by John Q on December 4, 2004
I’ve read lots of pieces on proposals to reform the US Social Security system, both positive and critical. Unfortunately, most of them include claims that are at best half-true and most of the rest assume a high level of knowledge of the issues. Over the fold, I’ve added a lengthy piece trying to explain the issues. Although I’m actively involved in debate on some of them, I’ve done my best to give a neutral presentation, at least until the final assessment of the proposals currently being discussed by the Administration and Congressional Republicans. This is primarily a matter of political judgement and can be summed up fairly quickly.
The Republican proposals involve accounting transfers amounting to trillions of dollars between different government accounts and newly created individual accounts. These transfers will almost certainly be packaged up with substantive changes to the Social Security system. Whether you support them depends on which you think is more likely:
* The transfers will be used to facilitate tough but necessary increases in contributions relative to benefits, eliminating the funding deficit. In doing this, the President and Congress will demonstrate their commitment to promoting the long term interests of the American people, even at the expense of short-term political pain
* The transfers will provide an ideal opportunity for all manner of pork-barrelling, from handouts to existing retirees to cosy deals for Wall Street investment banks, with accounting tricks being used to provide cover for a claim that the system has been restored to solvency
You may be able to guess which of these I think more likely, but you’ll have to read (or scroll) to the end to find out.
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by Henry Farrell on November 29, 2004
I spent a chunk of the Thanksgiving Weekend reading Mark Blyth’s Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century, on which more later. Before doing a proper post, though, I want to point to an interesting claim that Blyth makes in passing; I’ve seen versions of this argument before, but never stated as punchily. Blyth argues that there is no very good reason why we should be worried about the general effects of inflation on the economy – the empirical evidence shows that there is no statistically significant relationship between growth and inflation for inflation rates under twenty per cent per year, as acknowledged even by inflation bears such as Robert Barro. The argument that moderate-to-highish rates of inflation create real economic costs is, at the very least, contestable. Yet low inflation is one of the shibboleths of modern macroeconomic policy. Why? Blyth’s explanation (borrowing from Brian Barry) goes as follows:
bq. Inflation acts as a redistributionary tax on holding debt. Stock prices stagnate and bond prices increase as bond holders demand a premium to guard against the effects of inflation. Investment is hit as inflation eats away at depreciation allowances and stock yields … In short, _inflation is a class specific tax._ Those with credit suffer while those with debt, relatively speaking, prosper. Given then that the benefits of inflation control (restoring the value of debt) are specific while the costs of inflation control (unemployment and economic decline) are diffuse, the reaction of business, particularly the financial sector, to inflation is best understood as the revolt of the investor class [italics in original]
Thus, Blyth argues that efforts to combat inflation are the result of rent-seeking by a small class of individuals (investors/creditors) with sharply defined interests who are able to push government to protect their investments even when this conflicts with the common weal. Creditors don’t want inflation – especially when it’s unexpected – while debtors benefit from it.I’m not a macroeconomist, but the basics of this argument seem plausible, even if you don’t agree with Blyth’s implied Keynesian alternative. Is there a credible alternative explanation of the clear anti-inflationary bias of most advanced industrial democracies, one that, for example, identifies real social benefits attached to low inflation? Arguments against hyperinflation don’t count, since the causal relationship between middling-to-high inflation and hyperinflation is at best underspecified.
by John Q on November 24, 2004
Tyler Cowen links to Martin Wolf (FT, subscription) on the failure of the radical free-market reforms undertaken by New Zealand from 1984 to the mid-90s. The results are even more striking when you observe that the only sustained period of growth has come after 1999, when the newly-elected Labour government raised the top marginal tax rate, amended the most radical components of the Employment Contracts Act, and undertook some renationalisation. I’ve written about all this many times, for example in this AFR piece and this Victoria economic commentary published in NZ (PDF file).
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by Henry Farrell on November 22, 2004
My wife and I just bought our first jointly owned car – when we were negotiating the final details at the car dealership, they tried to use the hard sell to get us to buy “Lojack”:http://www.lojack.com, a vehicle recovery system. We didn’t bite (I don’t like hard sells), but I got to thinking afterwards that buying Lojack would have been an economically irrational contribution to a collective good (which is not to say, of course, that it would have been the wrong thing to do).
The system involves a difficult-to-detect tracer that’s put somewhere in your car – then, if the car is stolen, the police will have a much greater chance of recovering it and catching the thieves. The catch is, of course, that it doesn’t offer any visible deterrent to stealing your car – your only individual benefit is the somewhat dubious reward of getting your vehicle back, perhaps in several pieces after it’s been to the chopshop. However, Lojack offers real collective benefits if it works as the manufacturers claim. If you live in an area where there are lots of Lojack users, then car thieves are likely to be collectively deterred (or caught if they aren’t deterred).
The problem is, of course, that there will be a strong likelihood of underprovision of the collective good. If you live in a neighbourhood where there are lots of other Lojack users, then you have little incentive to buy it yourself – you can free ride on your neighbours. If you live in a neighborhood with few or no Lojack users, you still have little incentive to buy it – the marginal improvement that you make to general neighborhood security is of little value to you, compared to the substantial dollop of cash that you would have to pay to install Lojack. My musings came to an abrupt halt, however, when a Google search revealed that my clever idea had already been “written up”:http://www.nber.org/papers/w5928 several years ago by Ian Ayres and Steven Levitt, who suggest that individual Lojack users get less than 10% of its total social benefits (I note for the record that Levitt not only comes up with fun ideas, which is no more than any decent blogger or punter can do; he really excels in finding unusual data sources to test those ideas). As Ayres and Levitt suggest, if you’re an economically rational actor, you should go instead for the Club, which shifts the risk from your car to your neighbour’s.
by John Q on November 20, 2004
by Chris Bertram on November 12, 2004
Tyler Cowen, in India, “discusses how the people of Calcutta might adjust to rising sea levels”:http://www.marginalrevolution.com/marginalrevolution/2004/11/how_quickly_wil.html , how many of them would leave, etc (via “Davos Newbies”:http://www.davosnewbies.com/ ). There’s a certain Swiftian quality (no doubt unintended) to Cowen’s contemplation of the fate of these poor Indians. If the costs and burdens he suggests do fall on such people (as they probably will) then it puts in perspective the fatuousness of the arguments advanced by Bjorn Lomborg and others to the effect that we shouldn’t do anything about global warming because the costs of action will exceed the benefits. The costs will be incurred by the poor in places like India who will end up with their homes and workplaces under water, and the benefits have been and will be reaped by the already rich in the first world who carry on driving their SUVs. If the economist and policy-wonks who parrot the Lomborg line are proposing a massive compensatory transfer from the winners to the losers then I haven’t heard of it. _Qu’ils mangent de la brioche_ .
by Chris Bertram on November 9, 2004
Will Wilkinson’s “thoughts”:http://www.willwilkinson.net/flybottle/archives/2004/11/who_likes_leisu.html on the (alleged) European taste for leisure over work had me scurrying over to my bookshelf to find a copy of Marx’s _Grundrisse_ . Will surmises that the real reason that Europeans work shorter hours than Americans is that European taxes are too high. After all, anyone who is “economically rational” would surely work more if only the rewards were there, wouldn’t they? So goes human nature according to libertarians. Well, no Will, they might work _even less_ if they could satisfy their consumption needs with fewer hours at the grindstone. As Kurt Vonnegut “says”:http://www.vonnegutweb.com/vonnegutia/interviews/int_technology.html , human beings “are here on Earth to fart around, and don’t let anybody tell you any different.” Anyway, “that quote”:http://www.marxists.org/archive/marx/works/1857/grundrisse/ch06.htm from Marx:
bq. _The Times_ of November 1857 contains an utterly delightful cry of outrage on the part of a West-Indian plantation owner. This advocate analyses with great moral indignation—as a plea for the re-introduction of Negro slavery—how the Quashees (the free blacks of Jamaica) content themselves with producing only what is strictly necessary for their own consumption, and, alongside this ‘use value’, regard loafing (indulgence and idleness) as the real luxury good; how they do not care a damn for the sugar and the fixed capital invested in the plantations, but rather observe the planters’ impending bankruptcy with an ironic grin of malicious pleasure, and even exploit their acquired Christianity as an embellishment for this mood of malicious glee and indolence. They have ceased to be slaves, but not in order to become wage labourers, but, instead, self-sustaining peasants working for their own consumption.
Good for them!
by Daniel on November 2, 2004
Thank you from the bottom of my heart to the traders on the Iowa Electronic Markets, who, on the last day of the campaign, have bid Kerry up to 51% chance of winning. Thus ensuring that, whoever wins, I will have ample material to spend the next four years teasing James Surowiecki about the “Wisdom of Panicky Crowds”.
(the really interesting thing is that the single most probable IEM outcome is still Bush to win with less than 52% of the popular vote. The big move of the bids has been from Bush>52 to Kerry >52!)
by Daniel on October 24, 2004
One of the least attractive features of Steven Landsburg’s column in Slate was always his habit of assuming that anyone who disagreed with him obviously did so out of ignorance, and indeed that appears to be his response to my post on the subject of quantum game theory and information. As a matter of fact, I do understand a bit (just a bit) about quantum probability and I understand a bit more after mugging up on the relevant chapter of David Williams excellent book on probability. Landsburg’s point appears to be that since no information is exchanged, there is no communication, but this won’t do. “Information” in the physical sense is not exchanged, but “quantum information” (not the same thing, but neither something completely different) is, and that is enough to turn it into a communication game. Let me elucidate with yet another variation on the cats/dogs game.
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by Daniel on October 22, 2004
Oh goody, I’ve been waiting for Pile On Stephen Landsburg Week. That column of his in Slate has been winding me up for years.
As my contribution, check out this guest contribution to Marginal Revolution, where half-understood physics meets half-understood economics, with predictable results.
The guts of the post are as follows:
Let’s play a coordination game: You and I are each asked a single question, either “Do you like cats?” or “Do you like dogs?”. Our questions are determined by independent coin flips. We both win if our answers differ, unless we’re both asked about dogs, in which case we both win if our answers match.
Here’s a pretty good strategy we could agree on in advance: We’ll contrive to always differ. Whatever we’re asked, I’ll say yes and you say no. That way we win 3/4 of the time.
Can we do any better? No, if we live in a world governed by classical physics. Yes, if we live in the world we actually inhabit—the world of quantum mechanics.
I think I know a way to do better, using only classical physics.
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by John Q on October 22, 2004
I’ve never been a great fan of Steven Landsburg’s ‘Everyday Economics’ columns in Slate[1]. While he occasionally has something interesting to say, a lot of his columns are what Orwell called ‘silly-clever’, such as this piece defending looting. Economists are often prone to this kind of thing, and it doesn’t do the profession any good in my view, but it’s usually not worth refuting.
Landsburg’s latest piece is in a different category. It’s a repetition of dishonest rightwing talking points about taxation that have been refuted over and over, but apparently need to be refuted yet again. As is his wont, Landsburg seeks to defend a paradoxical claim, namely, that “Bush’s Tax Cuts Are Unfair …To the rich.” He makes a total hash of it.
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by Ted on October 19, 2004
Sinclair Broadcasting, the company which is forcing its stations to run an anti-Kerry film this week, fired one of its bureau chiefs for speaking out against its decision. As Joe Gandelman at the Moderate Voice points out, this rather strongly undermines the premise that the film is a news event.
In the event of a Kerry victory, Sinclair is painting a big bulls-eye on themselves that says “FCC, screw here”. But even if Bush wins, they’ll be too radioactive for the new Bush administration to help. Kerry supporters are furious at Sinclair’s unprecedented descent into blatant electioneering on public airwaves. They’ll continue the boycott of their advertisers, challenge the FCC licences, and use every means possible to punish Sinclair. Either way, Sinclair is not going to get the deregulation they need to stay viable.
In the words of Lehman Brothers, airing the film “has no upside and only multi-dimensional downside”. And it’s not as if this company was in a strong position to pull a stunt with their shareholders’ money. From their most recent 10-K:
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by Daniel on October 9, 2004
I’m trying to build up a small archive of articles that explain important things about financial markets in clear language to an educated liberal audience. This article in the Guardian by Edmond Warner is worth ten minutes of your time.
by Ted on October 5, 2004
Speaking of this, there was another passage from Howard Kurtz’s Media Notes column that caught my eye as a former market researcher. (I actually asked a question about this during the Media Notes Q&A session, but it wasn’t selected.)
Luntz, who is under contract to MSNBC, had already spent $30,000 on recruits for several focus groups…
I worked in market research from 1997 to 2001. By some measures, it wasn’t very long, but it was long enough to get an idea of the costs involved in conducting a market research project.
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by Daniel on September 23, 2004
Via the Marginal Revolution lads, here’s a working paper by Charles Manski, an economist at Northwestern who’s interested in a question that we’ve often returned to at CT; what are the prices in markets like the Iowa Electronic Markets (***MARKET UPDATE*** Kerry still “dying on arse”) actually measuring? Can we really take a market price of 0.70 and unproblematically read off it that “the market thinks there is a 70% chance”?
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