Incommensurable values
March 25, 2013 8:42 PM   Subscribe

Economists and the theory of politics - "why unions were often well worth any deadweight cost"

The standard approach to policymaking and advice in economics implicitly or explicitly ignores politics and political economy, and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We outline a simple framework for the study of the impact of current economic policies on future political equilibria — and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.
viz. What kind of mass movement with truly powerful institutional support can take the place of unions? - "I agree with just about everything they say about the value of unions, but I also feel forced to acknowledge that it doesn't matter. As a truly powerful mass movement, unions are dead and they aren't coming back. This has left a gaping hole in American politics: Corporations and the rich continue to have enormous institutional power, while the working and middle classes have almost no one to speak for them. I figure that filling this hole is the most important problem the left has to address over the next decade or so. Unfortunately, I don't know how."

cf. The Tyranny of Political Economy - "In reality, our contemporary frameworks for political economy are replete with unstated assumptions about the system of ideas underlying the operation of political systems. Make those assumptions explicit, and the decisive role of vested interests evaporates. Policy design, political leadership, and human agency come back to life... Expand the range of feasible strategies (which is what good policy design and leadership do), and you radically change behavior and outcomes."

also btw...
  • Markets in almost nothing - "One of the first things I noticed when I started studying economics was that goods that can't be bought and sold are basically ignored."
  • Wealth and Motivations for Saving - "teach the public more about how wealth builds over time"
  • The Supply and Demand for Safe Assets - "Where do safe assets come from? Empirical evidence suggests that the private sector creates more near riskless assets when the supply of government debt is low and reduces privately-created near riskless assets when the supply of government debt is high."
  • The safe asset shortage - "Safe debts – or what is often called information insensitive assets, as they do not suffer from the types of financial frictions that are characteristic to other financial assets – play a major role in facilitating transactions for institutional investors. And, as we have learned in the recent years, they also play a major role in triggering financial crises when they lose their safety status and turn into information sensitive assets."
  • GDP, welfare and the rise of data-driven activities - "The worry today is not that investment in technology might not be as productive as we thought (the so-called computer paradox), but the fact that the economic value of the fast growing consumption and production of online data may not be adequately captured in official statistics."
  • Uncle Sam, venture capitalist - "AMERICA, like much of the world, is facing a crisis of innovation. Its roots rest in several significant challenges: an awareness that rapid technological progress and growth will be crucial in weathering demographic headwinds and the threat of climate change among them. But there is very little consensus in Washington on just what the government ought to be doing to help."
  • What Google Reader tells us about banking and nationalisation - "Which is why the government taking charge of a service like RSS for the benefit of the public good — or for that matter providing the country with universal internet or high quality media — should not necessarily be treated with suspicion or mistrust. In the civilized world there is a perfectly reasonable way to ensure arm's length detachment and to protect such institutions from the political meddling of government."
  • If You Can't Fix It, You Don't Own It - "Who owns our stuff? The answer used to be obvious. Now, with electronics integrated into just about everything we buy, the answer has changed. We live in a digital age, and even the physical goods we buy are complex. Copyright is impacting more people than ever before because the line between hardware and software, physical and digital has blurred. The issue goes beyond cellphone unlocking, because once we buy an object — any object — we should own it. We should be able to lift the hood, unlock it, modify it, repair it... without asking for permission from the manufacturer. But we really don't own our stuff anymore (at least not fully); the manufacturers do. Because modifying modern objects requires access to information: code, service manuals, error codes, and diagnostic tools."
like think about sovereign debt -- that is safe assets -- more as a national equity: [1,2,3,4,5]
The US national debt is in truth - like all national debts - a complete and surreal fiction: it is a national equity, the greater part of which is interest-bearing either as claims over public or private revenues.

At least two-thirds of the quasi tax credits created by banks came into existence as mortgage loans, and are therefore backed by claims over the productive value of the US land and buildings which they fund. Much of the rest consists of claims over the value of US assets which fund the productive capacity of US corporations. The remainder - which provides the credit necessary to finance the circulation of goods and services in the US - is based upon the magnificent productive capacity of the US people. Only by liquidating US Incorporated could this National Equity ever be redeemed...

There is no shortage of dollars because every dollar's worth of productive capacity - public or private; productive people or productive assets - in the US is the capacity to issue a dollar credit, which reflects the increase in the US national wealth which underpins the US national equity.

President Barack Obama and his government should get busy creating national equity by instructing the Fed to create and issue the necessary finance for the creation of a new generation of US infrastructure; the transition to a low carbon future which the US can, and should, be leading; and in increasing the capacity of the US people to do so.
(or how the government budget constraint is different than a household's or corporation's -- namely that they can tax and can't be liquidated, unless extraordinarily mismanaged or conquered, I guess...)
posted by kliuless (26 comments total) 84 users marked this as a favorite
This is a good point from the "Markets in almost nothing" link:
Though people in rich countries work a bit less than people in poor countries, the super-rich often work very hard (at least, the ones I know do). This is a puzzle for the type of simple utility functions used to explain labor-leisure choice in macroeconomic models. Why do the super-rich work? It could be because working itself provides them with utility, or it could be because working enables them to produce the feelings of self-worth and capability that their huge bank accounts can't possibly buy in any market.
Look at how many people with enormous net worths go through years of grueling work just for a chance to be president, i.e. 4-8 more years of grueling work. Mitt Romney, John McCain, John Kerry, John Edwards, etc. This kind of thing seems to cast doubt on the idea that excessively high income taxes will dissuade the super-rich from working. If the super-rich were susceptible to that kind of rationally self-interested cost/benefit analysis, they'd stop working altogether and enjoy their life of leisure, regardless of the tax rates.
posted by John Cohen at 9:13 PM on March 25, 2013 [13 favorites]

"If the super-rich were susceptible to that kind of rationally self-interested cost/benefit analysis, they'd stop working altogether and enjoy their life of leisure, regardless of the tax rates."

That's something that's backed up by empirical data too — when top marginal tax rates increase, very few with the means to leave a jurisdiction do so. Obviously, it's a curve, but the idea posited that income tax increases on the super-wealthy lead to substantial individual wealth flight is unsupported, at least to my knowledge.

(And, just in personal experience, it's backed by anecdata: Every member of the 1 Percent I know works their ass off, though I find that they often dramatically underestimate the amount of work done by poor people.)
posted by klangklangston at 9:23 PM on March 25, 2013 [7 favorites]

how the government budget constraint is different than a household's or corporation's
Debt crises: On predicting fiscal doomsday
It sure seems like high public debt levels ought to represent a looming economic problem. Why, then, is it so difficult to demonstrate, conclusively, that they are? It could be due to the econometric challenges posed by any macroeconomic issue: sample sizes are small and the possibility of any number of statistical biases throwing things off is large. Or it could be that debt levels simply aren't, in many cases, as bad as everyone seems to think.
Via Brad DeLong: Economists Looking Under The Lamp For Fiscal Doomsday
posted by the man of twists and turns at 9:27 PM on March 25, 2013

The first link suggests that Acemoglu is an economist that has become left-leaning. It's interesting, as they are to some extent being claimed by libertarians as well. There's an interesting article discussing their nuanced view.

I feel it is the job of the economist to present things like deadweight loss and social welfare as one of many considerations. In the real world, governments end up with (in their view) second- or third-best options due to political or (hard to calculate) transaction costs. But I don't know how much an economist can contribute to things outside their domain. Part of the problem is that it's a lot harder to agree on the impact of unquantifiable things, and you end up with, well, political arguments. Robinson & Acemoglu have a very interesting approach in this regard, and I look forward to what follows in Polisci - Econ crossovers.
posted by helot at 10:20 PM on March 25, 2013

Only the unions are organized and able to lobby for the middle class. Outsourcing union jobs, refusing to pay trades people living wages, and negative publicity all have decreased the clout of unions. So the corporations get ever richer and have more money stock piled and thus out of circulation.
How many individuals do you know who can afford to hire lobbyists to knock on House and Senate doors with the message that they need to fix the imbalance? How many individuals can provide campaign money and cushy vacations for legislators?
posted by Cranberry at 12:00 AM on March 26, 2013

Yeah, they come this close || to saying that paying workers more is good for the economy. But they don't quite get there. Not a complicated-enough idea, or something.
posted by Kirth Gerson at 2:40 AM on March 26, 2013 [1 favorite]

Good post
posted by C.A.S. at 2:52 AM on March 26, 2013

Wealth and Motivations for Saving - "teach the public more about how wealth builds over time"

Look towards the EU after the Cyprus agreement with deposits held hostage and the 100,000 E guarantee marginally upheld. I guess some people will move their money to 'safe' banks abroad (cough 2008 cough), others will put it in a darned sock and others might try investing it since it's not as sure in banks as it used to be. See also the Spanish proposal for a 0.3% levy on deposits. Interesting times are overrated.
posted by ersatz at 6:20 AM on March 26, 2013

Brilliant post. This will keep me busy today - thank you.
posted by young sister beacon at 6:32 AM on March 26, 2013

I'm curious why there is so little recognition that massive wealth concentration creates much the same risks as a centralized economy.
posted by srboisvert at 7:03 AM on March 26, 2013 [12 favorites]

I'm curious why there is so little recognition that massive wealth concentration creates much the same risks as a centralized economy.

Yes! This! Thank you for formulating so succinctly what I've been trying to articulate for years now! Too much wealth concentration basically produces the same kind of system people claim to fear so much in central planning based economic systems like communism. At the extremes, the two ideological extremes meet.

Sufficiently advanced laissez-faire capitalism is indistinguishable from a centrally planned economic system.
posted by saulgoodman at 7:55 AM on March 26, 2013 [3 favorites]

Sort of related to the Tyranny of Political economy is an article I read this morning: How the Maker of TurboTax Fought Free, Simple Tax Filing
posted by mcmile at 8:38 AM on March 26, 2013

Sufficiently advanced laissez-faire capitalism is indistinguishable from a centrally planned economic system.

I've been thinking lately about how the demise of the Soviet Union and communist ideals in general is related to the demise of unions.

It's a bit of the thing where, you want to beat your rival at your game but you want to beat them at their game, too. So as long as a wide array of countries--and more important, your primary rivals--are beating the drum of worker's rights, unions, and the rest, it becomes imperative for the West to do the same, only 'better' in their own way.

Once that dynamic collapses, the incentive for western countries, and particularly the U.S., to even try to look good in the area of workers rights and wages seems to collapse as well.

I mean, maybe it's just coincidence but the demise of the communist bloc and the demise of unions (at least here in the U.S.) has gone pretty much in lockstep.
posted by flug at 9:21 AM on March 26, 2013 [3 favorites]

My threads! I want to dig deeper into this later. Great post!
posted by HighTechUnderpants at 10:18 AM on March 26, 2013

We are witnessing the end of the era of state capitalism and the beginning of the era of socialism. Capital is becoming ever more concentrated, and thus ever more socialized, as Marx predicted. As this occurs, the proletariat starts to emancipate itself from the industrial yoke, and seeks its destiny in purely human terms, and thus relativizes the importance of its industrial organizations.
posted by No Robots at 10:58 AM on March 26, 2013

On the other hand, the folks this article is about probably won't be feeling particularly emancipated in a few years time, so maybe it's too soon to start passing around the Cuban cigars:

The Greatest Retirement Crisis in American History
posted by saulgoodman at 11:09 AM on March 26, 2013

Joseph Stiglitz: Singapore’s Lessons for an Unequal America
Singapore has had the distinction of having prioritized social and economic equity while achieving very high rates of growth over the past 30 years — an example par excellence that inequality is not just a matter of social justice but of economic performance. Societies with fewer economic disparities perform better — not just for those at the bottom or the middle, but over all.
posted by Golden Eternity at 11:12 AM on March 26, 2013 [1 favorite]

@saulgoodman: The Baby Boomers may yet have a trick or two up their sleeves. Go, Grey Power!
posted by No Robots at 11:13 AM on March 26, 2013

They're gonna need 'em.
posted by saulgoodman at 12:01 PM on March 26, 2013

The Baby Boomers may yet have a trick or two up their sleeves. Go, Grey Power!

If my mom is one to go by those are actually just tissues tucked up there.
posted by srboisvert at 1:29 PM on March 26, 2013

^Well, with my mom it's a pistol, a half bottle of rye and lipstick. When I told her that, she said the bottle was empty.
posted by No Robots at 1:34 PM on March 26, 2013

That's a good article, homunculus. Thanks.
posted by No Robots at 8:32 PM on March 26, 2013

VICE: Clubbed By Growth
Our national fixation on growth papers over a lot of shameful insecurity. Not only does our anxiety push us to become the kind of people least capable of launching our own personal-growth plans, it encourages us to ignore the growing number of urgent issues that have nothing to do with the size of our per capita GDP.
Via TAC: The Cult Of Competitiveness
posted by the man of twists and turns at 10:20 PM on March 26, 2013 [1 favorite]

paying workers more is good for the economy

that's what Japan is trying :P

massive wealth concentration creates much the same risks as a centralized economy

just saw this: Crony Capitalism Thrives In The Absence Of A Safety Net
In his book 'The Rise And Decline Of Nations', Mancur Olson argued that over time stable democracies will experience a progressive increase in the power and influence of special interests and crony capitalists. Olson also identified the self-preserving nature of this phenomenon. Once rent-seeking has achieved sufficient scale, "distributional coalitions have the incentive and... the power to prevent changes that would deprive them of their enlarged share of the social output". Olson's diagnosis was accurate on both counts. Most developed economies are currently stuck within various stages of Olsonian demosclerosis...

[M]iddle-class subsidies act as the carrot that aligns the interests of the middle class with parasitic crony capitalism. However, along with the carrot comes a very hefty stick – the absence of a safety net... An employer-independent safety net promotes free enterprise by enabling us to dismantle the privatised welfare state that is the lifeblood of crony capitalism. Only if we construct a safety net for individuals can we dismantle the hammock that incumbent crony capitalists in our economy currently enjoy.
also btw Bill Gates recently panned _Why Nations Fail_; here's Acemoglu & Robinson's response...

cf. Mexico arrests head of teacher's union on fraud charges & Mexico Shaking Up Its Telecoms Sector

viz. "All of which brings us to the big question: what about China? Messrs Acemoglu and Robinson are sceptical of the Chinese economy while others, including Mr Gates, are confident that prosperity will continue and that gradual political change will lead to the development of inclusive institutions... Though there are pockets of advanced-economy wealth in China it remains a poor country. And while Mr Gates is correct to note that rapid Chinese growth has lifted hundreds of millions of people out of poverty, one could also argue that the restrictive policies of the authoritarian Chinese Communist Party have greatly limited the ability of hundreds of millions of others to share in the benefits."

Can China Escape the Middle-Income Trap? "Does that mean China is destined for the trap? Not so fast! There are other signs that China has some advantages that may help the country escape the trap — mainly, a healthy share of high-technology products in its exports, and a population with better education than other middle-income countries. Here's more from Eichengreen, Park and Shin..."

recall: "it may be far more efficient to focus on improving, say, the legal framework than to build more airports [that is] it is far better to cut back on investment and to focus on reducing the institutional constraints to more productive use of capital, such as weak corporate governance and a weak legal framework..."

or listen to Aung San Suu Kyi: "Investment in Burma was to be encouraged, she said, but warned that a proper legal framework and independent judiciary was not yet in place."

Paul Romer -- another 'new institutionalist' (NIE) -- looks at how HK cut its corruption tax:
In the 1970s, the same sorts of cultural pessimists thought that Hong Kong would always be corrupt. The actual experience there demonstrates just how wrong they were. Feasible policies can quickly change a culture of corruption.

As in many places, the responsibility for fighting official corruption in Hong Kong once rested with a special branch within the police force that was conveniently ineffective. In 1974, the governor general of Hong Kong vested anti-corruption responsibilities in a new elite ministry, the Independent Commission Against Corruption (ICAC). The commission was directly responsible to the governor general, who was himself an appointed rather than an elected official.

The governor general in Hong Kong was not an authoritarian leader. He answered to the democratically elected British prime minister but his position did not depend on local political contests. As a result, neither the governor general nor the commissioners that answered to him had any interest in using the substantial powers of the commission for narrow political gain. They could be trusted with strong powers because they were held accountable to an offshore democracy that wanted Hong Kong to thrive.

Unsurprisingly, the ICAC's efforts met with considerable resistance from the police. The governor general was eventually forced to grant amnesty for past crimes after the police went on strike and threatened violence. Though amnesty was viewed as a setback at the time, it meant that the commission could use all of its resources to prosecute fresh cases involving corrupt police officers and officials. This made it a much better deterrent against continued corruption.

Along with the formal prosecutions, the ICAC used education to change Hong Kong's social norms regarding corruption. It organised a broad campaign, adding anti-corruption classes to the public school curriculum and creating anti-corruption television programmes. It published surveys that tracked changes in the amount of corruption over time. The commission also reviewed the rules of all ministries and modified them to reduce opportunities for corruption (Manion 2004).

So much for Hong Kong's intractable culture of corruption. According to the surveys, the frequency of requests for bribes fell very quickly. Today Hong Kong is among the least corrupt places in the world, ahead of Japan, the UK, and the US.
oh and...
  • Doing the subsidy maths - "I was amused to note that SIFMA, a trade association, quoting the IMF, came to a 20bps subsidy... So suppose JP[Morgan] enjoys a 20bps subsidy on that $1T. That comes to $2B. Two billion dollars. To put this number in context, JPM's last dividend payment was roughly $1.1B (30 cents a share last quarter to 3.8B shares). So the annual state subsidy JP gets, using trade association numbers, covers 40% of what JP gives shareholders. Um. I don't know about you, but if this is even vaguely plausible, then the US taxpayer could legitimately be quite peeved about it."
  • BRICS Nations Plan New Bank to Bypass World Bank, IMF - "The U.S. has failed to ratify a 2010 agreement to give more sway to emerging markets at the IMF"
  • Norway Becomes Petro-State as Investors Balk at Hidden AAA Risks
like check out Jeremy Grantham's interview with Charlie Rose: "We should worry more about the real world and less about the paper world."
posted by kliuless at 2:34 PM on March 27, 2013 [2 favorites]

Wow, so many interesting links here! And Go Norway! :)
posted by jeffburdges at 11:16 AM on March 29, 2013

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