Political Economy

Over at our joint I’ve been doing a fair bit of “this day seventy-five years ago” because of the anniversary of Roosevelt’s hundred days and, well, because. This one may hold some interest for an international readership:

On this day in 1933, British Prime Minister Ramsay MacDonald delivered an address from the National Press Club in Washington, DC, discussing the common problems of the US and UK: “In America at this moment and in Great Britain there are millions of men who want work and can’t get it…. Governments cannot be indifferent to a state of things like that.”

MacDonald looked forward to “wise international government action,” to be established at the upcoming international economic conference. He hoped it would revive “a freely flowing international exchange,” i.e., trade—“Self-sufficiency in the economic field on the part of nations ultimately ends in the poverty of their own people.”

He was mindful of the apparent irony in Britain’s having taken the nationalist, defensive action of going off the gold standard: “Can you imagine that in the early days of that crisis we said gayly and light-heartedly, ‘Let it rip. Let it rip. We will go off gold. There are benefits in being off gold, and we will reap them.'” Obviously he meant the answer to be “no.”—“And so on this currency question, agreement is the only protection.”¹
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Clive Crook is probably my favourite sort-of-conservative big media commentator. But his “new piece”:http://www.theatlantic.com/doc/200803u/no-american-exceptionalism on ‘the End of the American Exception’ seems to me to be seriously out of whack.

That the United States stands apart is something Americans and Europeans have agreed on for a long time … Modern America has limited government, weak unions, high-powered incentives, capitalism red in tooth and claw. Post-war Europe has tax-and-spend, transport strikes, six-week vacations, and the welfare state. …Caricatures are well and good, but this one is just too much. In economic matters, America is far more like Europe, and Europe more like America, than either cares to admit. … health care … is America’s biggest social-policy exception …And it is marked for abolition. … . Consider regulation of business and finance. Few seem to question that the weight of regulation is less in the United States. In one area, anyway, this is true: Worker protections are weaker in America than in Western Europe … But think about product-safety regulation, or environmental regulation. … On regulation of corporate governance, Democrats are still calling for stricter rules … since Sarbanes Oxley, American financial and corporate regulation has been probably the most stringent and complex in the world.

…The unions are weaker here, it is said. To be sure, they have fewer members as a proportion of the workforce than in Britain, or (even more so) continental Europe. … proposed card-check legislation is expressly intended to slow and reverse the decline in union membership. This is a goal which few European governments would any longer think to embrace. In Britain it would be regarded as crazy … American unions remind me of the old-fashioned British kind. They seem anachronistically angry and assertive. … See what America’s unions have done to the auto industry. The Writers’ Guild just shut Hollywood down for several months. …I cannot think of a British union that any longer has that kind of muscle, or would think of exerting it if it did. In much of the rest of Europe, unions have become a quietly co-operative part of management more than militant champions of workers’ rights.

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Jeremy Waldron has a great piece in the latest LRB reviewing a recent book by Cass Sunstein. He has a nice discussion of the Cheney doctrine that even a one-percent probability of a catastrophic event should be treated as a certainty for policy purposes, where the class of catastrophic events is limited to those with a military, security or terrorist dimension. Reasoning like this interacts neatly with “ticking-bomb” scenarios: now a 1 per cent chance that the there’s a ticking bomb the terrorist knows about is sufficient in to justify waterboarding or worse. Of course other potentially catastrophic developments — such as climate change — haven’t generated a “treat as if certain” policy response from the US government, even thought even the most determined denialists must evaluate the probability that anthropogenic global warming is happening at greater than one in a hundred.

Waldron is also pretty acid about Sunstein’s treatment of global warming and distributive justice, noting some of the shortcomings of the idea that poor people’s lives should be valued according to what they’re prepared to pay to avoid the risk of death. But read the whole thing, as they say.

This “piece”:http://www.portfolio.com/views/blogs/market-movers/2008/04/01/blogonomics-valleywags-pay by Felix Salmon on the problems that Gawker Media is encountering with pay-per-pageview is pretty interesting.

Golson’s take-home pay is so much larger than his base salary that his base salary ($2,500 a month) has become basically irrelevant. Instead, he’s been relying entirely on his PVR of $9.75 per thousand pageviews – a rate which has seen him taking home more than $4,000 a month so far this year. For Golson, then, his realistic base salary is in the $4,000 range – much higher than the $2,500 which Robischon is referring to. … The problem here could have been partially fixed if Robischon had decided to give Golson a more realistic base salary to begin with. But Robischon’s boss, Nick Denton, wants fixed salaries to be as low as possible: he hates it when a writer doesn’t justify his salary with pageviews, and the best way of ensuring that situation never arises is to make the fixed salaries as low as possible.

This PVR is being lowered, leading to a strong reaction from Golson and others. Salmon explains their anger in terms of psychological mechanisms such as loss aversion, which are indeed applicable. But I think that there are two other things going on, both of which have to do with the economics of piecework. And after all, paying people on the basis of the number of pageviews their articles receive is a glorified version of piecework.
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In the greatest sea battle of World War I, British Admiral David Beatty watched with uncomprehending dismay as his battlecruisers got blown out of the water, and famously remarked that: “… there seems to be something wrong with our bloody ships today.” Ninety years after Jutland, there seems to be something wrong with our bloody financial system. A big reputable investment bank like Bear, Stearns wasn’t supposed to get into such trouble that it had to be bailed out by the Federal Reserve before it blew up. One of the legacies of the last systemic American financial crisis, in the 1930s, was a regulatory system intended to ensure greater transparency for investors, some measure of confidence for bank depositors, and prudential requirements for financial institutions. Recent events suggest that this system is no longer adequate to the task. The savings-and-loan crisis of the 1980s could have slowed down the push to deregulate, but in the 1990s the Asian Financial Crisis provided a moment for self-congratulatory triumphalism about the superiority of Anglo-Saxon finance and the perils of crony capitalism. With rigorous accounting standards, regulatory oversight, and a quantitatively-based credit culture that kept lenders honest, surely the U.S. wouldn’t be vulnerable to the real estate bubbles that plagued Indonesian, Thai and South Korean banks. Or so we fervently hoped. Thus, financial deregulation and innovation proceeded apace. Today’s sub-prime mortgage crisis wasn’t supposed to happen, and now investors are haunted by the fear that financial portfolios are filled with near-worthless paper. And the baleful effects of the credit crunch are now felt widely by both individuals and firms.
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Andy Gelman “links to”:http://www.stat.columbia.edu/~cook/movabletype/archives/2008/03/mps_for_sale.html a “new paper”:http://polmeth.wustl.edu/retrieve.php?id=740 on money and UK politics. The abstract speaks for itself.

While the role of money in policymaking is a central question in political economy research, surprisingly little attention has been given to the rents politicians actually derive from politics. We use both matching and a regression discontinuity design to analyze an original dataset on the estates of recently deceased British politicians. We find that serving in Parliament roughly doubled the wealth at death of Conservative MPs but had no discernible effect on the wealth of Labour MPs. We argue that Conservative MPs profited from office in a lax regulatory environment by using their political positions to obtain outside work as directors, consultants, and lobbyists, both while in office and after retirement. Our results are consistent with anecdotal evidence on MPs’ outside financial dealings but suggest that the magnitude of Conservatives’ financial gains from office was larger than has been appreciated.

Andy isn’t sure about the substantive impact that this has for political science, given the disparities between the amounts of money that flows through politicians’ hands in functioning democracies and the amounts of money that they may personally derive from office. I’m not so sure about that, as the monies sticking to politicians’ hands do likely help shape their incentives (e.g. one can plausibly speculate that Tories who rock the boat too much aren’t going to have much luck cashing in on those directorships), but, in any event, the fact that Andy doesn’t spot any obvious methodological problems makes me at least think that the observed effect is likely real.

“Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2008/03/public-choice-o.html responds to the discussion on open publishing.

I don’t envision the free access system as the status quo but free. Papers would be ranked directly in terms of status and popularity rather than ranked through the journals they are published in. Ultimately there wouldn’t be journals and this would make a big difference as journals are the current carrier of selective incentives and status rewards. It would be easy to refuse to referee, since you wouldn’t fear being shut out of publication of that journal; I suspect refereeing might die. And if status were attached to the individual paper rather than the journal, who would bother to become an editor? It would be a very different world and in some ways more like (academic) blogging than its proponents may wish to think. In other words, the partial monopolization of for-fee journals makes it possible to produce status returns to motivate both editors and referees. Returning to the free setting, refereeing will survive insofar as writing detailed referee comments on other people’s work helps with your own research; it is interesting to ponder in which fields this might hold.

The interesting bit for me here is Tyler’s suggestion about the implicit incentives for reviewing; that people referee papers for fear of not being able to get published in the journal in question. My personal take on it (as is the take of a number of other people, if “this discussion”:https://crookedtimber.org/2008/02/12/how-much-should-we-referee/ is anything to go by), is a little different. I review not so much because I feel that if I don’t review a paper for journal _x_ that the editors of that journal will look unkindly on me in future, but because of a broad sense that I send papers out that others ought to review, and hence there’s a diffuse obligation on me to review other people’s papers in turn. In other words, I think that the motivating factor is general reciprocity rather than specific reciprocity. Not only that: when I have been on search committees where we are considering people who have been in the field for a few years, I usually check their resumes to see whether they have been reviewers for a few journals. This isn’t so much to figure out what the editors think of them (very often, editors are happy with whoever they can get as a reviewer), as because it seems to me to be the best publicly available proxy for whether the candidate is the kind of person who is likely to take on their share of the unofficial responsibilities that any school or department has.

This isn’t to say that Tyler may not be right when he suggests that an open publication world might not support the kinds of detailed and thoughtful review that we hope for, and sometimes get, in the current system. But I suspect (perhaps wrongly) that the mechanism that would undermine reviewing would primarily be a sociological one rather than an economic one. That is, it would have more to do with the disappearance of the social role of reviewer, and the set of perceived general responsibilities that go with it, than with the opportunities for specific quid-for-quo interactions between reviewer and editor that the current review system lends it to.

“Lane Kenworthy”:http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/ shows how it’s done.

Martin Wolf, whom I frequently disagree with, but always find worth reading, had an “excellent piece”:http://www.ft.com/cms/s/0/228997cc-eb99-11dc-9493-0000779fd2ac.html in last Thursday’s _Financial Times_. It was about the quasi-hysteria in the UK press over the prospect that ‘non-doms’ – wealthy foreigners resident in the UK – would be obliged either to become taxpayers or fork over 30,000UKP per year after they had lived there for 7 years.
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Some of the things that are most interesting to international political economy scholars such as meself are notoriously difficult to measure. To take one example, there’s a lot of muttering in the US and elsewhere about international trade, whether multilateral and bilateral trade deals are good or bad for the US economy, and so on (these debates also have close equivalents in Europe and elsewhere). But how to cut through the hype to figure out whether or not there is a real likelihood of change in the current regime or not? The usual approach is to look for an indicator variable of some variety that will allow you to track underlying processes that you can’t directly measure. I think I’ve found one – and it’s _at least_ as good as the Economist’s famous Big Mac index for figuring out shifts in PPP. My claim is that the degree of rhetorical overkill in Jagdish Bhagwati’s op-ed fulminations on trade is a very good indicator of what the free trade establishment actually thinks about the underlying risks or threats to the existing regime, and (to the extent that this establishment is politically plugged in) a plausible leading indicator of what’s likely to happen in the future. I’ll endeavour to test this hypothesis by keeping track of the Bhagwati Blood Pressure Index (or BBPI) over a period of time, and testing whether it maps well onto the expected outcomes.

Bhagwati’s piece in today’s “FT”:http://www.ft.com/cms/s/0/f24fa1c4-e92b-11dc-8365-0000779fd2ac.html is a good place to start. Those unfamiliar with his writing style might think that language such as “faintly ludicrous,” “denigration of freer trade,” “witless fear of trade,” and “disturbingly protectionist” indicates a BBPI that is alarmingly high, both for free trade and for Professor Bhagwati. Comparative analysis with previous op-eds and writings would suggest, however, that these criticisms are almost genial by historical standards; at worst they’re love taps. By my reading, the BBPI has dropped quite significantly since mid 2007 or so, suggesting that the free trade establishment believes that the current fervor over free trade is froth that will mostly disappear after the primary season. On the evidence of this article, we may expect the BBPI to drop still further if Barack Obama is elected President (one presumes that Bhagwati believes Austan Goolsbee’s representations to the Canadian government), but to rise substantially in the unlikely event that Hillary Clinton snatches the crown. Also of interest is the evidence that the article provides on the mental modelling processes that underlie these empirical predictions:

whereas Mr Obama’s economist is Austan Goolsbee, a brilliant Massachusetts Institute of Technology PhD at Chicago Business School and a valuable source of free-trade advice over almost a decade, Mrs Clinton’s campaign boasts of no professional economist of high repute. Instead, her trade advisers are reputed to be largely from the pro-union, anti-globalisation Economic Policy Institute and the AFL-CIO union federation.

Clearly then, your soundness on trade depends on the extent to which your campaign employs economists whom Professor Bhagwati approves of. I suspect that Hillary’s campaign is doubly damned because it’s supported by Paul Krugman (whom professor Bhagwati condescendingly refers to as an apostate ‘former student’). Nor had I hitherto realized that the economists of the ‘pro-union, anti-globalisation Economic Policy Institute’ were unprofessional economists of little repute; silly me.

Update: “Megan McArdle”:http://meganmcardle.theatlantic.com/archives/2008/03/a_fair_trade_index.php suggests that a basket of pundits would be preferable.

From today’s Times:

bq. For the first time in the nation’s history, more than one in 100 American adults is behind bars, according to a new report. Nationwide, the prison population grew by 25,000 last year, bringing it to almost 1.6 million. Another 723,000 people are in local jails. The number of American adults is about 230 million, meaning that one in every 99.1 adults is behind bars. Incarceration rates are even higher for some groups. One in 36 Hispanic adults is behind bars, based on Justice Department figures for 2006. One in 15 black adults is, too, as is one in nine black men between the ages of 20 and 34.

Here is an older post about how the U.S. incarceration rate compares to other countries. Here is Becky Pettit & Bruce Western’s (2004) ASR paper, with its frankly astonishing result that in the cohort born between 1965 and 1969, thirty percent of black men without a college education—and sixty percent of black men without a high school degree—had been incarcerated by 1999. Recent cohorts of black men were more likely to have prison records (22.4 percent) than military records (17.4 percent) or bachelor’s degrees (12.5 percent).Here is Bruce Western’s Punishment and Inequality in America, a superb analysis of how the prison system is now a key instrument not just of social control, but also social stratification, in America.

I’ve been too busy with teaching responsibilities the last several days to link or respond to various posts that other people have put up on taxes, collective goods, and related questions, so I’m going to declare intellectual bankruptcy, and just tell you to read “Laura McKenna”:http://11d.typepad.com/blog/2008/02/more-on-the-tax.html, “Will Wilkinson”:http://www.willwilkinson.net/flybottle/2008/02/22/moral-duties-in-contexts-of-partial-compliance/ and “Russell Arben Fox”:http://inmedias.blogspot.com/2008/02/taxation-and-democracy-101-on-lucky.html. But I also wanted to point to some interesting stuff that’s been happening in Germany, which is sort of related to this question. The _Financial Times_ has been running stories for the last week or so about a disgruntled former employee of a Liechtenstein bank, who has sold a list of the beneficial owners of various trusts in Liechtenstein to the German tax authorities for several million dollars.
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“Dani Rodrik”:http://rodrik.typepad.com/dani_rodriks_weblog/2008/02/mr-kristol-you.html catches up with Bill Kristol a couple of decades later …

I have waited a really long time to do this, and I am happy that Bill Kristol finally gave me an opportunity with his column in today’s New York Times. … he was my dreaded instructor long ago in two of the classes that I took as a Harvard undergraduate … In each course, we had to write short papers once every couple of weeks. I can say that my performance on these papers, which Kristol graded, was fairly consistent. The essay on Machiavelli? Here is a C-. The essay on the Federalist Papers? Here is a C. John Stuart Mill? Well, how about, yes you guessed it, another C. You can say that Kristol did his best to discourage me from pursuing a career in political science.

… He walked into the classroom and his first words were: “Hello, my name is Mr. Kristol.” To underscore the point that he was that, and not Bill or any other friendly appellations by which we students may have chosen to address him, he went to the board and wrote “Mr. Kristol.” I may have been a poorly adjusted Turk in my first year in the U.S., but this still struck me as odd. … Well, Mr. Kristol’s column today takes aim at Barack (and Michelle) Obama, and does so quite unfairly in my view. … What caught my attention was this passage: [where Kristol says that in almost every empirical respect, American lives have in fact gotten better over the last quarter-century.] … Really? … for a high-school graduate, the odds that his compensation would have fallen by more than 10% is 50-50. Note that even college graduates have not seen any income gains since around 2000. … some groups have definitely been left worse off–not just in relative but also in absolute terms. So statistics aside, who do you think has a better sense of what has happened to “regular folk” since 1980? Michelle Obama or Mr. Kristol?

Megan McArdle “responds”:http://meganmcardle.theatlantic.com/archives/2008/02/tax_me_more.php to my earlier “post”:https://crookedtimber.org/2008/02/16/revealed-preferences/ on taxes and revealed preferences and really makes a bit of a mess of things. More detailed discussion below the fold. [click to continue…]