make even exacerbate the problem. As George Stigler points out,
…As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit…. The state has one basic resource which in pure principle is not shared with even the mightiest of its citizens: the power to coerce…. These powers provide the possibilities for the utilization of the state by an industry to increase its profitability.…The state—the machinery and power of the state—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. (Stigler, 1971, pp. 1-4).
So, if market failures having to do with industry structure, information asymmetry, or externalities are regulated, the “regulations” may be designed by precisely those industries ostensibly bound by the new rules. Regulation is setting the wolf to guard the henhouse.
In real markets, it may simply be impossible to regulate, or redirect, the forces that lead investors, producers, and consumers to act the way that they do. Even if one could imagine an alternative, ideal system, regulation is at least as likely to lead away from that goal as toward it. But the chimerical ideal of “efficiency” is what motivates much of what regulators do. If actual policy falls short (and it always will) of the idealized vision of the regulator, it is tempting to try to reform government agencies, to revise organization charts, to pass new regulations, and to create new agencies and scrap old ones. This temptation should be resisted.
References
Coase, Ronald H. “The Problem of Social Cost,” Journal of Law and Economics, (October 1960): 1-44.
Demsetz, Harold. (1968). “Why Regulate Utilities?” Journal of Law and Economics. 11: 55-65.
Niskanen, William. (1971). Bureaucracy and Representative Government. Chicago: Aldine-Atherton.
Rothbard, Murray N. (1971). Power and Market: Government and the Economy. Kansas City: Universal Press Syndicate.
Stigler, George. (1971). “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science. 2: 3-21.
von Mises, Ludwig. ([1933]1981). Epistemological Problems of Economics. New York: NYU Press.
von Mises, Ludwig. ([1944]1994). Bureaucracy. New York: Libertarian Press.
von Mises, Ludwig. ([1949]1997). Human Action. New York: Fox and Wilkes Press.
(Ludwig von Mises, Epistemological Problems of Economics)
The idea of controlling citizens is as old as government. But the notion of “regulating” citizens, and markets, is comparatively recent. The definition of regulation is a set of one or more rules or standards that direct or restrict conduct, with some provisions for enforcing the standards by punishing violators. To be legitimate, regulators must stipulate some utopian benchmark, pinpointing a gap between the real world and the “optimal” activities of private groups. For the libertarian, regulation presents two sets of questions, raised by scholars as diverse as Friedman, Rothbard, Stigler, and von Mises
· First, even if this gap exists, can government close it? Or is regulation likely to make things worse? We would need a theory of “government success,” in addition to “market failure,” before regulation could be justified.
· Second, even if government could, in principle, improve the performance of the economy, should it be given the power to try?
A regulated market economy differs from socialism, where government owns the means of production. Metaphorically, supporters of regulation concede that private activity is the locomotive that moves the economy. But government regulators direct the train and keep it from overheating or breaking down. This raises the key question in understanding regulation: by what right can government use its coercive power to restrict the private activity of some citizens, for the benefit of “society”? To understand the argument regulation supporters make for this right, we need to examine the utopian point of reference, perfect competition.
Perfect Competition: The Nonexistent Benchmark
In “perfectly competitive” markets, prices accurately signal the relative scarcity of all valuable resources, including inputs such as labor and capital, and outputs such as consumer goods and services. Wherever price exceeds marginal cost (what it costs to produce the last unit) of production, resources flow frictionlessly into that industry, until the price is driven down, and all producers are earning zero profits at the margin. “Price equals production cost” is the hallmark of perfectly competitive markets, because it means all parties accept the pattern of transactions.
The perfect competition outcome is called “efficient,” because it implies zero waste. More technically, for the advocate of regulation, an efficient outcome is the idealized benchmark where there is no feasible reallocation of resources that could result in higher total output of goods and services. The comparison to perfect competition, and the associated concept of efficiency, is at the core of the rationale behind support for regulation. Inefficiency, or “market failure,” implies that regulation is needed, even when the ideal of efficiency is actually unattainable.
Market Failures
There are three main categories of market failure: (I) Information Asymmetry, (II) Natural Monopoly, and (III) Externalities.
I. Information Asymmetry: Citizens often don’t know much about products or services in advance. There are many examples of regulation in this setting. Licensing requirements, for example, ensure that airplane pilots can fly (and land!) planes. Likewise, drug regulations require that products are safe and effective before they can be marketed.
But where should draw the line? Why not regulate all activities where quality is unknown? Some restaurants are not very good, after all. Why not establish a “Federal Bureau of Indian Buffets,” and close down restaurants that serve bad vindaloo? Because the “problem” of information asymmetry is not really a market failure at all. Markets can handle this problem quite well. If you go to a restaurant, and gag on the vindaloo, you don’t go back. You tell your friends, or write a newspaper review. People stay away, and the restaurant closes.
Reputation and brand names are powerful, and general, spontaneous (market-generated) answers to information asymmetry. If you are traveling in another city, or even another country, and see a chain restaurant you recognize, you may eat there, because you know that the quality will be of a certain level: not great, but not terrible. Natives may not eat there, because they have local knowledge of even better restaurants, but brand names can solve the information problem fairly well for people who lack such knowledge.
II. Natural Monopoly Perfect competition means that all market participants are “price takers,” whose activities are so small that their impact on price is negligible. But what if some market participants are not price takers? The problem of “natural monopoly” occurs when an activity, such as the supply of electricity or sewer services, requires enormous up-front costs. The result is that only one producer can supply the “efficient” level of the good or service.
A common example of the up-front costs problem is electrical generation facilities, with the associated delivery infrastructure that includes wires, switches, and transformers. What prices should be charged by such enterprises? If they charge at marginal cost, or the cost of generating the electricity once the infrastructure is in place, they can’t pay for the infrastructure. But if they divide the cost over all the units of output, then price greatly exceeds marginal cost. Further, the cost per unit actually falls as production goes up, meaning that one large firm can produce at half the cost of two smaller firms with the same total capacity.
Local governments can either accept the higher costs of many inefficient firms competing, or suffer the higher costs of monopoly overpricing. The third way out is to regulate the monopoly, by mandating rates to be charged and the return that can be earned on investment.
But there have been arguments that regulation of utilities, though pervasive, is unnecessary and costly. If long-term contracts with private firms are bid competitively, the terms of the contract can easily include price and performance criteria. If the firm violates the contract, it forfeits the value of investments it has made in the long-term arrangement. The most important argument for this position is Demsetz, 1968, but this view has lately been given more credence by a number of states public utilities commissions.
III. Public Goods/Externalities The perfect competition model assumes that all consequences of consumption and production choices are internal, meaning they only affect those involved in the exchange. If there are other effects, for which no compensation is made, then the individual incentives may be distorted.
Suppose, for example, someone dumps raw toxic wastes into a river. This is an example of an externality, where one’s action affects others, but those affected have no say. The dumper considers only the small costs he incurs (just tip the barrels into the river). But he ignores the “social” costs of his actions (downstream poisoning and cancer), causing a market failure.
This is a good point to step back, and ask again why it is that government action is necessary. What, in the case of the toxic waste dumper, is the source of the “externality”? Is it really a failure of the market, or is it (as Coase 1960 would suggest) a failure to specify property rights and a system of legal recourse based on torts, class action suits, and compensation for damages?
In fact, the libertarian answer to most market failures is to specify property rights more clearly, and make it less costly for people to arrive at accurate prices on their own.
As Ludwig von Mises noted in Human Action:
It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in the system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.
Regulation often makes the problem of market failure worse, because regulated markets always, by design, transmit biased or noisy price signals. Robbed of the organizing principle of accurate prices directing resource allocation, some other kind of judgment (in this case, that of a bureaucrat or regulator) must be substituted for private investment. Regulated markets generally beget more regulation, but perform no better (and often worse) than the “failed” market process that regulation was designed to correct in the first place.
Real Markets, Real Regulation
Prices give signals about the value of resources, commodities, and activities. The unregulated market is the most efficient, and the most impartial, animating principle the world has ever known. It doesn’t discriminate, and it directs resources to their highest valued use. The problem with regulation as a response to market failures, even with the best of intentions, is that government rarely “gets prices right.”
Without the “best of intentions,” regulation may make even exacerbate the problem. As George Stigler points out,
…As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit…. The state has one basic resource which in pure principle is not shared with even the mightiest of its citizens: the power to coerce…. These powers provide the possibilities for the utilization of the state by an industry to increase its profitability.…The state—the machinery and power of the state—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. (Stigler, 1971, pp. 1-4).
So, if market failures having to do with industry structure, information asymmetry, or externalities are regulated, the “regulations” may be designed by precisely those industries ostensibly bound by the new rules. Regulation is setting the wolf to guard the henhouse.
In real markets, it may simply be impossible to regulate, or redirect, the forces that lead investors, producers, and consumers to act the way that they do. Even if one could imagine an alternative, ideal system, regulation is at least as likely to lead away from that goal as toward it. But the chimerical ideal of “efficiency” is what motivates much of what regulators do. If actual policy falls short (and it always will) of the idealized vision of the regulator, it is tempting to try to reform government agencies, to revise organization charts, to pass new regulations, and to create new agencies and scrap old ones. This temptation should be resisted.
References
Coase, Ronald H. “The Problem of Social Cost,” Journal of Law and Economics, (October 1960): 1-44.
Demsetz, Harold. (1968). “Why Regulate Utilities?” Journal of Law and Economics. 11: 55-65.
Niskanen, William. (1971). Bureaucracy and Representative Government. Chicago: Aldine-Atherton.
Rothbard, Murray N. (1971). Power and Market: Government and the Economy. Kansas City: Universal Press Syndicate.
Stigler, George. (1971). “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science. 2: 3-21.
von Mises, Ludwig. ([1933]1981). Epistemological Problems of Economics. New York: NYU Press.
von Mises, Ludwig. ([1944]1994). Bureaucracy. New York: Libertarian Press.
von Mises, Ludwig. ([1949]1997). Human Action. New York: Fox and Wilkes Press.
Friday, December 10, 2004
Human Rights Day
Shujaat, on Human Rights Day.
He has a point. Regardless of U.S. intentions, the view reflected in Shujaat's cartoon eye is one that is widely held. The U.S. is not in a position to lecture other nations about human rights violations.
He has a point. Regardless of U.S. intentions, the view reflected in Shujaat's cartoon eye is one that is widely held. The U.S. is not in a position to lecture other nations about human rights violations.
Thursday, December 09, 2004
"They Wreck Their Ship in Harbour..."
There is a tendency for citizens of each age to think their problems are unique, and more difficult than in times past. Still, future generations may well look back at fin de millennium America, and be glad they were born later.
There is a parallel tendency for people to think their problems are not of their own making. This blaming others, or fate, or greed, is entirely misplaced. Other people are always unpredictable, fate is inscrutably unbiased, and greed is human nature. But most problems are caused by problem-plagued people themselves. If things are going pretty well, people will find a way to complain. The problem is the idea of "democracy."
Consider this snippet, from Polybius:
The Athenian [democracy] is always in the position of a ship without a commander. In such a ship, if fear of the enemy, or the occurence of a storm induce the crew to be of one mind and to obey the helmsman, everything goes well; but if they recover from this fear, and begin to treat their officers with contempt, and to quarrel with each other because they are no longer all of one mind,--one party wishing to continue the voyage, and the other urging the steersman to bring the ship to anchor; some letting out the sheets, and others hauling them in, and ordering the sails to be furled,--their discord and quarrels make a sorry show to lookers on; and the position of affairs is full of risk to those on board engaged on the same voyage; and the result has often been that, after escaping the dangers of the widest seas, and the most violent storms, they wreck their ship in harbour and close to shore.
Polybius, HISTORIES, Book VI, Chapter 44, ca. 130 B.C.
(Translated by Evelyn S. Shuckburgh, 1889)
There is a parallel tendency for people to think their problems are not of their own making. This blaming others, or fate, or greed, is entirely misplaced. Other people are always unpredictable, fate is inscrutably unbiased, and greed is human nature. But most problems are caused by problem-plagued people themselves. If things are going pretty well, people will find a way to complain. The problem is the idea of "democracy."
Consider this snippet, from Polybius:
The Athenian [democracy] is always in the position of a ship without a commander. In such a ship, if fear of the enemy, or the occurence of a storm induce the crew to be of one mind and to obey the helmsman, everything goes well; but if they recover from this fear, and begin to treat their officers with contempt, and to quarrel with each other because they are no longer all of one mind,--one party wishing to continue the voyage, and the other urging the steersman to bring the ship to anchor; some letting out the sheets, and others hauling them in, and ordering the sails to be furled,--their discord and quarrels make a sorry show to lookers on; and the position of affairs is full of risk to those on board engaged on the same voyage; and the result has often been that, after escaping the dangers of the widest seas, and the most violent storms, they wreck their ship in harbour and close to shore.
Polybius, HISTORIES, Book VI, Chapter 44, ca. 130 B.C.
(Translated by Evelyn S. Shuckburgh, 1889)
Wednesday, December 08, 2004
Pangloss was Right: Reform is Always Bad
Remember Dr. Pangloss? “‘Tis demonstrated that things cannot be otherwise; for, since everything is made for an end, everything is necessarily for the best end…. Those who have asserted that all is well talk nonsense; they ought to have said that all is for the best.” (Candide, p. 4).
Many economists have argued persuasively that the tax system that imposes the least deadweight loss is…whatever tax system we happen to have! The reason is that economic agents adjust their activities, and rewrite contracts, to optimize given the tax system that is currently in place. Changing the tax system, in any way, imposes large costs, costs that will almost certainly swamp the positive long term effects of “reform,” no matter how well intentioned.
This argument is equally persuasive for the reform of congressional institutions, only more so. The potential costs of reform are so large that they may not be measurable.
Consider three specific instances:
Principle 1: “An old tax is a good tax.”[1] Old policies are understood, their deadweight losses capitalized. Sure, these are losses, but they don’t matter at the margin once contracts account for them. Interest groups, citizens, and consumers develop expectations about the way that the policy process works, and gauge tax rates and regulatory costs in making investment decisions. Even if reforms “improve” welfare, in a static sense of approaching optimality, constant fiddling makes expectations diffuse. In short, predictable nonoptimality can easily be better for a society than widely varying, unpredictable reform efforts chasing optimal institutional arrangements.
Regarding the “good tax is an old tax” phenomenon, Buchanan points out:
In the most general terms, the appropriate analogue is the physical law of inertia. It is easier to continue a flow once started than it is to start it in the first place. All that is necessary for this point to be accepted as relevant for an individual decision calculus is some acknowledgement of a temporal sequence of choices.[2]
So the burden of the reformer has to be more than just static improvement. Reform has to be a permanent improvement, with no further action required. Otherwise, it is far better to maintain the current policies. Since reformers rarely have this kind of foresight, and think only of short term improvements, most reforms end up being fantastically expensive.
Principle 2: The “transitional gains trap.”[3] The government can’t even give anything away. Subsidies for an asset result in that asset being overvalued, compared to its market price. Costs are bid up, and owners end up making a normal return, just as they did before the “reform.” Only owners at the time of the policy change get any benefits, and even that gain is realized only if the policy is unexpected. All future owners get nothing.
But if the policy is ever changed back, all owners (those who gained, and those who didn’t) lose large amounts of wealth. Consequently, reforms designed to help a few people rarely accomplish that goal, and end up costing everyone. Ultimately, the costs last forever, because (by principle 1, above), it is cheaper to continue the bad policy than switch to the good one. It would be better still never to implement the reform in the first place, of course, but tell that to earnest young Candide!
Principle 3: “Cost illusion.” Costs of reform are analogous to “renters’ illusion,” the situation where renters underestimate the effect of real estate taxes because renters (unlike homeowners) don’t pay taxes directly. There is some debate about whether renters’ illusion is real[4], but “cost illusion” is rampant among the reformist followers of Candide. The costs of reform are generally imposed on specific sectors; since the reformers don’t have to pay anything, the reform is “free.”
For example, we are told that campaign finance reform requires that television stations give political candidates “free” air time. Well, it really is free to the reformers, but air time is expensive. Prohibiting stations from charges hardly makes it free; reform would simply shift the cost of campaign finance reform onto the stockholders of communication companies. Once thought of that way, the “reform” makes no sense. Why should the stockholders of the media corporations bear all the costs of political reform? What of the alternative, using public funds to pay for the “free” air time? That would be too expensive!
The flaw in this reasoning is obvious. If free air time is too expensive for everyone to pay for, it is certainly too expensive to extort from television stations as a condition of their license. The costs are the same either way.
And that is the rub: reforms are generally too expensive to pay for directly, so we disguise the costs of reform by focusing the expense on a small group, or by pretending the costs don’t exist. Reform, shmeform: Pangloss was right. In equilibrium, things are already for the best.
[1] James Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, Chapel Hill: UNC Press, 1967, p. 58.
[2] Buchanan, ibid., p. 60.
[3] Gordon Tullock, “The Transitional Gains Trap,” Bell Journal of Economics, (1975): 671-678.
[4] For a review, see Wallace Oates, “On the Nature and Measurement of Fiscal Illusion: A Survey.” In Geoffrey Brennan (ed.), Taxation and Fiscal Federalism: Essays in Honor of Russell Matthews. Sydney: Australian National University Press.
Many economists have argued persuasively that the tax system that imposes the least deadweight loss is…whatever tax system we happen to have! The reason is that economic agents adjust their activities, and rewrite contracts, to optimize given the tax system that is currently in place. Changing the tax system, in any way, imposes large costs, costs that will almost certainly swamp the positive long term effects of “reform,” no matter how well intentioned.
This argument is equally persuasive for the reform of congressional institutions, only more so. The potential costs of reform are so large that they may not be measurable.
Consider three specific instances:
Principle 1: “An old tax is a good tax.”[1] Old policies are understood, their deadweight losses capitalized. Sure, these are losses, but they don’t matter at the margin once contracts account for them. Interest groups, citizens, and consumers develop expectations about the way that the policy process works, and gauge tax rates and regulatory costs in making investment decisions. Even if reforms “improve” welfare, in a static sense of approaching optimality, constant fiddling makes expectations diffuse. In short, predictable nonoptimality can easily be better for a society than widely varying, unpredictable reform efforts chasing optimal institutional arrangements.
Regarding the “good tax is an old tax” phenomenon, Buchanan points out:
In the most general terms, the appropriate analogue is the physical law of inertia. It is easier to continue a flow once started than it is to start it in the first place. All that is necessary for this point to be accepted as relevant for an individual decision calculus is some acknowledgement of a temporal sequence of choices.[2]
So the burden of the reformer has to be more than just static improvement. Reform has to be a permanent improvement, with no further action required. Otherwise, it is far better to maintain the current policies. Since reformers rarely have this kind of foresight, and think only of short term improvements, most reforms end up being fantastically expensive.
Principle 2: The “transitional gains trap.”[3] The government can’t even give anything away. Subsidies for an asset result in that asset being overvalued, compared to its market price. Costs are bid up, and owners end up making a normal return, just as they did before the “reform.” Only owners at the time of the policy change get any benefits, and even that gain is realized only if the policy is unexpected. All future owners get nothing.
But if the policy is ever changed back, all owners (those who gained, and those who didn’t) lose large amounts of wealth. Consequently, reforms designed to help a few people rarely accomplish that goal, and end up costing everyone. Ultimately, the costs last forever, because (by principle 1, above), it is cheaper to continue the bad policy than switch to the good one. It would be better still never to implement the reform in the first place, of course, but tell that to earnest young Candide!
Principle 3: “Cost illusion.” Costs of reform are analogous to “renters’ illusion,” the situation where renters underestimate the effect of real estate taxes because renters (unlike homeowners) don’t pay taxes directly. There is some debate about whether renters’ illusion is real[4], but “cost illusion” is rampant among the reformist followers of Candide. The costs of reform are generally imposed on specific sectors; since the reformers don’t have to pay anything, the reform is “free.”
For example, we are told that campaign finance reform requires that television stations give political candidates “free” air time. Well, it really is free to the reformers, but air time is expensive. Prohibiting stations from charges hardly makes it free; reform would simply shift the cost of campaign finance reform onto the stockholders of communication companies. Once thought of that way, the “reform” makes no sense. Why should the stockholders of the media corporations bear all the costs of political reform? What of the alternative, using public funds to pay for the “free” air time? That would be too expensive!
The flaw in this reasoning is obvious. If free air time is too expensive for everyone to pay for, it is certainly too expensive to extort from television stations as a condition of their license. The costs are the same either way.
And that is the rub: reforms are generally too expensive to pay for directly, so we disguise the costs of reform by focusing the expense on a small group, or by pretending the costs don’t exist. Reform, shmeform: Pangloss was right. In equilibrium, things are already for the best.
[1] James Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, Chapel Hill: UNC Press, 1967, p. 58.
[2] Buchanan, ibid., p. 60.
[3] Gordon Tullock, “The Transitional Gains Trap,” Bell Journal of Economics, (1975): 671-678.
[4] For a review, see Wallace Oates, “On the Nature and Measurement of Fiscal Illusion: A Survey.” In Geoffrey Brennan (ed.), Taxation and Fiscal Federalism: Essays in Honor of Russell Matthews. Sydney: Australian National University Press.
Sunday, December 05, 2004
Jerry Lewis is a Comic Genius
Well, in France.
And now I see why: Inspector Clouseau actually runs their security system.
(Nod to Cap'n Ed)
And now I see why: Inspector Clouseau actually runs their security system.
(Nod to Cap'n Ed)
Democracy is Overrated, IV
It [is impossible] to separate the democratic idea from the theory that there is a mystical merit, an esoteric and ineradicable rectitude, in the man at the bottom of the scale—that inferiority, by some strange magic, becomes superiority—nay, the superiority of superiorities. What baffles statesmen is to be solved by the people, instantly and by a sort of seraphic intuition. This notion . . . originated in the poetic fancy of gentlemen on the upper levels—sentimentalists who, observing to their distress that the ass was overladen, proposed to reform transportation by putting him in the cart. (H.L. Mencken, from Notes on Democracy, 1926)
What people mean by “democracy” is some combination of good government, protection of individual rights, extremely broad political participation, and widely shared economic prosperity. One might as well throw in an ideal body mass index and a cure for influenza. It’s all good, but meaningless. Democracy has no useful definition. The reason we say we like it is that we refuse to think about what it means.
There is a definition many people pretend to believe, unless they are pressed. It is much narrower, and goes like this: If a group is constituted to decide as one, then any numerical majority of that group can make decisions. These decisions can be binding on all (majority rules the totality), or binding just on some class or group specified in decision itself (majority rules the minority). While I have already said that all definitions are not really useful, this version seems to be the one that many people hold.
The problem with the narrower definition I stated is that no one could really believe it, at least not in isolation from lots of other assumptions. One is left to wonder whether democracy, in the sense of rule by the people, is a conceit or a fraud. As a conceit, it may be harmless enough. It may even be useful, because it celebrates the wisdom and good will of the common person. This sort of mythology has a calming, leveling effect on public discourse.
If a fraud, however, then we are in darker and more forbidding terrain. The pretense that we found rectitude in the multitude is dangerous. The public invocation of the public wisdom simply holds citizens down whilst we steal their purses, or send their children off to war.
There are two linked ideas about democracy, and it is important to keep them separate. The first is the existence of a good, of a right (best) thing for the society to do. This is a question that has both normative and positive elements. It may seem strange to question the existence of “the good” in politics, but in fact it is simply not obvious that a society can discover transcendent principles of the good through voting.
The second aspect of the democratic idea is the problem of choosing rules or institutions most likely to lead to the discovery of the good (assuming it exists). There are two very different approaches to the problem. The positive, ends-based approach emphasizes the properties of the voting or preference revelation techniques as if they were estimators. One can then apply quasi-statistical techniques, much as if an estimator were being subjected to Monte Carlo testing. That is, given a configuration of preferences in which some “good” alternative is embedded by construction, what are the relative frequencies with which different techniques discover it?
The other approach, normative and process-based, focuses on the fairness or legitimacy of rules themselves, as means. There is an obvious assumption in this approach, one that has led two generations of public choice scholars (see, for example, Riker, 1982, Liberalism Against Populism) to question it, but it persists nonetheless. That assumption is that “fair” processes necessarily lead to “good” outcomes.
Republican elections in the nineteenth century were seen as a means of exerting control over elected officials, and little more. We have to balance this against the expansive modern faith in, and practice of, democratic governance. The rules, procedures, and the basic “machinery” of democratic choice have not kept up with the faith people seem to have in the wisdom of the majority. To some extent, this is the fault of officials in the states, who have failed to give enough thought to problems involved in implementing new paperless voting technologies. (Sure, some of these folks are crackpots, and Keith Olbermann is a nutjob, but Caesar's wife has to be above reproach) (More accurately, Plutarch has Caesar say, "I wished my wife to be not so much as suspected.")
But the other problem, at least as important, is that the academic establishment in the U.S. has done a poor job making students understand the limitations and dangers of unlimited democratic choice. For both reasons, the mismatch between what we demand of democratic institutions and what they can reasonably deliver endangers the stability of our system of government.
While this danger may be most significant in the U.S., there are also dangers when we foster the secular trend toward reliance on “democracy” as a means of reconciling disagreement in other nations. What social choice theory teaches us is that we cannot expect institutions to produce consensus in the face of disagreement, unless (a) certain arguments or positions are outlawed, or (b) choice is left up to a single individual, or dictator.
People seem to believe in the value of consensus, but they do not appear believe in either domain restrictions or dictatorship. Policy makers must face the fact that the failure of voting institutions to produce consensus is really two separate problems:
- Our technology of democracy is too old, and prone to abuse or at least distrust. We must bring voting technology into the 21st century, because we accept much less than is possible.
- Our ideology is utopian science fiction. So, we must also take voting ideology back to the 19th century, because we have come to expect much more than is possible.
Saturday, December 04, 2004
Treebeard
I get emails asking why I am so inconsistent in my political views.
Well...at the risk of sounding like John Kerry, I haven't been inconsistent. It is just that I don't agree much with anybody. (Okay, John Kerry was different. He was trying to AGREE with anyone. Any idiot can do that, and most do).
Here is the problem, as I see it, boiled down to two propositions:
1. There are no self-evident truths.
2. Even #1 is not self-evident. You don't understand it until you think about it a long time.
Since people in politics all seem to deny #1 constantly, I try to critique all of them.
...Or, you could say it like Treebeard did: "I am on nobody's side for nobody is on my side."
Well...at the risk of sounding like John Kerry, I haven't been inconsistent. It is just that I don't agree much with anybody. (Okay, John Kerry was different. He was trying to AGREE with anyone. Any idiot can do that, and most do).
Here is the problem, as I see it, boiled down to two propositions:
1. There are no self-evident truths.
2. Even #1 is not self-evident. You don't understand it until you think about it a long time.
Since people in politics all seem to deny #1 constantly, I try to critique all of them.
...Or, you could say it like Treebeard did: "I am on nobody's side for nobody is on my side."
Budget Deficits II: You Can't Blame Dogs for Eating Out of the Garbage
"Why does Camelot lie in ruins? Intellectual error of monumental proportion has been made, and not exclusively by the politicians. Error also lies squarely with the economists. The ‘academic scribbler’ who must bear substantial responsibility is Lord Keynes ...” Buchanan, Wagner, and Burton, 1978.
(Continuing yesterday's rant on deficits...)
Government deficits are not (usually) earthquakes or floods, the natural consequence of random or deterministic process. Instead, deficits are the aggregate consequence of the self-interested individual actions of hundreds of elected and appointed officials, the sine qua non of the public choice approach. A more traditional view of the “public interest” in political science, of course, imagines that government officials work to advance the public good, or at a minimum their own vision of that good. Keech (1995) describes the “public choice” alternative:
… [The] democratic process is not so benign. In that view, politicians are opportunistic, and voters are naïve. Incumbents manipulate their performance to appear misleadingly good at election time, and both challengers and incumbents make unrealistic and insincere promises. Voters are myopically oriented to the present, which makes them unprepared to hold incumbents accountable for their performance over entire electoral periods, or to relate electoral choices to future well-being in a meaningful way. Economic performance deteriorates. Politicians exploiting popular discontent propose superficial reforms that fail to solve the problems, such as the Gramm-Rudman-Hollings deficit-reduction acts of 1985 and 1987. (p. 3).
The public choice model of government decision-making predicts that government surpluses have the life expectancy of an adult mayfly. There have been several published collections that have made this point clearly, including Buchanan and Wagner (1977), Buchanan, Rowley, and Tollison (1987), and Rowley, Shughart, and Tollison (2002). Of course, Keynes himself accepted, and in fact was one of the foremost advocates of, the idea that ideas matter, in his over-quoted passage on how “the world is ruled by little else.” But it is worth quoting the entire passage, to show what argument (interest groups and self-interest) Keynes thought he was refuting.
But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. (Keynes, General Theory)
One key to understanding the public choice approach, particularly in its application to the study of debt and deficits, is this: Keynes is posing an absurdly false dichotomy. Ideas are not opposed to “the interests,” but are more often tools, even rhetorical weapons, used in service of those interests. That is not to say that ideas don’t matter, but rather to insist (contra Keynes) that interests do.
Let me link this back to deficits and the debt, and the contribution of the public choice school of political economy. It is easy to think that debt is not really a problem. For “functional finance” scholars (see, e.g., Lerner, 1943), deficits are simply the harmless means of accomplishing good ends. After all, we owe the debt to ourselves, and rational income earners will always save now to meet future tax obligations. As Abba Lerner famously put it, "national debt is not a burden on posterity because if posterity pays the debt it will be paying it to the same posterity that will be alive at the time when the payment is made." (Lerner, 1944: p.303).
What this idea implies, as Buchanan (1976) pointed out in response to Barro (1974), is the strong claim that the issue of new public debt is simply a form of new taxation. Barro had argued that the society could spend out of tax revenue now, or spend out of future tax revenues by borrowing. Buchanan notes that this is precisely the issue raised by “Ricardian Equivalence,” if taxpayers perceive future taxes as claims on the next generation, with the added understanding that the next generation is made up of our children. If we look “forward” in this way, it can be argued that debt will have no impact on total spending, because the spenders in a democracy recognize that they are also the payers, and are no more likely to authorize increased spending out of debt “revenue” than they are out of tax revenue.
The point is that the extreme form of Ricardian Equivalence, combined with the Keynesian policy prescription for deficit spending as a positive good, constitute an important “idea.” What this idea has enabled, however, is the empowerment of a set of interests whose political goals have little to do with the abstract utopian economysticism of the Keynesian macro-control scholars. In an important series of papers (Buchanan, 1958; Buchanan, 1976, and Brennan and Buchanan, 1980) James Buchanan took on the problem of “future generations,” and at a minimum showed that facile “equivalence” claims simply do not follow from the arguments given for them. In fact, he is able to show that some of the claims Barro made for equivalence imply absurd predictions about the world. On the other hand, the absurdities Buchanan points out highlight the debt and deficit experience of the last 30 years.
One implication of his analysis would be that the social security system as it has operated should not have modified the rate of private saving in the economy…If politicians are ultimately responsive to the desires of their constituents, we may infer something about constituents’ evaluations by observing the behavior of politicians. The 40-year history of social security financing yields ample evidence that politicians are extremely reluctant to adopt anything which smacks of full funding for the system. Under the Barro hypothesis, there should be roughly indifferent public reaction to a fully funded and to an unfunded pension system.
If we shift to the more general model, governments should be roughly indifferent as between financing current outlays from taxation and from genuine debt issue. There should be no effect of debt-financed deficits on aggregate spending... [The] behavior of legislators seems to offer indirect evidence against the capitalization hypothesis. Can anyone in the post-Keynesian world of 1975 seriously question the proclivity of politicians to expand the public debt in preference to tax increases? (Buchanan, 1976, p. 341).
From the vantage point of 2004, rather than 1975, it is easy to understand Buchanan’s skepticism. The level of under-funding of Social Security obligations has now reached the point where the discussion no longer centers on whether the system will default. What analysts wonder is when, and by how much, benefits will have to be slashed, or perhaps even eliminated. In this context, it is difficult indeed to sustain the claim that the constraint imposed by Ricardian equivalence describes political choices of either citizens or elected officials.
An interesting perspective, which connects the “public interest” and “public choice” view of budgeteering, is that of Higgs (1987), which argues that decision-making is motivated (or supported) by an ideology we might call “Keynesianism” or fiscal activism. Higgs describes “ideology” this way:
By ideology I shall mean a somewhat coherent, rather comprehensive belief system about social relations.... Ideology has four distinct aspects: cognitive, affective, programmatic, and solidary. It structures a person's perceptions and predetermines his understandings of the social world, expressing these cognitions in characteristic symbols; it tells him whether what he "sees" is good or bad or morally neutral; and it propels him to act in accordance with his cognitions and evaluations as a committed member of a political group in pursuit of definite social objectives. (Higgs 1987, 37)
Higgs incorporates Keynes’ claim that ideas matter, but there is a twist. The growth of government and the increase in the acceptable size of deficits, accumulated in the debt, are linked to a fundamental change in the conception of government. People changed their view of the obligations of citizens, and of the role of government in their lives. So, part of the reason that the size and scope of government has increased is simple interest group politics: every program creates an interest that depends on the program for its survival. But programs are also protected by the idea, now widely held among citizens, that it is right and proper for government to regulate and subsidize the everyday activities of citizens.
Charles Rowley (Rowley, 1987a; 1987b) independently develops a more specific, but related, set of analytic themes about the macroeconomy. He approaches Keynes and Keynesianism in a way that should receive more attention from macroeconomic scholars, because he links the ideas of what we now think of as Keynesianism to the “public choice” arguments that require attention to interest and political consequence. And there we have the reason that debt and taxes are quite radically different: even if one concedes the Barrovian logic of economic equivalence, the process is driven by political interest, in which debt is nearly always preferable to but they emphasize the political sense in which debt and taxes are radically different.
When one tries to draw together the independent strands of thought of Buchanan, Higgs, and Rowley on deficits, it is hard not to be reminded of von Mises’ famous observation about economic theory and its use in making policy prescriptions.
Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world...They wish to be free of a universe of whose order they do not approve. (Mises, Chapter 4, Section 6, Epistemological Problems of Economics).
To most politicians, of any of the main partisan affiliations, it now seems established that deficits and large accumulations of debt are benign, or at worst only pose a danger far off in a distant future. The problem is that these political “leaders” may be sending a message that the electorate would take issue with, if it were presented as a package rather than piecemeal. The problem is not just that voters are too passive and disorganized to respond. The real problem is that voters want is perfectly sensible, but impossible to deliver because it is not feasible. Voters want three things: (a) lower taxes, (b) increased spending on “needed” programs, and (c) lower deficits.
Of course, I want these things, too. We just can’t have them, at least not all the time. And it now seems clear that the salience, or marginal utility (depending on whether you are a political scientist or an economist) of these three is not equal. Every time a politician offers lower taxes and increased spending, voters act they just got a prom date with the prettiest cheerleader, or that handsome striker, or maybe both. Voters actually want lower deficits, but only at the cost of raising someone else’s taxes, or cutting someone else’s needed programs.
Given what we now know, or think we know, about the problem of fragility and contagion in the remarkably interconnected and interdependent financial systems of the world, it is clear that voters are making a mistake, putting deficits last, or allowing political leaders to do so. Putting aside the (quite real) ethical problems of financing current consumption on the pocketbooks of future generations of taxpayers, one can make a strong argument that voters are being misled, or at least badly led. One cannot blame our political leaders for cravenly exploiting the political advantages of deficits, any more than one can blame dogs for eating out of uncovered garbage cans. It's what they do.
Here's the thing: my liberal friends often make two complaints....(1) We should use government to do pretty much everything, because it is better, more rational, and more responsive to the needs of the people. (2) We hate George Bush, because he pursues political advantage ruthlessly. Why don't liberals see that investing huge powers in government and trusting government to do the right thing is EXACTLY what causes George and his policies to be such a dangerous force in our lives.
"For they have sown the wind, and they shall reap the whirlwind.". ~ Hosea 8:7
Social scientists must do a better job of explaining the trade-offs that an economy, and a political society, make when considering the shadow their choices cast into the future.
References
Barro, Robert. 1972. “Are Government Bonds Net Wealth?” Journal of Political Economy. 82: 1095-1117.
Brennan, H.G. and Buchanan, J.M. (1980). “The logic of the Ricardian equivalence theorem.” Finanzarchiv 38 (1): 4–16.
Buchanan, J.M. ([1958] 1999). Concerning future generations. In Public principles of public debt: A defense and restatement, 27–37. The collected works of James M. Buchanan, vol. 2, ed. by H.G. Brennan, H. Kleimt and R.D. Tollison. Indianapolis, IN: Liberty Fund.
Buchanan, J.M. (1976). “Barro on the Ricardian Equivalence Theorem.” Journal of Political Economy. 84: 337-342.
Buchanan, James M., Charles K. Rowley, and Robert D. Tollison. Deficits. Oxford: Basil Blackwell, 1987, pp. x, 417
Buchanan, James M. and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes. New York: Academic Press, 1977.
Buchanan, James M., Richard Wagner, and John Burton. (1978). “The Consequences of Mr. Keynes” Hobart Paper 78 (London: Institute of Economic Affairs, 1978).
Buchanan, Neil. (1996). “Which Deficit? Comparing Thirteen Measures of the U.S. Fiscal Deficit on Theoretical and Empirical Grounds,” Working Paper No. 170, Levy Institute, Bard College Department of Economics, http://www.levy.org/docs/wrkpap/pdf/170.pdf
Federal Reserve Board, 2003, Household Debt Service and Financial Obligations Ratios, http://www.federalreserve.gov/releases/housedebt/default.htm
Higgs, R. (1987). Crisis and Leviathan: Critical episodes in the growth of American government. New York: Oxford University Press.
Hinich, Melvin, and Michael Munger. (1994). Ideology and the Theory of Political Choice. Ann Arbor, MI: University of Michigan Press.
Ippolito, Dennis. 2003. Why Budgets Matter: Budget Policy and American Politics. Pennsylvania State University Press.
Keech, William. (1995). Economic Politics: The Costs of Democracy. New York: Cambridge University Press.
Keynes, John Maynard. (1936 / 1997). General Theory of Employment, Interest, and Money. New York: Routledge.
Lerner, A.P. (1943). Functional finance and the federal debt. Social Research 10 (February): 38–51.
Lerner, A.P. (1944). The Economics of Control: Principles of welfare economics. New York: MacMillan.
Mises, Ludwig von. (Buchanan, Rowley, and Tollison), pp. 114-142.
Rowley, C. K. (1987b). “The Legacy of Keynes: From the General Theory to Generalized Budget Deficits,” in Deficits (ed by Buchanan, Rowley, and Tollison), pp. 143-172.
Rowley, C. K., William Shughart, and Robert Tollison. (1987). “Interest Groups and Deficits,” Deficits (ed by Buchanan, Rowley, and Tollison), pp. 263-280.
US Office of Management and Budget (2003). Budget of the United States, fiscal year 2004: Historical tables. Washington, DC: US Government Printing Office. http://www.whitehouse.gov/omb/budget/fy2004/pdf/hist.pdfU.S. Treasury Department. 2003. “REVISED SERIES: MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES.” http://www.treas.gov/tic/mfh.txt1933 / 1976). Epistemological Problems of Economics. 1976 edition, New York: New York University Press.
Muris, Timothy, (1999) “Ronald Reagan and the Rise of Large Deficits: What Really Happened in 1981.” Fairfax, VA: George Mason University Law School Working Paper, http://www.gmu.edu/departments/law/faculty/papers/docs/00-05.pdf
North, Douglass. (1990). Institutions, Institutional Change, and Economic Performance. New York: Cambridge University Press.
Rowley, C.K., Shughart, W.F. II and Tollison, R.D. (Eds.) (2002). The economics of budget deficits, 2 vols. International library of critical writings in economics 153, ed. by M. Blaug. Cheltenham, UK, and Northampton, MA, USA: Edward Elgar.
Rowley, C. K. (1987a). “John Maynard Keynes and the Attack on Classical Political Economy’ in Deficits (ed by
(Continuing yesterday's rant on deficits...)
Government deficits are not (usually) earthquakes or floods, the natural consequence of random or deterministic process. Instead, deficits are the aggregate consequence of the self-interested individual actions of hundreds of elected and appointed officials, the sine qua non of the public choice approach. A more traditional view of the “public interest” in political science, of course, imagines that government officials work to advance the public good, or at a minimum their own vision of that good. Keech (1995) describes the “public choice” alternative:
… [The] democratic process is not so benign. In that view, politicians are opportunistic, and voters are naïve. Incumbents manipulate their performance to appear misleadingly good at election time, and both challengers and incumbents make unrealistic and insincere promises. Voters are myopically oriented to the present, which makes them unprepared to hold incumbents accountable for their performance over entire electoral periods, or to relate electoral choices to future well-being in a meaningful way. Economic performance deteriorates. Politicians exploiting popular discontent propose superficial reforms that fail to solve the problems, such as the Gramm-Rudman-Hollings deficit-reduction acts of 1985 and 1987. (p. 3).
The public choice model of government decision-making predicts that government surpluses have the life expectancy of an adult mayfly. There have been several published collections that have made this point clearly, including Buchanan and Wagner (1977), Buchanan, Rowley, and Tollison (1987), and Rowley, Shughart, and Tollison (2002). Of course, Keynes himself accepted, and in fact was one of the foremost advocates of, the idea that ideas matter, in his over-quoted passage on how “the world is ruled by little else.” But it is worth quoting the entire passage, to show what argument (interest groups and self-interest) Keynes thought he was refuting.
But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. (Keynes, General Theory)
One key to understanding the public choice approach, particularly in its application to the study of debt and deficits, is this: Keynes is posing an absurdly false dichotomy. Ideas are not opposed to “the interests,” but are more often tools, even rhetorical weapons, used in service of those interests. That is not to say that ideas don’t matter, but rather to insist (contra Keynes) that interests do.
Let me link this back to deficits and the debt, and the contribution of the public choice school of political economy. It is easy to think that debt is not really a problem. For “functional finance” scholars (see, e.g., Lerner, 1943), deficits are simply the harmless means of accomplishing good ends. After all, we owe the debt to ourselves, and rational income earners will always save now to meet future tax obligations. As Abba Lerner famously put it, "national debt is not a burden on posterity because if posterity pays the debt it will be paying it to the same posterity that will be alive at the time when the payment is made." (Lerner, 1944: p.303).
What this idea implies, as Buchanan (1976) pointed out in response to Barro (1974), is the strong claim that the issue of new public debt is simply a form of new taxation. Barro had argued that the society could spend out of tax revenue now, or spend out of future tax revenues by borrowing. Buchanan notes that this is precisely the issue raised by “Ricardian Equivalence,” if taxpayers perceive future taxes as claims on the next generation, with the added understanding that the next generation is made up of our children. If we look “forward” in this way, it can be argued that debt will have no impact on total spending, because the spenders in a democracy recognize that they are also the payers, and are no more likely to authorize increased spending out of debt “revenue” than they are out of tax revenue.
The point is that the extreme form of Ricardian Equivalence, combined with the Keynesian policy prescription for deficit spending as a positive good, constitute an important “idea.” What this idea has enabled, however, is the empowerment of a set of interests whose political goals have little to do with the abstract utopian economysticism of the Keynesian macro-control scholars. In an important series of papers (Buchanan, 1958; Buchanan, 1976, and Brennan and Buchanan, 1980) James Buchanan took on the problem of “future generations,” and at a minimum showed that facile “equivalence” claims simply do not follow from the arguments given for them. In fact, he is able to show that some of the claims Barro made for equivalence imply absurd predictions about the world. On the other hand, the absurdities Buchanan points out highlight the debt and deficit experience of the last 30 years.
One implication of his analysis would be that the social security system as it has operated should not have modified the rate of private saving in the economy…If politicians are ultimately responsive to the desires of their constituents, we may infer something about constituents’ evaluations by observing the behavior of politicians. The 40-year history of social security financing yields ample evidence that politicians are extremely reluctant to adopt anything which smacks of full funding for the system. Under the Barro hypothesis, there should be roughly indifferent public reaction to a fully funded and to an unfunded pension system.
If we shift to the more general model, governments should be roughly indifferent as between financing current outlays from taxation and from genuine debt issue. There should be no effect of debt-financed deficits on aggregate spending... [The] behavior of legislators seems to offer indirect evidence against the capitalization hypothesis. Can anyone in the post-Keynesian world of 1975 seriously question the proclivity of politicians to expand the public debt in preference to tax increases? (Buchanan, 1976, p. 341).
From the vantage point of 2004, rather than 1975, it is easy to understand Buchanan’s skepticism. The level of under-funding of Social Security obligations has now reached the point where the discussion no longer centers on whether the system will default. What analysts wonder is when, and by how much, benefits will have to be slashed, or perhaps even eliminated. In this context, it is difficult indeed to sustain the claim that the constraint imposed by Ricardian equivalence describes political choices of either citizens or elected officials.
An interesting perspective, which connects the “public interest” and “public choice” view of budgeteering, is that of Higgs (1987), which argues that decision-making is motivated (or supported) by an ideology we might call “Keynesianism” or fiscal activism. Higgs describes “ideology” this way:
By ideology I shall mean a somewhat coherent, rather comprehensive belief system about social relations.... Ideology has four distinct aspects: cognitive, affective, programmatic, and solidary. It structures a person's perceptions and predetermines his understandings of the social world, expressing these cognitions in characteristic symbols; it tells him whether what he "sees" is good or bad or morally neutral; and it propels him to act in accordance with his cognitions and evaluations as a committed member of a political group in pursuit of definite social objectives. (Higgs 1987, 37)
Higgs incorporates Keynes’ claim that ideas matter, but there is a twist. The growth of government and the increase in the acceptable size of deficits, accumulated in the debt, are linked to a fundamental change in the conception of government. People changed their view of the obligations of citizens, and of the role of government in their lives. So, part of the reason that the size and scope of government has increased is simple interest group politics: every program creates an interest that depends on the program for its survival. But programs are also protected by the idea, now widely held among citizens, that it is right and proper for government to regulate and subsidize the everyday activities of citizens.
Charles Rowley (Rowley, 1987a; 1987b) independently develops a more specific, but related, set of analytic themes about the macroeconomy. He approaches Keynes and Keynesianism in a way that should receive more attention from macroeconomic scholars, because he links the ideas of what we now think of as Keynesianism to the “public choice” arguments that require attention to interest and political consequence. And there we have the reason that debt and taxes are quite radically different: even if one concedes the Barrovian logic of economic equivalence, the process is driven by political interest, in which debt is nearly always preferable to but they emphasize the political sense in which debt and taxes are radically different.
When one tries to draw together the independent strands of thought of Buchanan, Higgs, and Rowley on deficits, it is hard not to be reminded of von Mises’ famous observation about economic theory and its use in making policy prescriptions.
Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world...They wish to be free of a universe of whose order they do not approve. (Mises, Chapter 4, Section 6, Epistemological Problems of Economics).
To most politicians, of any of the main partisan affiliations, it now seems established that deficits and large accumulations of debt are benign, or at worst only pose a danger far off in a distant future. The problem is that these political “leaders” may be sending a message that the electorate would take issue with, if it were presented as a package rather than piecemeal. The problem is not just that voters are too passive and disorganized to respond. The real problem is that voters want is perfectly sensible, but impossible to deliver because it is not feasible. Voters want three things: (a) lower taxes, (b) increased spending on “needed” programs, and (c) lower deficits.
Of course, I want these things, too. We just can’t have them, at least not all the time. And it now seems clear that the salience, or marginal utility (depending on whether you are a political scientist or an economist) of these three is not equal. Every time a politician offers lower taxes and increased spending, voters act they just got a prom date with the prettiest cheerleader, or that handsome striker, or maybe both. Voters actually want lower deficits, but only at the cost of raising someone else’s taxes, or cutting someone else’s needed programs.
Given what we now know, or think we know, about the problem of fragility and contagion in the remarkably interconnected and interdependent financial systems of the world, it is clear that voters are making a mistake, putting deficits last, or allowing political leaders to do so. Putting aside the (quite real) ethical problems of financing current consumption on the pocketbooks of future generations of taxpayers, one can make a strong argument that voters are being misled, or at least badly led. One cannot blame our political leaders for cravenly exploiting the political advantages of deficits, any more than one can blame dogs for eating out of uncovered garbage cans. It's what they do.
Here's the thing: my liberal friends often make two complaints....(1) We should use government to do pretty much everything, because it is better, more rational, and more responsive to the needs of the people. (2) We hate George Bush, because he pursues political advantage ruthlessly. Why don't liberals see that investing huge powers in government and trusting government to do the right thing is EXACTLY what causes George and his policies to be such a dangerous force in our lives.
"For they have sown the wind, and they shall reap the whirlwind.". ~ Hosea 8:7
Social scientists must do a better job of explaining the trade-offs that an economy, and a political society, make when considering the shadow their choices cast into the future.
References
Barro, Robert. 1972. “Are Government Bonds Net Wealth?” Journal of Political Economy. 82: 1095-1117.
Brennan, H.G. and Buchanan, J.M. (1980). “The logic of the Ricardian equivalence theorem.” Finanzarchiv 38 (1): 4–16.
Buchanan, J.M. ([1958] 1999). Concerning future generations. In Public principles of public debt: A defense and restatement, 27–37. The collected works of James M. Buchanan, vol. 2, ed. by H.G. Brennan, H. Kleimt and R.D. Tollison. Indianapolis, IN: Liberty Fund.
Buchanan, J.M. (1976). “Barro on the Ricardian Equivalence Theorem.” Journal of Political Economy. 84: 337-342.
Buchanan, James M., Charles K. Rowley, and Robert D. Tollison. Deficits. Oxford: Basil Blackwell, 1987, pp. x, 417
Buchanan, James M. and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes. New York: Academic Press, 1977.
Buchanan, James M., Richard Wagner, and John Burton. (1978). “The Consequences of Mr. Keynes” Hobart Paper 78 (London: Institute of Economic Affairs, 1978).
Buchanan, Neil. (1996). “Which Deficit? Comparing Thirteen Measures of the U.S. Fiscal Deficit on Theoretical and Empirical Grounds,” Working Paper No. 170, Levy Institute, Bard College Department of Economics, http://www.levy.org/docs/wrkpap/pdf/170.pdf
Federal Reserve Board, 2003, Household Debt Service and Financial Obligations Ratios, http://www.federalreserve.gov/releases/housedebt/default.htm
Higgs, R. (1987). Crisis and Leviathan: Critical episodes in the growth of American government. New York: Oxford University Press.
Hinich, Melvin, and Michael Munger. (1994). Ideology and the Theory of Political Choice. Ann Arbor, MI: University of Michigan Press.
Ippolito, Dennis. 2003. Why Budgets Matter: Budget Policy and American Politics. Pennsylvania State University Press.
Keech, William. (1995). Economic Politics: The Costs of Democracy. New York: Cambridge University Press.
Keynes, John Maynard. (1936 / 1997). General Theory of Employment, Interest, and Money. New York: Routledge.
Lerner, A.P. (1943). Functional finance and the federal debt. Social Research 10 (February): 38–51.
Lerner, A.P. (1944). The Economics of Control: Principles of welfare economics. New York: MacMillan.
Mises, Ludwig von. (Buchanan, Rowley, and Tollison), pp. 114-142.
Rowley, C. K. (1987b). “The Legacy of Keynes: From the General Theory to Generalized Budget Deficits,” in Deficits (ed by Buchanan, Rowley, and Tollison), pp. 143-172.
Rowley, C. K., William Shughart, and Robert Tollison. (1987). “Interest Groups and Deficits,” Deficits (ed by Buchanan, Rowley, and Tollison), pp. 263-280.
US Office of Management and Budget (2003). Budget of the United States, fiscal year 2004: Historical tables. Washington, DC: US Government Printing Office. http://www.whitehouse.gov/omb/budget/fy2004/pdf/hist.pdfU.S. Treasury Department. 2003. “REVISED SERIES: MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES.” http://www.treas.gov/tic/mfh.txt1933 / 1976). Epistemological Problems of Economics. 1976 edition, New York: New York University Press.
Muris, Timothy, (1999) “Ronald Reagan and the Rise of Large Deficits: What Really Happened in 1981.” Fairfax, VA: George Mason University Law School Working Paper, http://www.gmu.edu/departments/law/faculty/papers/docs/00-05.pdf
North, Douglass. (1990). Institutions, Institutional Change, and Economic Performance. New York: Cambridge University Press.
Rowley, C.K., Shughart, W.F. II and Tollison, R.D. (Eds.) (2002). The economics of budget deficits, 2 vols. International library of critical writings in economics 153, ed. by M. Blaug. Cheltenham, UK, and Northampton, MA, USA: Edward Elgar.
Rowley, C. K. (1987a). “John Maynard Keynes and the Attack on Classical Political Economy’ in Deficits (ed by
Friday, December 03, 2004
Budget Deficits: K. Grease Plays Chicken Little
(NOTE: IF THERE IS ANY COHERENCE IN THIS ESSAY, IT COMES FROM TALKING TO KEVIN GRIER. BUT DON'T BLAME HIM...)
The old post-Keynesians, such as Hyman Minsky, made much of the increased financial interdependence, and consequent fragility, of our banking and credit system (see, for details, Minsky, 1971, 1982, 1995. For more than anyone could want to know, see Bellofiore and Ferri, 2001). Here was how Minsky put the problem, which he called “the economics of euphoria,” and which sounds familiar to anyone who lived through the 1990s:
The confident expectation of a steady stream of prosperity [creates a] …willingness...to take what would have been considered in earlier times undesirable chances in order to finance the acquisition of additional capital goods...Those that supply financial resources live in the same expectational climate as those that demand them...An essential aspect of a euphoric economy is the construction of liability structures which imply payments that are closely articulated...to cash flows due to income production...Withdrawals on the supply side of financial markets may force demanding units that were under no special strain and were not directly affected by financial stringencies to look for new financing connections. An initial disturbance can cumulate through such third- party or innocent-party bystanders...Financial instability occurs whenever a large number of units resort to extraordinary sources for cash [at the same time]. (Minsky, 1971; cited in Mayer, 1998).
I was lucky enough to take classes from Hy Minsky in the early 1980s, and I have to admit that at the time I thought he was paranoid. But looking at the quote above (and remember, this was from the early 1970s!), I am much more persuaded that the idea of fragility, and increased speed and power of transmission of economic crises, is plausible, though it may be hard to express rigorously.
Nonetheless, several scholars have recently taken the idea of financial fragility, or the increased susceptibility of an economic system to shocks, very seriously. One mechanism through which contagion can spread is the cross-market “rebalancing" of portfolios, much as Minsky was describing in the long quotation above. The key insight is that investors transmit idiosyncratic shocks from one market to others (either sectoral markets, within a nation, or in financial markets, across nations) by adjusting their exposures to macroeconomic risks.
But the attempted portfolio adjustments are by no means independent; again, as Minsky pointed out, “Those that supply financial resources live in the same expectational climate as those that demand them.” For present purposes, one of the most interesting contributions is the paper by Leung (2003). Leung claims that the external debt owed by less developed nations has increased the amplitude, as well as the duration, of cyclic fluctuations in aggregate economic activity. Using simulations, Leung shows how increased external debt may directly increase risk of ruinous and unpredictable business cycles.
But is “external” debt really a problem for the U.S.? Certainly the amount of debt (in the U.S. case, Treasury securities) in foreign hands has been increasing, but is it a problem? The answer is “probably not,” or “at least not yet.” The value of Treasury securities in foreign hands recently exceeded $1.3 trillion, with the plurality of that amount ($450 billion) held by the Japanese. While some of the foreign holdings can be explained by attempts to prevent other currencies (particularly, in this case, the yen) from appreciating too much against the dollar, there is the dangerous possibility that some tipping point can be reached.
The more general problem is that a financial crisis, even if it were to start with, or simply involve, the U.S., might propagate in ways that international monetary and financial institutions could not control. As two recent papers, by Lagunoff and Schreft (2001) and Kodres and Pritsker (2002) point out, the very fact that rational agents hold diversified portfolios means that financial positions are linked. If a shock, in financial, energy, or some other key global markets, causes some losses, there will be consequent separate-but-not-independent attempts at portfolio rebalancing. But the aggregate consequence of individual attempts to realize small changes in financial position, if the information that caused the readjustment is common knowledge, could well be a disastrous decline in entire sectors and their asset values. These cascades in values can cause other losses which cause additional reallocations by other investors, so that even isolated shocks might quickly metastasize throughout the financial system.
There is an element of Chicken Little here, I should admit. There is no specific prediction that U.S. deficits, at some particular point or for any particular reason, will cause disaster. Still, the increase in deficits “as far as the eye can see,” combined with the unrelated but potentially menacing private debt in the U.S., leads to an important question: Why is it that we have deficits? Why did the surplus disappear so quickly, and sink so rapidly?
References
Bellofiore, Riccardo, and Piero Ferri (eds). 2001. Financial Keynesianism and Market Instability: The Economic Legacy of Hyman Minsky (two volumes). Cheltenham, UK: Northampton, MA : Edward Elgar
Kodres, Laura and Matthew Pritsker. 2002. "A rational expectations model of financial contagion." Journal of Finance 57: 769-99.
Lagunoff, Roger, and S. Schreft. 2001. "A Model of Financial Fragility." Journal of Economic Theory, 99: 220-224.
Leung, Hing-man. 2003. “External Debt and Worsening Business Cycles in Less Developed Countries.” Journal of Economic Studies 30: 155-68
Mayer, Martin. 1998. “The Asian Disease: Plausible Diagnoses, Possible Remedies.” Economics Working Paper Archive—WUSTL (http://econwpa.wustl.edu), Macroeconomics Series, # 9805015.
Minsky, Hyman P. (1971), “Financial Instability Revisited,” in Reappraisal of the Federal Reserve Discount Mechanism. Washington, DC: Federal Reserve System, pp. 100-105.
Minsky, Hyman P. (1982). Can "It" Happen Again? Essays on instability and finance. Armonk, NY: M.E. Sharpe.
Minsky, Hyman P. (1995), Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions II, in Journal of Economic Issues, vol. 29, no. 1, March, pp. 83-96.
The old post-Keynesians, such as Hyman Minsky, made much of the increased financial interdependence, and consequent fragility, of our banking and credit system (see, for details, Minsky, 1971, 1982, 1995. For more than anyone could want to know, see Bellofiore and Ferri, 2001). Here was how Minsky put the problem, which he called “the economics of euphoria,” and which sounds familiar to anyone who lived through the 1990s:
The confident expectation of a steady stream of prosperity [creates a] …willingness...to take what would have been considered in earlier times undesirable chances in order to finance the acquisition of additional capital goods...Those that supply financial resources live in the same expectational climate as those that demand them...An essential aspect of a euphoric economy is the construction of liability structures which imply payments that are closely articulated...to cash flows due to income production...Withdrawals on the supply side of financial markets may force demanding units that were under no special strain and were not directly affected by financial stringencies to look for new financing connections. An initial disturbance can cumulate through such third- party or innocent-party bystanders...Financial instability occurs whenever a large number of units resort to extraordinary sources for cash [at the same time]. (Minsky, 1971; cited in Mayer, 1998).
I was lucky enough to take classes from Hy Minsky in the early 1980s, and I have to admit that at the time I thought he was paranoid. But looking at the quote above (and remember, this was from the early 1970s!), I am much more persuaded that the idea of fragility, and increased speed and power of transmission of economic crises, is plausible, though it may be hard to express rigorously.
Nonetheless, several scholars have recently taken the idea of financial fragility, or the increased susceptibility of an economic system to shocks, very seriously. One mechanism through which contagion can spread is the cross-market “rebalancing" of portfolios, much as Minsky was describing in the long quotation above. The key insight is that investors transmit idiosyncratic shocks from one market to others (either sectoral markets, within a nation, or in financial markets, across nations) by adjusting their exposures to macroeconomic risks.
But the attempted portfolio adjustments are by no means independent; again, as Minsky pointed out, “Those that supply financial resources live in the same expectational climate as those that demand them.” For present purposes, one of the most interesting contributions is the paper by Leung (2003). Leung claims that the external debt owed by less developed nations has increased the amplitude, as well as the duration, of cyclic fluctuations in aggregate economic activity. Using simulations, Leung shows how increased external debt may directly increase risk of ruinous and unpredictable business cycles.
But is “external” debt really a problem for the U.S.? Certainly the amount of debt (in the U.S. case, Treasury securities) in foreign hands has been increasing, but is it a problem? The answer is “probably not,” or “at least not yet.” The value of Treasury securities in foreign hands recently exceeded $1.3 trillion, with the plurality of that amount ($450 billion) held by the Japanese. While some of the foreign holdings can be explained by attempts to prevent other currencies (particularly, in this case, the yen) from appreciating too much against the dollar, there is the dangerous possibility that some tipping point can be reached.
The more general problem is that a financial crisis, even if it were to start with, or simply involve, the U.S., might propagate in ways that international monetary and financial institutions could not control. As two recent papers, by Lagunoff and Schreft (2001) and Kodres and Pritsker (2002) point out, the very fact that rational agents hold diversified portfolios means that financial positions are linked. If a shock, in financial, energy, or some other key global markets, causes some losses, there will be consequent separate-but-not-independent attempts at portfolio rebalancing. But the aggregate consequence of individual attempts to realize small changes in financial position, if the information that caused the readjustment is common knowledge, could well be a disastrous decline in entire sectors and their asset values. These cascades in values can cause other losses which cause additional reallocations by other investors, so that even isolated shocks might quickly metastasize throughout the financial system.
There is an element of Chicken Little here, I should admit. There is no specific prediction that U.S. deficits, at some particular point or for any particular reason, will cause disaster. Still, the increase in deficits “as far as the eye can see,” combined with the unrelated but potentially menacing private debt in the U.S., leads to an important question: Why is it that we have deficits? Why did the surplus disappear so quickly, and sink so rapidly?
References
Bellofiore, Riccardo, and Piero Ferri (eds). 2001. Financial Keynesianism and Market Instability: The Economic Legacy of Hyman Minsky (two volumes). Cheltenham, UK: Northampton, MA : Edward Elgar
Kodres, Laura and Matthew Pritsker. 2002. "A rational expectations model of financial contagion." Journal of Finance 57: 769-99.
Lagunoff, Roger, and S. Schreft. 2001. "A Model of Financial Fragility." Journal of Economic Theory, 99: 220-224.
Leung, Hing-man. 2003. “External Debt and Worsening Business Cycles in Less Developed Countries.” Journal of Economic Studies 30: 155-68
Mayer, Martin. 1998. “The Asian Disease: Plausible Diagnoses, Possible Remedies.” Economics Working Paper Archive—WUSTL (http://econwpa.wustl.edu), Macroeconomics Series, # 9805015.
Minsky, Hyman P. (1971), “Financial Instability Revisited,” in Reappraisal of the Federal Reserve Discount Mechanism. Washington, DC: Federal Reserve System, pp. 100-105.
Minsky, Hyman P. (1982). Can "It" Happen Again? Essays on instability and finance. Armonk, NY: M.E. Sharpe.
Minsky, Hyman P. (1995), Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions II, in Journal of Economic Issues, vol. 29, no. 1, March, pp. 83-96.
Thursday, December 02, 2004
The Thing Itself III
Can government do anything to better people's lives? Should government do anything? These questions don’t get asked very much. We all just assume that government should do SOMETHING, and then argue about what that is….
Still…Let me ask. Actually, let me answer.
1. Can government do anything to make things better? Let’s suppose that government is neutral instrument, with a real power for accomplishing good in people's lives. The provision of public goods, particularly local public goods, is a "government" function.
(One might quarrel with this claim, as Burke did when he said, “The thing! The thing itself is the abuse!” But let’s not go there)
EVEN THEN, there are limits to what government can do. One of the first people to recognize this was the man who put the dismal in the dismal science, Parson Thomas Malthus. (Yeah, I know, it was Thomas Carlyle). Malthus discovered a general principle that will sound familiar to everyone: the more you have of something, the more you need!
In third world countries, we have found that if all you do is give people enough resources to make them a little bit healthier, you increase births. Births continue until the society comes up against the new resource constraint. People are still starving, but now there are lots more of them.
In cities and counties, the same logic applies to roads: if you make commuting cheaper by building or widening roads, it isn't long before people are once again, stopped and staring at the stationary taillights ahead of them. There are six lanes of gridlock now, instead of two, but people respond to the costs of the activity until the cost rises.
Sometimes we try to get around this problem by subsidizing an activity we think we value. Suppose, for example, we all think family farms are good. But we look around, and see that family farmers are all poor or going out of business. So, Congress or the state legislature passes a law that subsidizes farm crops. Everyone who owns farmland gets a one time wealth transfer from consumers and taxpayers. So far, so good: farmers (briefly) are wealthier.
Over time, though, people sell the land, or deed it to their children. But these people now implicitly pay a higher price for the land, a price that capitalizes the subsidy on the crop. If you ever cut the subsidy, the farmers will go bankrupt. But if you leave the subsidy, the farmer (at best) only breaks even, barely scraping by. We all still hear stories about the poor farmers, and wonder how this can be, when we are spending all this money on farm support.
This is how it can be: after the one time wealth increase for people who own land, new people enter (or farmers or their children stay on their farms). Profits fall back to subsistence levels, and farmers are once again poor, just indifferent between staying and leaving. Only now, we are all paying high prices for crop support programs, and taxes for subsidies! Lots of pain for us, no gain for the poor farmers!
In short, much of the time, government CANNOT do anything to help. Rent-seeking dissipates give-aways, and in equilibrium people crowd up to the same point whether there is a two lane road or a six lane road, as long as you charge a zero price.
2. The second question I raised above was: Should government try to help people? Appallingly fallacious analogy to "customers." Taxpayers aren't our customers; they are our bosses. May be that the use of "customers" is a way getting employees to accept a role, a style of treatment, in dealing with the public. Easier to train employees this way, better results.
But consider the implications of the "customer" metaphor run amok. I have participated in "studies" (and you can hear the quote marks drip down the side of that word as I use it) where we were paid money by the state, by a county, or a city to do "market research." What we did was ask poor people if they would like a better house, assuming somebody else would pay for it.
Mirabile dictu, they said "Yes!" We then wrote a study saying that there was, indeed, a "need" for this program. To put it another way (and this is how we put it): There was customer interest in this new program. But remember what that program was: we were taking money from taxpayers, without their consent and under threat of arrest or seizure of property, and giving it to people who didn't have decent housing. Then, to check to see if the program should be expanded, we asked the "customers" (the people whose housing would be improved) if they liked it. When they said yes (actually, they said the amount of the rental subsidy should be doubled), we concluded in our scientific way that this was something government should do.
Now, I participated for two reasons: First, I needed the grant money. Second, I believed (and still believe) in the goals of the program, which were to give poor people a life of dignity and a chance to achieve self sufficiency.
But the "customers" metaphor was a lie! Liberals pretend not to understand why taxpayers are so angry, but I understand it, and you should, too. Here is the reason.
The liberal philosophy, based on this conception of customers, has become a pathetic self parody: "Look, there's one! If we just had some funding, we could help him! Her, too! Her life would be better if we improved government services to her." Again, this is just rent seeking, and it is a nonproductive activity that is absorbing a high proportion of our best minds and resources.
When you apply for a grant, or money from a government program, you are doing it so your constituents (maybe taxpayers in your county, or clients in your social service delivery program) can be better off. But that money doesn't come from creating a new product or service, it comes from taxpayers. Instead of devoting creativity and talent to new ways to make things people need, or make those things more cheaply, we are overseeing an enormous bureaucratic paper shuffle: you spend months writing a grant proposal, a team of people read it, and send a few applicants some money. Everyone is paid for their role in this exercise, and all pay taxes on their income to help subsidize the next go round.
The worst part is, it can only get harder and more time consuming as the years go by. Have you noticed that the applications for grants are getting longer? That the competition for this free money is getting tougher? Ultimately, rent seeking forces agencies and non profits to spend a substantial part of the value of the grant up front, just so they can win the competition to get the grant. The only time you can really do much good is if there is a new grant program (just like a new farm subsidy). After a few years, many more agencies are applying for the same fixed (or shrinking) grant pool. You spend so much time pursuing this "free money" that you wonder if it is worth it.
What the left has forgotten, or actually never wanted to believe, is that you have to persuade taxpayers that this is a good thing to do. Discovering heretofore unknown "rights," which are really privileges involuntarily extracted from taxpayers, is the stock in trade of the political liberal.
The failure of liberalism in the United States is to articulate a compelling set of reasons why. The great expansions in the social "safety net" occurred under a clear (debatable, but clear) set of arguments. FDR, JFK, and LBJ all seemed to believe that you had to get the people's consent, or at least their understanding, before you started taking their money. The argument that we can do good has become the only argument that we should.
So now we are at an impasse, a Gordian knot with nothing but fingers sticking out, all pointed in different directions. Liberals pretend not to understand that you have to persuade people that tax money should be used to "help customers." The fact that you can "help" people if you give them other peoples' money is not enough of an argument, not today.
Still…Let me ask. Actually, let me answer.
1. Can government do anything to make things better? Let’s suppose that government is neutral instrument, with a real power for accomplishing good in people's lives. The provision of public goods, particularly local public goods, is a "government" function.
(One might quarrel with this claim, as Burke did when he said, “The thing! The thing itself is the abuse!” But let’s not go there)
EVEN THEN, there are limits to what government can do. One of the first people to recognize this was the man who put the dismal in the dismal science, Parson Thomas Malthus. (Yeah, I know, it was Thomas Carlyle). Malthus discovered a general principle that will sound familiar to everyone: the more you have of something, the more you need!
In third world countries, we have found that if all you do is give people enough resources to make them a little bit healthier, you increase births. Births continue until the society comes up against the new resource constraint. People are still starving, but now there are lots more of them.
In cities and counties, the same logic applies to roads: if you make commuting cheaper by building or widening roads, it isn't long before people are once again, stopped and staring at the stationary taillights ahead of them. There are six lanes of gridlock now, instead of two, but people respond to the costs of the activity until the cost rises.
Sometimes we try to get around this problem by subsidizing an activity we think we value. Suppose, for example, we all think family farms are good. But we look around, and see that family farmers are all poor or going out of business. So, Congress or the state legislature passes a law that subsidizes farm crops. Everyone who owns farmland gets a one time wealth transfer from consumers and taxpayers. So far, so good: farmers (briefly) are wealthier.
Over time, though, people sell the land, or deed it to their children. But these people now implicitly pay a higher price for the land, a price that capitalizes the subsidy on the crop. If you ever cut the subsidy, the farmers will go bankrupt. But if you leave the subsidy, the farmer (at best) only breaks even, barely scraping by. We all still hear stories about the poor farmers, and wonder how this can be, when we are spending all this money on farm support.
This is how it can be: after the one time wealth increase for people who own land, new people enter (or farmers or their children stay on their farms). Profits fall back to subsistence levels, and farmers are once again poor, just indifferent between staying and leaving. Only now, we are all paying high prices for crop support programs, and taxes for subsidies! Lots of pain for us, no gain for the poor farmers!
In short, much of the time, government CANNOT do anything to help. Rent-seeking dissipates give-aways, and in equilibrium people crowd up to the same point whether there is a two lane road or a six lane road, as long as you charge a zero price.
2. The second question I raised above was: Should government try to help people? Appallingly fallacious analogy to "customers." Taxpayers aren't our customers; they are our bosses. May be that the use of "customers" is a way getting employees to accept a role, a style of treatment, in dealing with the public. Easier to train employees this way, better results.
But consider the implications of the "customer" metaphor run amok. I have participated in "studies" (and you can hear the quote marks drip down the side of that word as I use it) where we were paid money by the state, by a county, or a city to do "market research." What we did was ask poor people if they would like a better house, assuming somebody else would pay for it.
Mirabile dictu, they said "Yes!" We then wrote a study saying that there was, indeed, a "need" for this program. To put it another way (and this is how we put it): There was customer interest in this new program. But remember what that program was: we were taking money from taxpayers, without their consent and under threat of arrest or seizure of property, and giving it to people who didn't have decent housing. Then, to check to see if the program should be expanded, we asked the "customers" (the people whose housing would be improved) if they liked it. When they said yes (actually, they said the amount of the rental subsidy should be doubled), we concluded in our scientific way that this was something government should do.
Now, I participated for two reasons: First, I needed the grant money. Second, I believed (and still believe) in the goals of the program, which were to give poor people a life of dignity and a chance to achieve self sufficiency.
But the "customers" metaphor was a lie! Liberals pretend not to understand why taxpayers are so angry, but I understand it, and you should, too. Here is the reason.
The liberal philosophy, based on this conception of customers, has become a pathetic self parody: "Look, there's one! If we just had some funding, we could help him! Her, too! Her life would be better if we improved government services to her." Again, this is just rent seeking, and it is a nonproductive activity that is absorbing a high proportion of our best minds and resources.
When you apply for a grant, or money from a government program, you are doing it so your constituents (maybe taxpayers in your county, or clients in your social service delivery program) can be better off. But that money doesn't come from creating a new product or service, it comes from taxpayers. Instead of devoting creativity and talent to new ways to make things people need, or make those things more cheaply, we are overseeing an enormous bureaucratic paper shuffle: you spend months writing a grant proposal, a team of people read it, and send a few applicants some money. Everyone is paid for their role in this exercise, and all pay taxes on their income to help subsidize the next go round.
The worst part is, it can only get harder and more time consuming as the years go by. Have you noticed that the applications for grants are getting longer? That the competition for this free money is getting tougher? Ultimately, rent seeking forces agencies and non profits to spend a substantial part of the value of the grant up front, just so they can win the competition to get the grant. The only time you can really do much good is if there is a new grant program (just like a new farm subsidy). After a few years, many more agencies are applying for the same fixed (or shrinking) grant pool. You spend so much time pursuing this "free money" that you wonder if it is worth it.
What the left has forgotten, or actually never wanted to believe, is that you have to persuade taxpayers that this is a good thing to do. Discovering heretofore unknown "rights," which are really privileges involuntarily extracted from taxpayers, is the stock in trade of the political liberal.
The failure of liberalism in the United States is to articulate a compelling set of reasons why. The great expansions in the social "safety net" occurred under a clear (debatable, but clear) set of arguments. FDR, JFK, and LBJ all seemed to believe that you had to get the people's consent, or at least their understanding, before you started taking their money. The argument that we can do good has become the only argument that we should.
So now we are at an impasse, a Gordian knot with nothing but fingers sticking out, all pointed in different directions. Liberals pretend not to understand that you have to persuade people that tax money should be used to "help customers." The fact that you can "help" people if you give them other peoples' money is not enough of an argument, not today.
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