Archive | Public Choice

Should We Celebrate or Mourn the Ides of March?

Today is the Ides of March, the anniversary of Julius Caesar’s assassination. Economist David Henderson asks a question that people have been debating for over 2000 years: Should Caesar have been killed? Obviously, this issue divided Romans at the time, and later generations haven’t agreed on it either.

If the issue comes down to whether Caesar deserved to die, I’d say the answer is yes. He killed or enslaved hundreds of thousands of innocent people during his wars in Gaul and elsewhere. Nor is this merely a critique based on modern values that ancient Romans didn’t share. Some of Caesar’s contemporary critics, such as Cato the Younger, also attacked him on the same basis. The ancient Romans were far from humanitarian when it came to war and slavery, but even some of them were appalled by the scale of Caesar’s atrocities. Unless you believe that killing is never justified, it’s hard to deny that Caesar got what he deserved. We should bury Caesar, not praise him.

If, on the other hand, the issue is whether the assassination did more harm than good, the answer is less clear. Caesar’s death led to several additional rounds of civil war that caused enormous death and destruction. In the end, the Roman Republic was still superseded by a monarchy led by Caesar’s heir Augustus. Had the assassins failed, maybe the same result could have been “achieved” with less bloodshed. We may never know.

As I discuss in this post, the late Roman Republic suffered from structural weaknesses that made it likely that some ambitious general would overthrow it soon or later. That may be one of the reasons why Caesar’s assassins ultimately failed to restore republican government. Other generals, such as Mark Antony, were waiting in the wings ready to follow Caesar’s [...]

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Reflections on the Potential Revolution in Egypt

I don’t have any brilliant suggestions for how President Obama should handle the situation in Egypt. But history and economic theory do give us some insight on why the revolt against the government started so suddenly and unexpectedly. They also highlight the danger that any regime that replaces incumbent dictator Hosni Mubarak might turn out to be much worse than he is.

I. Why the Revolt was Such a Surprise.

It seems likely that the revolt against Mubarak came as a surprise to him, and also to Western intelligence agencies, including the Israelis, who are renowned for their capabilities in this field and have obvious incentives to keep close tabs on events in Egypt. Why was everyone so surprised?

A key reason is that citizens of oppressive regimes have strong incentives to keep anti-government opinions to themselves. As a result, many who oppose the government might hesitate to say to to pollsters, foreign journalists, and anyone else who might potentially reveal their views to the authorities. As I have previously emphasized here, here, and here, this makes it very hard to gauge the true level of opposition to the government. Indeed, even the regime itself might underestimate the true extent of its own unpopularity, which may be one reason why Mubarak was caught flatfooted.

As economist Timur Kuran showed in a brilliant 1995 book on this kind of “preference falsification,” regimes that rely on repression to inhibit expression of opposition opinion can rapidly collapse if the public perceives that the reins have been loosened. Once a few people start protesting openly and the government does not react as forcefully and effectively as everyone expects, protests can quickly snowball and spread, as more and more people begin to believe that it’s safe to express antigovernment opinions openly. [...]

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E.J. McMahon Argues for Alternatives to State Bankruptcy, and Fred Siegel on Public Employee Unions

The Manhattan Institute’s EJ McMahon argues for alternatives to state bankruptcy in the Wall Street Journal today.  The article is not framed as an argument for the sustainability of the state debt obligations – i.e., raise taxes to the level necessary to cover the promises made – but instead argues that governors and state legislatures have the tools necessary to deal with the public employee unions.  Perhaps most tellingly, it asks why a state would voluntarily enter into bankruptcy if it already lacked the political will to deal with the public employee unions.

For constitutional reasons, any federal law enabling state bankruptcy would have to be voluntary, meaning states would have to invite federal judges to play tough with their unions. But if Gov. Jerry Brown and the California legislature are unwilling to rewrite their collective bargaining rules—signed into law by Mr. Brown himself, 33 years ago—why assume they would plead with a federal judge to do it for them?

It’s more likely that a state like California would pursue bankruptcy if powerful unions and other budget-dependent interest groups saw this as a way to deflect some of the pain to bondholders. California is one of the states that constitutionally guarantees its general obligation debt, and whose bondholders are now seemingly untouchable. That could change with a bankruptcy option.

It’s a good piece, and worth reading closely, although I think it is somewhat arguing past Skeel’s argument.  It’s even better read in conjunction with historian Fred Siegel’s account of how New York’s mayor Robert F. Wagner first saw the opportunity presented by public employee unions, and how politicians and the unions found the way to collude to internalize benefits to themselves and externalize costs onto taxpayers.  It is a textbook example of public choice theory in operation, and Siegel gives [...]

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Bankruptcy for States

Bankruptcy law professor David Skeel, whose new book The New Financial Deal is one I admire a great deal, has a new op-ed in the Wall Street Journal today urging a bankruptcy regime for the states.  Among his most important points is that bankruptcy for states offers the most likely means that states can address the arguably most important long-term problem – the deals set with public employee unions for retirement benefits that are already crowding out the provision of services to the public.  States cannot afford to maintain current staff – teachers or whatever job category – given the obligations to retired employees, even if one assumes that those services, requiring whatever levels of staffing, at whatever levels of current pay, are prudent.  As he says:

[S]tate bankruptcy could even permit a restructuring of the Cadillac pension benefits that states have promised to public employees. These are often “vested” under state law, and in some states, like California, are protected by the state constitution. Under state law, little can be done to adjust them to more reasonable amounts.

Although the law is somewhat murky, there is a strong argument that bankruptcy could provide for an adjustment of these obligations. Unless the state’s “guarantees” were construed as a property right protected by the Takings Clause of the Constitution (which is doubtful if there is no collateral or other indicia of a property right), the federal bankruptcy law would trump contrary state law under the Constitution’s Supremacy Clause.

A central feature of these promises in many states and municipalities is the capture of both sides of the bargaining table by public employee unions.  It is a classic process described by public choice theory, through which the campaign contributions of a highly motivated subset of voters capture the political offices that negotiate [...]

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What Would Public Choice Theory Say About Rating Agencies and Sovereign Debt?

Particularly since the European sovereign debt crisis put the question of sovereign debt ratings squarely on the table, and even more in the last few days since the rating agencies have downgraded Greek debt to junk status, I have to wonder what insulates Moody’s, Standard & Poors, and Fitch against pressures direct and indirect, subtle and not so subtle, by interested sovereigns.  The New York Times business pages ran a story on Friday (January 14, 2011, Graham Bowley) reporting that Moody’s and the S&P warned the United States that its outlook might conceivably put its AAA status at risk.  In Europe, it’s not just Greek bonds that are finally in question, it’s the debt of much bigger states as well – and the fact that the rating of sovereign debt even of Greece matters quite a lot to Germany or France for many reasons, not the least of which is that so much of it is held by their banks.

Standard public choice theory seeks to account for the essentially political forces that “supply” law and regulation to its economic “consumers” (voluntary or not!) in the marketplace.  It fills in a crucial gap in the account of law and economics, which tends to start with the laws and regulations and their creation as a given for structuring the incentives and disincentives of markets.  It connects law and markets, politics and markets, politicians and market-makers.  Sovereign debt, for its part, is a commodity in the markets that depends in very special ways on political and governmental forces, in part acting as market players, but in part acting as rule-creating sovereigns.  All of which is a roundabout way of saying that sovereign issuers of sovereign debt have large incentives to use their rule-influencing, regulatory, and law-creating powers, their political will, to influence [...]

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Who Won the Tax Deal?

I’ll leave it to the professional pundits to determine whether House Republicans, President Obama, or someone else got the better deal with last week’s announced compromise.  One winner in the deal, however, is the ethanol lobby.  Although conservative Republicans, environmental groups and even Al Gore had come out against extending ethanol’s tax breaks, Iowa lawmakers made sure ethanol got (more than) its share of the bargain.  Alas, ethanol’s not alone, as the lame-duck tax bill is beginning to look like a Christmas tree. [...]

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“Guerrilla Polling” in Repressive Societies

I have several times criticized Western observers who naively assume that pro-government statements by people who live under repressive regimes necessarily reflect their true opinions (see here and here). Even if they actually hate the government, such people have obvious incentives to pretend otherwise in order to avoid punishment. At the same time, it is also a mistake to conclude that all citizens of repressive regimes are closet dissidents. Often, many of them genuinely support the regime and its ideology, if only because indoctrination can be effective, especially in an environment where opposing views are suppressed.

How can we find out the true beliefs of people living under repressive governments? There are several strategies, each of which has its flaws. For example, interviewing emigrants can be very useful; but they are unlikely to be a fully representative sample of the society they come from.

In Foreign Policy, political scientists Angela Hawken and Matt Leighty describe an interesting recent effort to overcome this problem: “guerrilla polling”:

We’ve been intimately involved in the effort to conduct public-opinion surveys in countries controlled by authoritarian regimes.In January, we completed the analysis of an in-person survey of 1,046 adults living in Syria. The poll, conducted by the Democracy Council, a California-based NGO, was the first face-to-face survey collected by an unsanctioned organization on the ground in Syria.

Democracy Council had to overcome several hurdles to pull off the survey. First, it had to find 60 qualified interviewers in a country where such data collection is illegal and then train them from scratch. The interviewers were recruited by word of mouth, and each was put through an extensive background check to make sure that he or she had no association with the Syrian government.

New technology greatly assisted in the training process.

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The Political Economy of the Roman Republic

One of my longstanding interests is the political economy of ancient Greece and Rome. Former VC-er Eric Posner has an excellent new article on the political economy of the Roman Republic:

The constitution of the Roman Republic featured a system of checks and balances that would eventually influence the American founders, yet it had very different characteristics from the system of separation of powers that the founders created. The Roman senate gave advice but did not legislate; the people voted directly on bills and appointments in popular assemblies; and a group of magistrates, led by a pair of consuls, proposed bills, brought prosecutions, served as judges, led military forces, and performed other governmental functions. This paper analyzes the Roman constitution from the perspective of agency theory, and argues that the extensive checks and balances, which were intended to prevent the recurrence of monarchy, may have gone too far. Suitable for an earlier period in which the population was small and the political class was homogeneous, the constitution proved unworkable when Rome acquired a vast, diverse empire. The lessons of Roman constitutionalism for the American constitution are also discussed.

Eric makes many interesting points, and I learned a lot from the paper. But I disagree with the bottom-line conclusion that the Roman Republic failed because it had too many checks and balances, which led to paralysis and gridlock. Even in its last, most dysfunctional century, the Republic repeatedly vanquished powerful foes, including monarchs such as Mithridates of Pontus, Eric’s argument that monarchy was a more efficient form of government during this period notwithstanding. The Republic also undertook various important new domestic policy initiatives, including expanding the citizenship and granting land to enormous numbers of military veterans. This is not the sign of a polity paralyzed by gridlock.

On balance, I [...]

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A Recession-Driven Speed Trap in Falls Church?

Economic studies show that local governments often step up enforcement of minor traffic offenses during recessions in order to increase revenue. I seem to have been the victim of this kind of recession-driven revenue-mongering by the authorities in Falls Church, Virginia.

Twice during the past year, I have been ticketed for driving over the 25 MPH speed limit on Route 7 near downtown Falls Church, Virginia. Both times, the officers claimed I was going over 40 MPH, even though there was heavy traffic and it would have been physically impossible for me to have gone that fast without hitting the car ahead of me (which I didn’t come close to doing). I admit that it is quite possible that I was in fact going over 25 MPH. But this is a busy commercial thoroughfare where nearly all the traffic goes faster than that. As the officer in the second incident admitted to me, “all the cars [he] checked were going over 25 MPH.” Had I chosen to go much slower than the rest of the traffic, I would have endangered both myself and others. That’s why I got nailed in the second incident despite the fact that I knew to be careful in this area after what happened the first time.

During normal times, police generally let minor infringements of the speed limit go because they recognize that it is unrealistic to expect drivers to fully obey the speed limit and because they know that going much slower than the surrounding traffic is dangerous. During a deep recession, however, local governments pressure police to crack down and increase revenue. I suspect that such pressure is particularly likely in areas like Route 7 where much of the traffic is by people who don’t live in the jurisdiction. That way, local [...]

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Wasteful Weatherization Projects

The stimulus bill included $5 billion for weatherization projects.  The idea was not just to create jobs, but also invest in energy efficiency.  The money didn’t get spent quite as quickly as some had hoped, but it was still worthwhile , right?  Maybe not.  The stimulus funds ramped up weatherization programs so much that quality control and oversight may have suffered.

Exhibit A is Illinois’ Weatherization Assisatance Program, which received $242 million in stimulus money.  As the NYT‘s Green blog reports, a new Department of Energy Inspector General audit of Illinois’ program finds serious problems.

An audit by the inspector general focused on some work done by the Community and Economic Development Association of Cook County, one of 35 agencies in Illinois that are expected to share $91 million over three years. The audit looked at 15 homes and found that 12 failed final inspection “because of substandard workmanship.” In some cases, technicians who tuned up gas-fired heating systems did so improperly, so that they emitted carbon monoxide “at higher than acceptable levels.”

In eight cases, initial assessments of the houses and apartments called for “inappropriate weatherization measures.” In one case an inspector called for more attic insulation but ignored leaks in the roof, which would have ruined the insulation, the audit said. And for 10 homes, “contractors billed for labor charges that had not been incurred and for materials that had not been installed.’’ . . .

The federal audit said that Illinois had found a 62 percent error rate when it re-inspected homes weatherized by CEDA. And sometimes CEDA was spending more for materials than an individual homeowner would spend, the audit found. Some of the work created fire hazards, the audit said.

These results may not be representative of programs in other states, but there [...]

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Lessons from an Unlicensed Barber

Center for American Progress house blogger Matthew Yglesias confesses that he has an unlicensed barber, and has no regrets.

Regulation of this sort seems totally unnecessary. People don’t die of bad haircuts, and since hairstyle is a quintessential matter of taste there’s absolutely no reason to think consumers can’t figure out for themselves who has a decent reputation as a cutter of hair. You can cut your own hair perfectly safely in your own house, and if you screw it up all that happens is you need to find a real professional to fix it. But what’s more, even if regulation were somehow a good idea, the composition of the board couldn’t possibly serve a legitimate consumer protection function. It’s overwhelmingly composed of people from the industry whose incentive is to limit competition and raise prices.

But barbers are licensed and heavily regulated in much of the country nonetheless.  What could justify this?  Sraight razors perhaps?  No dice, says Yglesias.

though “torts and the free market will take care of it” isn’t the answer to everything, it’s surely the answer to some things. Getting some kind of training before you shave a dude with a straight razor is obviously desirable in terms of strict self-interest. If you screw it up in a serious way, you’ll face serious personal consequences and the only way to make money doing it—and we’re talking about a very modest sum of money—is to do it properly. People also ought to try to think twice about whether their views are being driven by pure status quo bias. Barbers are totally unregulated in the United Kingdom, is there some social crisis resulting from this? Barber regulations differ from state to state, are the stricter states experiencing some kind of important public health gains?

The government [...]

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Excellent Review of Todd Zywicki’s and Max Stearns New Book on Public Choice and the Law

University of Florida lawprof D. Daniel Sokol has published a very good (and extremely favorable) review of co-conspirator Todd Zywicki’s important recent book Public Choice Concepts and Applications in Law (coauthored with Maxwell Stearns), in the Michigan Law Review.

Danny writes that the book is “likely to be recognized as the leading work on the subject for some time.” Having read it myself, I tend to agree. It’s a great introduction to and analysis of the literature on public choice and its implications for law. The book drives home the implications of the simple but important public choice insights that government actions can be understood using the same tools of economic analysis that economists have long applied to the private sector, and that political behavior is often just as self-interested as market behavior. I would also note that the book has an interesting political balance, since Stearns is generally liberal and certainly well to the left of Todd.

Danny’s review essay also considers some possible additional applications of public choice to legal issues that were not covered by Stearns and Zywicki, especially in the field of international law. As he points out, scholars in the international law field have made very little use of public choice analysis, even though international legal institutions have serious public choice problems that may be even worse than those of domestic political processes in Western democracies. John McGinnis and I have sought to help close this gap in the literature in our work on international human rights law and domestic incorporation of international law. [...]

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Does the Supposedly Superior Expertise of Regulators Justify Libertarian Paternalism?

Some of the commenters on my last two posts criticizing libertarian paternalism accuse me of ignoring the possibility that such paternalism is justified by the supposedly superior expertise of government regulators. Actually, I have addressed this point in several previous posts, such as here and here. However, readers can’t be blamed for not taking the time to collect bits and pieces from previous posts scattered over a three year period. Therefore, it may be helpful to collect my thoughts on this point in a single post. To summarize, I think that the regulators’ superior expertise applies at most only to one-half of the relevant equation, that even with respect to that half it has serious drawbacks, and that consumers who need expert advice can usually do better by relying on the private sector.

I. Regulators Lack Expertise on the Subjective Benefits of Risky Activities.

Regulators may have greater knowledge than consumers about the health or safety dangers of risky activities. But they lack comparable knowledge of the benefits that consumers derive from those activities. A public health expert probably knows more than I do about the risks of drinking or smoking. But only I know how much enjoyment I derive from having a beer or puffing on a cigarette. This is especially true when we remember that preferences about such things vary widely. I get zero utility from smoking and (unusually for a Russian) very little from drinking alcohol. Many other people have very different experiences. With respect to the subjective benefits they get from risky activities, consumers actually have vastly greater expertise than regulators do. In a classic 1945 article, F.A. Hayek emphasized the importance of this constraint on expert knowledge:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably

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Han Solo and the Economics of Rebellion Against Repressive Regimes

Economist Daniel Hamermesh has an entertaining game theoretical analysis of Han Solo’s decision to fight for the rebels against the Empire back in the first Star Wars movie. The analysis is a bit of a joke, but there is a serious point here. And not the one that Hamermesh emphasizes:

In the original Star Wars movie (Episode IV), Luke Skywalker pleads with Han Solo to help the Rebel Alliance battle the Empire, but Han refuses and a disgusted Luke storms off. Chewbacca, being a student of game theory, lays out the payoff bimatrix to Han in their “conversation” [Note by IS: there follows a payoff matrix in which it is clear that the Rebels will maximize their payoff by fighting regardless of what Han does, and that Han, in turn can increase both his payoff and that of the Rebels' if he chooses to fight too]….
Han understands that the Rebels have a dominant strategy of fighting. Knowing that, although he has no dominant strategy, and being the self-centered person he has already shown himself to be, Han realizes he is better off choosing to aid the Rebels and fight. (Fight, Fight) is a Nash equilibrium and also a Pareto optimum….

Hamermesh downplays the real game theoretical reason why it’s rational for Han to fight: His contribution is likely to be decisive to the outcome. After all, he’s got “the fastest ship in the galaxy,” and it can make mincemeat of Imperial tie-fighters (as we already saw earlier in the movie). Hamermesh’s payoff matrix implicitly represents this by positing that if Han fights, he increases his own payoff from 5 to 8, and that of the Rebels from 7 to 10. In truth, however, Han’s contribution might well make the difference between victory and total defeat (as in fact happens). [...]

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