Wednesday, April 30, 2014

Fred Thompson: Is the USA a Plutocracy?

NOTE: Another contribution by Fred Thompson:

A recent paper by Martin Gilens and Ben Page entitled “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens” and forthcoming Fall 2014 in Perspectives on Politics has garnered a lot of commentary in the blogosphere. But some have hailed the study for doing things Gilens and Page do not do: prove scientifically that America is basically an oligarchy/plutocracy. Moreover, while I find Gillen and Page’s empirical analysis very impressive – a real tour de force –, it is less than fully conclusive.

On the first point, America may well be an oligarchy/plutocracy. But Givens and Page do not claim that this is what their analysis shows; at most they claim that their findings are consistent with the notion that wealthy elites and businesses run things, which they acknowledge is their view. Nevertheless, they are very careful to distinguish between their opinions and their empirical findings.

On the second point, let’s start with what they find and how they got there. Gilens and Page find that the preferences of economic elites and organized groups, especially those representing business interests, influence (to a degree) the shape and content of public policies, while those of average citizens do not. They also find that business-oriented groups play a bigger role in shaping policy outcomes than do other kinds of groups, primarily because more of them are engaged on each issue (roughly twice as many, on average), and also because they are almost always in agreement on proposed policy changes. Both sets of findings are based upon a multivariate analysis of 1,779 cases, in which the a-priori policy preferences of average citizens, economic elites, mass-based interest groups, and business-oriented interest groups were regressed upon legislative outcomes.

These findings are interesting and plausible, but they aren’t very strong or robust. Their strongest model has an R-squared of just over .07, which is to say, all of the predictor variables in the analysis taken together explain only 7 percent of the variance in legislative outcomes; taken individually none of them explain more than 5 percent.

There is a second reason for my questioning the conclusiveness of their findings: I don’t think their analysis shows what they think it does. Their analysis focuses on the shape and content of public policies, not their effects overall. It is hard for me to see how ordinary citizens could or would want to shape the public policies of a huge and complex government like that of the United States. Nor does democratic theory require them to.

As Gilens and Page themselves explain, rational choice theories of electoral democracy presume that competitive vote-maximizing parties or candidates in a two-party system converge at the mid-point of the distribution of voters’ most-preferred positions. Consequently, where preferences are jointly single peaked so that they can be arrayed along a single dimension, the public policy outcome consistent with the preferences of the median voter is the empirically predicted equilibrium result of two-party electoral competition.

In economics, this outcome is usually referred to as Bowen equilibrium (after Howard Bowen, one of my teachers in graduate school). Note, however, that the naïve median-voter outcome is rarely an efficient outcome (the losers could compensate the winners to move to a different place on the continuum and still be better off) and under most straightforward sets of circumstances the inefficiency usually takes the form undersupply of publicly provided goods and services. In contrast, if one accounts for side payments (think tax prices), an outcome can be imagined that is both efficient and consistent with the median-voter result, but compared to the voters’ starting positions, would tend to shift the policy outcome in the direction of the preferences of those who have the most to gain/lose from the policy outcome in question (just what Gilens and Page tend to observe).

The efficient outcome that satisfies the median-voter outcome is, in fact, the true “Condorcet winner:” the only outcome that would be preferred to any alternative policy in head-to-head majority-rule voting by all voters. Except where this knife-edged position is realized there is always an alternative position and set of side-payments that can defeat the last head-to-head winner. Hence, it is arguably the “most democratic” policy.

Under most rules of order, the status quo remains in effect until the true Condorcet winner is located or until someone brings the process to a premature conclusion. Because the division of authority and jurisdiction in most legislative arenas permits leaders to manage/direct the process, real-world policy choices depend not only upon the preferences of the participants but also upon how the rules and organization of the legislative process. This means that real-world institutional arrangements can produce outcomes, which are neither democratic nor efficient. For example, where concentrated, salient, short-term payoffs (pork, jobs, etc.) trump diffuse, low-visibility, long-term consequences.

In theory, policy outcomes also depend upon how preferences are configured. As Gilens and Page explain: If voters’ preference orderings are not unidimensional and are sufficiently diverse, there may be no Condorcet winner (p. 5). Economists typically finesse this issue by assuming that any preference that matters will have measurable consequences and that anything that can be measured can be expressed in terms of willingness and ability to pay (money), which means that preference orderings on any issue can be treated as unidimensional – but this may merely reflect our own one-dimensional notions of what matters.

Gilens and Page acknowledge that there is a version of democratic control in which deviations from naïve or a priori policy preferences might be entirely consistent with the outcomes they observe (also those suggested by the informal economic theorizing above). In this version of democratic control, the marginal voter has weak policy preferences but instead cares about the consequences of policies – they ask only how well their interests have been served and vote accordingly; politicians enact policies in anticipation of those judgments. Consequently, rather than responding to citizens’ stated policy preferences, legislators are oriented to the electorate’s interests (which is unfortunately not necessarily the same as the public interest).

Gilens and Page simply dismiss this possibility, both because they don’t know how to test it and because they cannot imagine it to be true.

I am willing to grant that elected officials often fail to pursue the public interest, otherwise how can one possibly explain Congressional dithering over TARP in the late summer of 2008 or the absence of further fiscal stimulus in 2010. However, I am as inclined to attribute this to an excess of responsiveness to public opinion with respect to policy content as to too little.

Friday, April 25, 2014

Economist's Notebook: The Coase Theorem and Lane Hogs

Note: this one have been in the notebook for years, so I bring the old notebook out today after a long hiatus.  

One of The Oregonian's Joe Rose's most common themes is the lane hog.  Whether it be the dratted left-lane hog or the slightly less sinister middle-lane hog.  As Joe points out there is nothing that specifically prohibits either action in Oregon law, and yet there is a clear externality problem when slower drivers clog the left lane (and middle lane).

I think there is a clear Coasian interpretation to this.  The Coase theorem posits that and efficient outcome is more likely in the case of externalities when property rights are well defined.  Here they are not well defined: there is the suggestion that the left lane is for passing but no specific prohibition.

I have always thought that the elegant solution was the one they have in many parts of Europe where 'undertaking' - in our case passing on the right - is forbidden.  This creates a situation where all drivers know that to pass the left lane hogs have to get over and yield the lane. In other words rather then banning the left-lane hog, which requires a difficult definition and even more difficult enforcement.  Simply ban passing on the right and I suspect that soon (as I have observed on the roads of Europe) the rules will be self-enforcing and an efficient equilibrium will arise.

Thursday, April 24, 2014

A Lesson in Ignoring Sunk Costs

From the NY Times:
Oregon Considers Handing Troubled Insurance Exchange to U.S.
This is almost certainly the correct call, but something that human nature has a hard time doing.  Behavioral economists know that sunk costs (those that are non-recoverable) can have large psychic effects even when the rational decision maker should ignore them.  Glad there is some rationality in the Cover Oregon camp finally.

Update: Because I have been asked - a typical sunk cost behavioral response story would be something like this:  Suppose you buy a season long Sno-Park permit for $25 because you estimate that you'll use it more than 6 times and thus it is more cost efficient than the $4 daily permit.  Then on the last skiing day of the season you are trying to decide whether to go skiing on the mountain one more time or hike on the coast. All else equal you would prefer the coast on that day, but you think that since you have only used the Sno-Park permit a few times you "want to get your money's worth out of it" and decide to go skiing instead.   Economically speaking you have made a mistake - the $25 is gone and non-recoverable so there is no reason to take it into account.  Emotionally, however, we have a hard time ignoring such expenditures and often act on them.  I do it too.

This doesn't mean economic theory is wrong, just that we don't specify the utility function correctly.  If I care about not making mistakes (like buying a season Sno-Park), I might actually maximize my utility by not ignoring the cost.

But organizations are not individuals and in the case of Cover Oregon there is no place for sentimentality.  This has to be a purely rational decision.

Tuesday, April 22, 2014

The Problem with Protectionism: Brazil's Stagnant Productivity

A nice article in The Economist about the startling lack of labor productivity gains in Brazil since 1960.  Startling because of the recent economic boom - a boom more about commodity prices and huge oil reserves than a modernizing economy.

I have seen it all first hand: the tremendous drag of the bloated bureaucracy, the massive protection manufactured and high tech goods receive in Brazil.  Heck, even in my extremely well-funded private university the professors computers were old and slow because replacing them in Brazil is so expensive.  I had a Brazilian-made monitor that was so bad it was hard to read the screen at all.

A perfect example of what is wrong in Brazil is Petrobras - the state-owned petroleum megafirm that is a complete mess.

It is time for the state to start retreating from the commanding heights of the economy and let some market discipline in...before it is too late.

Monday, April 21, 2014

A Lesson in Economics for the Water Bureau

From the Oregonian (no link for I don't feel like wasting the hour it would take to find it):

"Portland Water Bureau officials say that draining 38 million gallons from Mt. Tabor Reservoir 5 won't cost the agency additional money.  The draining, cleaning and refilling of the reservoir is expected to cost a few thousand dollars for the salaries of the workers involved, but officials say it's factored into the bureau's budget and will not require any overtime."

Which, of course, is true in the accounting sense but not in the economics sense.  From an economics perspective there is a real cost to diverting workers to this task instead of others - the opportunity cost.  If these workers would shave been otherwise idle, then there is a real cost for the inefficiency of hiring more workers than needed.

The point being that it is silly to claim there is no cost to draining and refilling the reservoir - the cost is precisely all the work foregone by attending to this task instead.  It is economics 101 (or 201 in the case of OSU).

By the way I have this feeling of deja vu: I think I posted something almost identical during the Randy Leonard era when he claimed there was no 'cost' workers working on the "Water House."

Friday, April 18, 2014

Friday Dump: OR Unemployment, Common Core, Long-Term Unemployment Insurance...and Soccer

Okay, so it has been another one of those weeks - just when it seems the weather has slipped winter's grasp and it's all smooth sailing ahead, my household is beset with illness.  Keeping up with the day-to-day has been a monumental task.  So much so that I haven't been able to pick even the lowest hanging fruit.  But today is Friday, recovery is almost complete, and I can do a quick recap of all the stuff I would have blogged about had I had time...

1) Oregons' job  picture improved again in March.  The state added a very healthy 7,500 jobs and the unemployment rate essentially heal steady at 6.9%.  This last part is actually good news because a steady unemployment rate in the face of strong job growth means folks are coming back to the job market after dropping out.

2) A note on the Common Core standards which are now coming under attack in many localities, including Portland.  I have many concerns about how standardized testing and such common standards impact curriculum but I will say, as an empirical researcher, that I do like the notion at least of a set of national standards.  Why?  Because these will provide real metrics to state policymakers and voters that I expect will show how poorly Oregon is doing relative to other states.  I expect this because I believe that things like shorter school years and larger class sizes are bad for learning - there is enough evidence to be convincing.  But it is one thing to say that other research points to a causal link and to have real comparators.  I think this will lead to more investment in K-12 education in Oregon, which is a good thing.

3) The Long-Term Unemployment Insurance extension that is stalled in the Congress casts a spotlight on the persistent problem of the long-term unemployed in the US.  Josh Lehner at the Oregon Office of Economic Analysis has a nice discussion of the problem with colorful graphs.  

4) Finally, soccer.  The MLS announced its latest expansion franchise: Atlanta.  To those of us old enough to remember when MLS started, this seems like a sad regression.  An NFL owner with a big new stadium looking for more programming brings in MLS to play in a too big stadium on plastic.  See: Kraft and the Revolution.  On the other hand, apparently TV ratings are up significantly for the beginning of the season, so perhaps some momentum is building in that area and an Atlanta-based team will certainly help with the overall TV footprint.

Phew!  Hopefully some more regular blogging next week.

Wednesday, April 16, 2014

Vote for Joe!

Who says economists are not intriguing?  Apparently they are according to The Oregonian, which is running a poll and the quarterfinal match up is Monica Wehby versus local economist Joe Cortright.  Joe cites, as evidence in his favor, his new comic book.  

Let's rally together econ-o-nerds, vote for JOE!

Tuesday, April 8, 2014

Social Progress Index

From The Economist:

I like this quite a lot.  The Economist describes:
Importantly, the indicators do not look at inputs (like spending on education) but only outputs (like literacy). And they hew to social, health and environmental factors, not economic ones—making it unique compared with other indices measuring well-being from the OECD, UN Development Programme and others.

Yet when the SPI is compared with GDP per person, its usefulness shines. Countries situated above the curve do better in terms of social inclusiveness than their economic strength might dictate, while countries below the curve perform worse. "There is a view that economic development and social progress go hand in hand. That's true on average, but not in particular," says Michael Porter, a professor at Harvard Business School who worked on the study. (Matthew Bishop, The Economist's US Business Editor, also served on the advisory board.) Hence, Costa Rica and Iran have similar GDP per person, but exhibit massive social differences. Likewise, Brazil and Kuwait rank about the same in terms of social progress, even though the Gulf country has four times the GDP per person.
This ins't entirely right.  The SPI looks at plenty of inputs as well as outputs.  The details of the Social Progress Index are here.  For example, if the goal is education, the measure looks at literacy but also school enrollments - which is arguably an input.  But it is still a nice, more comprehensive measure of social progress and makes the point that simply looking at GDP per capita misses the entire story (though I will say that the correlation is still quite high and thus GDP per capita is a useful starting point).

It also looks at 'opportunity' which is a bit of a development buzzword and is something that the UNDP has been pushing especially hard.  Included in opportunity are things like 'tolerance and inclusion' which dings more socially conservative societies hard.  

Anyway, here is a nice toy to play with:


Thursday, April 3, 2014

Picture of the Day: Jobs

Via the Wall Street Journal:

Note: these are absolute numbers, so though the red life shows the number at the peak (in early '08), the number of folks entering the labor market between now and then is not represented.  If it were it would be a bit endogenous - in a healthy economy more folks enter the labor force while recessions cause drop outs and delays to entry.  Just something to keep in mind.

The US March jobs report is out tomorrow morning.