Monthly Archive

I would rather vote for a party than an individual politician, especially when parties are allowed to define their own internal structure and their own rules for deciding how to vote (as I suggested before). Individual politicians have big problems with commitment credibility because it is difficult to keep tabs on them to make sure they are doing what they said they were going to do. Politicians that have been around for a while tend to be more credible because they have a reputation to protect and have at least shown that they will not do the opposite of what they campaigned on, but this only goes so far because it is still difficult to monitor them and because political careers are bounded. Parties which can define their own internal structure can mitigate both these problems by adopting voting rules which give the party more credibility. For example, if a party has an internal council that decides its votes it will have a good deal of credibility because it is very difficult to maintain a conspiracy with a large number of people. Additionally, the lifespan of a party is unbounded, unlike that of individual politicians, so the time frame to build up a good reputation is much longer. When parties are allowed to define their rules for deciding votes and internal structure, competition between parties will create strong incentives to adopt rules which lead to party behavior that appeals to voters, such as transparency, commitment credibility and time consistency.

I suspect that parties in closed-list proportional representation systems are a good deal like parties which can define own voting decision rules, because their party structures have total control over who fills the seats allocated to the party so it has ultimate control over how the party votes. I am not sure how much of an improvement allowing parties to have more flexible structure would improve party behavior.

My appreciation for strong political parties is actually a complete reversal for me. I used to be deeply skeptical of political parties, especially “official” ones that receive votes directly, but I consideration has lead me to favor parties over people.

Would you rather vote for a person rather than a party? If so, why?

A while ago, I suggested a scheme for the division of power between the executive and legislative branches (link) which involved two congressional bodies, an executive congress and a legislative congress. One of the goals of the scheme was to solidify the separation between policy making and policy enforcement. One question I failed to ask, though, was “what does it mean to have an optimal separation?” I don’t really doubt that the separation between legislative and executive powers is a good idea, but that I do not understand rigorously why the separation of executive and legislative powers is a good idea. To understand how much separation should exist and where powers should be separated for optimal operation, one must have a good understanding of why that separation is a good idea.

One could argue that separation of powers is largely to enforce the rule of law; putting distance between the creation of law and the execution of law means that the way for executive officers to maximize their power is to enforce the law broadly and therefore somewhat consistently over people and over time, but completely separating legislative and executive powers is not the only way to put distance between law making and law enforcement.  Parliamentary systems, where the legislature elects the executive, have this feature when there are procedural restrains on the legislative body electing executive officers. For example, if executive officers are elected only at regular intervals there would be significant space between the formulation of law and execution of law. Part of the reason for separation must be this rule of law aspect, and part of it must also be the vague notion that separating power will cause the separate concentrations of power to  limit each other and prevent tyranny. There has been at least one attempt to formalize this latter aspect, but I found it very unsatisfactory. Without a rigorous understanding of exactly what the purpose of the separation of powers is, it is impossible to determine what an “optimal” separation is, and that limits how much I can consider and compare different governmental structures.

Opium farming is big in Afghanistan, and there has been a big effort to fight it. This article makes it clear that Afghan farmers are plenty rational; when the government drives up the costs of farming opium by specifically destroying opium crops, they substitute other crops. In this case, they have substituted Marijuana:

As Afghanistan struggles to cut its raging opium production, aid workers try to find alternative crops, but for some former poppy farmers the choice was easy — they planted marijuana instead.

The article also makes it clear why:

Marijuana, while not as profitable as opium, still makes more money than other legal crops.

This should not really have been unexpected

Now, it is time for the fundamental model of all economics!

The supply and demand model allows us to determine how much of good will be sold and at what price it will be sold in the market under given conditions. It works well for most markets. Mathematically, we achieve this end by finding relations between price and quantity for both buyers and sellers. We expect that buyers will want to buy more when the price is lower, while sellers will want to sell more when the price is higher. We then find the equilibrium price and quantity, where the price is such that buyers want to buy exactly as much as sellers want to sell.

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For this post, let’s find a relationship between price and quantity for buyers. We assume that other factors that might affect how much of a good buyers would like to buy (quantity demanded) are held constant. Such factors include tastes, income, how much information buyers have about the good, and government policy.

Let us consider watermelons.

These numbers are all made up, by the way. This line is a demand curve, a depiction of how quantity demanded changes with price. We can see on the graph that 24 watermelons are purchased if the price is $3, while 15 are sought if the price is $4. If the price changes and there is a corresponding change in quantity demanded, we say that we’ve “moved along the demand curve.”

A tangent regarding notation: You may be used to seeing x on the horizontal axis and y are the vertical axis, where x determines y — this convention holds across math and science for the most part. For example, if we were looking at a function, we would ordinarily put the value that goes into the function on the horizontal and the value that comes out on the vertical. However, economics does things differently, and I have no idea why. It’s a silly convention, but unfortunately it is widespread. Quantity (or sometimes quantity per unit time) is on the horizontal, price is on the vertical, but price determines quantity, not the other way around.

The demand curve for all buyers is built from the demand curves of each individual buyer.

Here is what an individual demand curve might look like. Jane, our hypothetical consumer, is very keen on having at least a single watermelon and will buy one if the price for watermelons is between $6 and $4 . She’ll buy a second and third watermelon as well, provided that the price is low enough. Between $4 and $2, she buys two watermelons, and at $2 or less, she buys three. Beyond the third, she doesn’t want any more (for any positive price, at least). By adding up many individual “stair step” curves that are all a little different from one another, you can imagine how a fairly smooth curve would be built, approximating the line above.

Implicit in the slope of that line I have chosen for my example is the assumption that as price falls, buyers demand more of a good. This assumption is important in economics, earning the title Law of Demand. According to this “law,” if other factors affecting demand are held constant, demand curves slope downward. This law isn’t quite ironclad; one could contrive an example of a good where its value to buyers increases with price.

Of course, economists also wonder what happens when other factors are varied. Such a variation results in a “shift of the demand curve” (as opposed to “movement along…”). If, say, the price of cantaloupes were to fall, then at any given price for watermelons, we would expect quantity demanded to be less than before (since canteloupe is a decent substitute for watermelon and some consumers will switch over to the now-cheaper cantaloupe). The same effect might result if consumers began to dislike watermelons, if the government put a tax on them, or if it was discovered that they are bad for your health.

Here, a $1 reduction in the price of cantaloupe causes consumers to buy fewer watermelons at any given price for watermelons. In other words, the demand curve for watermelons shifts to the left. (Sometimes a shift in this direction is called a shift inwards, a shift downwards, or a decrease in demand.) After the shift, a price of $3 elicits demand for 18 watermelons, while a price of $4 corresponds to a mere 8.

In the next post, we’ll look at how price and other factors affect the quantity of a good that sellers are willing to sell and, finally, put it all together to determine price and quantity based solely on those other factors.

Edited: 12/15/07

I’m moving back to Seattle and starting school in a few days, so blogging will be light for the next few days.

John Yoo frightens me in general; his view of the presidency is essentially the exact opposite of mine. Yoo argues for fewer constraints on presidential power, while I regularly argue for limited executive power. In a talk given to the Federalist society Yoo opined:

It’s “good for the president to nominate someone with his views [as attorney general]. Every subordinate should agree with his views so there is a unified approach to the law”

I too would like the executive branch to have a very consistent (and moderate) view of the law, because I think that would strengthen the rule of law a good deal. I don’t think Yoo’s position makes very much sense at all; is it really good to have the whole executive branch have a unified approach to the law if that approach changes significantly every four or eight years when a new president is elected? Wouldn’t you expect congress to have a much more time consistent median position than the President?

via Balkinization

From time to time I like to consider how the structure of government might be altered for the better. A few days ago I wrote about the market power that the President has in the appointment process. Let me propose an alternative way of organizing executive and legislative authority which relies heavily on removing the market power of both the president and Senate party structures.

Instead of the Presidency and Congress, the executive and legislative branches would be composed of an executive congress and a legislative congress, both proportionally elected. The legislative congress would act much like contemporary non-parliamentary legislatures. All non-foreign policy related executive appointments would be filled by the candidate who is first to pass both congresses much in the same way as bills are passed now by the House and Senate. All executive branch positions (besides the actual executive congress) would be filled either by appointment or hired directly or indirectly by an appointee. Only the executive congress would have the authority to remove an appointment for non-criminal reasons, and it would have to do so by a heavy majority. Federal judgeships would also be filled by appointment, but would only be removable by regular criminal proceedings for corruption and other crimes.

The goal of having both congresses approve appointments would be to select consistently centrist executives with strict respect for rule by law (not necessarily rule of law). The job of the executive congress would be to make sure that executive appointees are not beholden to the legislative branch; to give appointment positions. The job of the legislative congress in the appointment process would be to make sure that executive appointees are interested in evenhanded enforcement of the law. Heavy majority requirements for passing both congresses would work to make sure that appointments are very centrist so that enforcement of the law would remain relatively constant through time. Competition between representatives in the congresses for influence on appointment results would make appointments relatively quick.

The executive congress alone would choose the foreign policy minister or ministers in charge of foreign policy and national defense (but not civil law enforcement). In place of a veto, the executive congress would have the power to send bills passed by the legislative congress to a constitutional court. Sending a bill to a constitutional court would require a large minority (something around 25%) in the executive congress.

The legislative congress would act much as traditional legislatures do, but it would be more limited in the power it could exert over the executive branch. The legislative congress would create executive agencies by charter, setting their internal structure and purpose, but it could only modify an agency intermittently.

My primary concern with this system is that I am not sure if the executive congress would try to strengthen the power of the executive branch in opposition to the legislative branch’s attempts to strengthen itself, because I am not sure it would have enough vested interest in the executive branch.

Coyote says:

there is a LOT of bitching out there about the new IPod classics.

I purchased one four days ago (along with a MacBook). It’s still in the mail. I guess this will teach me a lesson to research everything well before I buy. At least I researched the MacBook.

I don’t think I agree with more than three or four of the 23 proposals, but I am still really looking forward to this book.

In making appointments the President has a good deal of power to appoint who he wants, even though his appointments must be confirmed by the Senate. The President has appointment market power because as the sole supplier of appointment nominations, the president faces almost no competition or potential competition. The presidential term is long, and there is only one of him. This is especially true in the President’s second term because he cannot be re-elected and so has little incentive to please voters. In contrast, Senators face competition in supplying votes for confirmation, and face at least some electoral competition.

Because American parties are strong, there is some degree of market power in the Senate, but it is not unbreakable because the party structures can only exert limited pressure on Senators. Senators can and do defy their party. Additionally, I suspect that the Senate actively blocking appointments is much more visible to the public than the president submitting extreme nominations, which makes it easier for the Senate to lose politically. These factors add up to a strong presidential advantage in the appointment process.

Consider President Bush’s recent nomination for Attorney General Michael Mukasey. Some people might say that the Democratic majority got all it argued for (it got a nomination it suggested), but consider how modest the aims of the Democrats were; Democrats didn’t suggest lefty candidates or even centrist candidates to be “consensus nominations”; they suggested a candidate who shares much of the Administration’s ideology. Opposition Senators can win nomination concessions at the margin, but they have an infra-marginal disadvantage.

While many regard the president’s appointment market power as appropriate, I do not. Strong rule of law requires that laws be enforced as evenhandedly and as free of agenda as possible. The task of the executive branch is to carry out the law, not to make policy. The president’s latitude in appointing who he wants, gives him the power to shape policy by appointing people with shared policy objectives to executive agencies, influencing policy not by changing the law, but by changing the enforcement of the law. The power of the president to appoint judges who are particularly sympathetic to the executive branch acts to amplify the power of the president to shape policy (Charlie Savage discusses that here). If we want moderate administrators of the law who have respect for the law the president’s market power in the appointment power must be less than it is now.

I don’t understand why it’s so difficult to read books online. Two books on my reading list, Let Their People Come and Economics for Real People (an intro to Austrian economics), are freely available online (here, and here), but I will be buying hard copies,  because I know that, regardless of my interest, I won’t read the whole book online.

I read a lot of stuff online, but there seems to be a length limit. I can’t read more than about fifty pages of any one material online. Perhaps it is simply that my chair is uncomfortable, or perhaps having a physical book reminds me to continue reading. I don’t find either of these explanations convincing.

I also wonder how much of the failure of the “paperless office” is explained by this difficulty.

Does anyone have a good explanation?

After Ron Steenblik of the group Global Subsidies Initiative commented on John’s recent ethanol post, I followed the link to the Initiative’s website. It’s good stuff for those of us who get fired up about subsidies. I did have a chuckle, though, when I saw this underwhelming Reuters piece about a shift in Egyptian energy policy:

“The trade and industry ministry said it will gradually reduce the subsidies, which are a main factor behind the country’s deficit…”

Great!

“…and then set prices based on the international market.”

Oh.

I found it tough to get too excited about a statist regime finally being forced by a budget deficit to crudely mimic the forces of supply and demand. Just let the market do its thing!

The demand elasticity for most goods increases the longer the time frame that is considered. For example, in the short term, the demand for gasoline is very inelastic. If the price of gasoline triples in the next week, people will probably keep buying at near the same rate. In the long run, the demand for gasoline is much more elastic. If the price of gasoline stays at that price for a decade, people will learn to use more mass transportation, buy more fuel efficient cars and live closer to work in order to limit their need for gasoline.

Some goods, however, follow the opposite time trend. Consider your demand for air, if someone flatulates in your vicinity, the cost of breathing increases significantly. In the short run, your demand for air is quite elastic, because you can hold your breath. In the long run, your demand for air is much more inelastic. If the air stays stinky, you still have to breathe.

While demands which are less elastic in the long run than in the short run exist, I can’t think of any markets where this might have important implications.

The Sightline blog discusses when we should favor cap-and-trade versus carbon tax solutions to curbing greenhouse gas (GHG) emissions:

Do we want a system where the emissions reductions are fairly certain, but the price tag for polluting is unpredictable (i.e., a cap)?  Or would we rather have a system in which prices are a given, but the effects are difficult to gauge in advance (i.e., a tax)?

I agree with this reasoning, but I think it is missing an important aspect. As I pointed out on my a few months ago, we must also consider what we know about the costs of climate due to GHG emissions versus what we know about the optimal level of GHG emissions directly. If we have better estimates of the marginal social cost of GHG emissions we should favor a carbon tax because it will help us find the optimal emission level. On the other hand, if we know the most about what the optimal GHG emission level, such as if there is a tipping point when further GHG emissions have very large marginal social costs, then we should favor a cap-and-trade scheme because. If we have some combination of information, perhaps a hybrid policy, like cap-and-trade with a “safety valve” or its opposite, an emissions right sale with a quantity limit, would be best.

I do know that marginal cost estimates for GHG emissions are not good, but I don’t know if climate scientists predict any sort of tipping point.

I rarely cheer for either political party, but the Democrats are calling for a ‘consensus candidate’ and threatening to block Bush’s nomination if it is Ted Olson, who would be a very political nomination. I strongly support the nomination of consensus candidates over political ones, so: Go Democrats!

Democrats, including current Judiciary Committee Chairman Patrick Leahy, indicated they would mount strong challenges to Olson if Bush nominates him. “He is certainly not a consensus nominee,” said Sen. Chuck Schumer, D-N.Y. “He has a very political background.”

Later in the article:

If Democrats delay the nomination, [Republican Senate leader] McConnell warned, “they’ll show the American people that their concern for the department was insincere.”

It takes some serious chutzpa to attack the Democrats for showing concern about the independence and centrism of the justice department.

I can’t be the only one who thinks that the position of Attorney General, or any appointment, should not be a political appointment. There are many people that would be acceptable to almost everyone, and the president should nominate one of these candidates.

Tim Haab is hopping mad about bans on non-deadly goods:

…and I slam my head against the wall screaming “Why, Why…WHHHHHYYYYY!?”

Bans on non-deadly goods are bad economic policy.  Period. 

[...]

I’m starting a new campaign:  Ban bans.

I’ll join his campaign, but part of the proposal he is criticizing is this:

A new labeling requirement could be introduced to inform consumers of products’ annual energy consumption compared with other similar appliances.

I actually like this part; it sounds like a good idea. At least, I think an on-appliance labeling requirement explaining the power costs of the appliance is a good idea. If the government wants the public to reduce its energy usage, the first step is to make it easier for individuals to know what the energy margin looks like. We already require nutrition labeling, and the analogy between these two situations is strong; like unhealthy food, without labeling, the costs of power hungry appliances are not immediately apparent.

I am curious why such labeling is not already common. The most efficient appliances, at least, should have an incentive to label themselves. I’m sure there’s some research out there on this type of thing. 

From Morris Fiornia’s Divided Government, I learn some more interesting results:

Epstein and O’Halloran test the proposition [that divided government limits executive discretion] by examining the association between control of the government and Congressional alternations in discretionary trade authority between 1890 and 1990. Controlling for other variables that previous research has found to be important in trade policy making (e.g. unemployment and the price index), a change from unified to divided government has a significant restrictive effect on protectionism (both in the model and parallel empirical analysis), it appears that divided control inhibits the executive’s ability to conduct free trade policy.

Some would probably label me a free-trade fanboy, but I dislike executive discretion. I wonder if these results extend to other issues.

After hearing so much negative commentary on econ blogs about what gets printed on the WSJ editorial page (admittedly mostly from more left-leaning economists), I hesitated a bit when I came across this piece from a senior fellow at the Brookings Institute (linked to on Greg Mankiw’s blog). I braced myself against the temptations of right-wing economic punditry, knowing that my own sympathies tend in that direction, but I was pleasantly surprised. Read the rest of this entry »

Balkinization points to a Fresh Air interview with Charlie Savage on his new book about the expansion of executive power. Conclusion: Bush and Cheney, not Hayekians.

Dani Rodrik links to an interesting literature review which discusses the lack of evidence establishing a causal relationship between Europe’s heavily regulated labor market and Europe’s high unemployment. I found Dr. Rodrik’s alternative analysis of firing restrictions interesting:

In at least one area of labor-market intervention, employment protection (firing restrictions), the orthodox expectation is not the only “logically consistent” story that accords with economic intuition. If you make it harder to fire an employee, you essentially give that employee some property rights over the job he occupies. Now, according to the Coase theorem, how property rights are allocated (to the employer versus the employee) has no effect on efficiency in the absence of bargaining and other transaction costs. If eliminating a job is the efficient thing to do, an employer can do it either by fiat or by paying the employee to leave. There are distributional implications (obviously the employer is worse off in the latter case), but nothing to stop the efficient thing from getting done. This is an idea I associate with my Harvard colleague Richard Freeman.

At first, the Coasian perspective seemed like a useful one, but after considering it, I think it is inappropriate or at least incomplete.

As Dr. Rodrik suggests, one way to look at firing restrictions is as giving employees property rights over their job or, more specifically, property rights over their pay. However, Dr. Rodrik is wrong to assert that such restrictions have no consequences for efficiency, because in the long run, firing restrictions do not affect the initial allocation of ownership rights but the sorts of employment relationships which are allowed. It is impossible to arrange for anyone but the employer to have the initial allocation of job rights, without abolishing employers altogether, simply because the employer creates the position and decides who to hire. Instead of changing the initial allocation of property rights, firing restrictions limit the types of employment relationships that are allowed to those that involve a full transfer of pay rights from the employer to the employee. Now the neoclassical analysis, that Dr. Rodrik discusses, applies completely. Employers face information asymmetry and employees have credibility problems, so employers are reluctant to hire.

The short run is a little different. In the short run, if the creation of firing restrictions were sudden, there would be a reassignment of property rights from employers to employees and a corresponding redistribution which may be desirable. Such a sudden and arbitrary reassignment of property rights should not be taken lightly, however, because it would be a massive violation of the rule of law, and we should always be wary of violations of the rule of law.

I would like to read Richard Freeman; perhaps my analysis is too shallow.

Note: For some reason, I thought Dr. Rodrik was Hispanic for some reason, but, apparently, he is from Turkey.

In the last three days, I have heard three different agricultural ethanol sources lauded as “the next corn.” Poplar, sugar, and switchgrass. I don’t think Congress is subsidizing turning any of these products into ethanol yet, but the sugar lobby, at least, is pushing for sugar-ethanol subsidies (never mind that there is a $.50/gal tariff on Brazilian ethanol, which is made from sugar).

Micromanaging technology subsidies and mandates is not a good way to combat CO2 emissions or the national security problems with heavy reliance on imported oil for energy. The clearest reason is that the federal government (or state governments for that matter) is not in a good position to figure out what technologies are going to lead to the most cost effective reductions in CO2 emissions or petrol imports; no one organization is. The information about what energy use reductions or fuel source changes might be cost effective is totally decentralized. Every industry has its own unique places where cost effective energy savings and emissions reductions are possible; factories can use more efficient machinery and reuse waste heat; offices know how they can save energy by using more efficient appliances and doing business by phone and video instead of by plane. Everyone has information about their own little world, and no single person or organization has even close to all that information. No centralized government program will ever be able to aggregate that information effectively.

And as we can see in the case of ethanol, attempts to micromanage these sorts of technologies are really prone to rent-seeking; various farm lobbies try to get their specific crop added to the subsidy list; factories try to get exempted from specific mandates or to get subsidized themselves. Congress is only too willing to listen to rent seekers.

Luckly there is a simple and effective solution to the problems of CO2 emissions and foreign oil dependence: climate pricing. Let’s ditch the ethanol subsidies.

That’s from Divided Government by Morris Fiorina.

Apparently I am a little bit behind the times. In January, the federal government struck another blow to federalism by giving the president more power over state national guards which were normally under the control of state governors.

To the dismay of the nation’s governors, the White House now will be empowered to go over a governor’s head and call up National Guard troops to aid a state in time of natural disasters or other public emergencies. Up to now, governors were the sole commanders in chief of citizen soldiers in local Guard units during emergencies within the state.

The fact that all 50 state governors were against this strongly suggests that it was totally unnecessary. If there were real problems with the old system, the governors would probably be at least partially split. I very much doubt this sort of thing would happen if state legislatures still had an effective voice in congress.

As a side note, I used to think, that the decline of federalism was in large part due to the 17th Amendment, as many people do, but this paper suggests that the election of federal senators by the state legislatures basically fell apart by itself. I don’t know what institutional arrangements would have continued to protect federalism. I intend to read Federalism, the Supreme Court, and the Seventeenth Amendment as well as Todd Zywicki’s law reviews on the issue.

I was curious what the immigration rate for the U.S. was, so I made this chart:

I might get some more/better data later. I am interested in what the immigration rate was before 1950.

Data: Fact Monster, Migration Policy Institute (this looks like a really cool site)

I would be OK with a Ron Paul presidency, but his support of a return to the gold standard is a bit crazy. Here is Ron Paul on the evils of fiat money:

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people - just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

Here is the value of gold in real terms for the last 106 years (source):

Gold is not nearly as stable as people imagine. Now, if it were impossible to have a central bank insulated from politics, the gold standard would be a good alternative, but I think the last 25 years demonstrate that independent central banks are institutionally possible.

Addendum: Megan McArdle eloquently explains why she is against the gold standard. Here’s the core:

The gold standard cannot do what a well-run fiat currency can do, which is tailor the money supply to the economy’s demand for money. The supply of gold grows–or not–depending on how much of the stuff is mined. Demand also fluctuates for non-economic reasons; gold has uses besides being money, like industrial components and jewelry.