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.

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)

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.

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)

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.