Tag Archives: Matt Yglesias

U.S. Income Inequality vs. World Income Inequality

A few weeks ago, Matt Yglesias had this to say on Twitter:

Yglesias quote

 

 

 

 

He was referring to this chart, taken from Branko Milanovic’s excellent 2010 book The Haves and the Have-Nots. As informative as the chart is, I—like Matt Y—have always found it a bit inaccessible. So I decided to remake it in video form, enlisting the help of the creative and ever-patient Charles Blatz. Let us know what you think:

James M. Buchanan: Realistic Optimist

This week we mourn the passing and celebrate the achievements of James M. Buchanan. There have already been many moving and informative tributes. Alex Tabarrok offers a nice summary here. I was fortunate to take one of the last classes Buchanan taught. Even though he was well into his eighties, I found him to be sharp, enthusiastic, and more than a little intimidating to this graduate student.

I’m sure people will be debating Buchanan’s contributions and legacy for quite some time. One aspect that seems unsettled is the degree to which Buchanan’s legacy is optimistic or fatalistic. An old exchange I had with Matt Yglesias highlights the optimism I found in Buchanan’s work:

Back in 2011, in a post titled “Against Public Choice, For Public Virtue,” Matt declared: “I don’t really “get” public choice and think I never will.” He argued:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so.

In a post responding to Matt, I made the case that public choice is no more fatalistic about government failure than other branches of econ are fatalistic about market failure:

Consider a problem from normal economics: the tragedy of the commons. Armed with empirical and theoretical reasons to expect that fishermen will over-fish a common pool, we should plan accordingly. We should examine the incentives of fishermen and think of ways to improve or alter these incentives (e.g., assign property rights over the pool, or impose a Pigouvian tax). To my knowledge, few if any economists would council that we ought to spend our time begging fisherman to pretty please stop overfishing. That is likely to be a fool’s errand.

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

 

The Real Public Choice Economics of Big Bird

In an informative post last week, Matt Yglesias pointed out that the few hundred million dollars a year that go to the Corporation for Public Broadcasting are in many ways the “least important” of Big Bird’s government-granted privileges. A far more important privilege is the spectrum on which Big Bird is broadcast. Public TV stations:

don’t have to bid at auction for access to the broadcast spectrum they use. It’s just been given away for free. The decision to allocate some of that spectrum to public TV stations is, at a fundamental level, why they exist.

Matt also points out that another important privilege—one which Tyler Cowen highlights in his book Good and Plenty—is the tax deduction for charitable contributions from viewers like you.

Matt’s post was titled “The Real Economics of Big Bird,” but I’d point out that it also provides a lesson in the real public choice economics of big bird. The President has eagerly mocked his rival’s interest in Big Bird, correctly pointing out that our trillion dollar deficit is not going to be solved by cutting a few hundred million dollars from Sesame Street. But this line of argument misses the public choice lesson.

First, Sesame Street is able to obtain so many government-granted privileges in part because these privileges are inconspicuous. This is known as “fiscal illusion,” and it is an idea which pervades James Buchanan’s research: when people are not clearly presented with the bill for government intervention, they will gladly accept more intervention.

In my research on government-granted privilege, I’ve noticed that the least-conspicuous forms of privilege are often the most popular among politicians. Farm subsidies are the exception, not the rule. Typically, privileges don’t appear as line items in the budget. More often, they are hidden. Think of the Export-Import bank which doesn’t subsidize Boeing, but instead subsidizes firms that buy planes from Boeing. Loan guarantees, tax credits, and favorable regulatory treatment are more-common still and each of these privileges is rather difficult to see.

Second, Sesame Street’s privileges are an illustration of the problem of concentrated benefits and diffused costs. Sesame Street’s direct (and even indirect) subsidy is tiny, especially when it is spread out among 311 million Americans. But it is precisely this characteristic of government spending which has allowed it to get out of hand. Too many government programs concentrate benefits on a comparatively small section of society and disperse the costs over the multitude of taxpayers and consumers. This means that those who benefit from a particular program have a strong incentive to get organized and lobby on its behalf. It is big money for them. But it also means that the millions who pay for the program have little incentive to get organized to oppose it. It’s just pennies to them.

This wouldn’t be so bad if the Corporation for Public Broadcasting were the only government program. But it’s not. Stealth bombers, bridges to nowhere, sugar subsidies, ethanol mandates, light bulb regulations, etc. all have this characteristic. They impose costs on multitudes and confer benefits on a handful. Add it all up and you have a government that spends $7 million every minute.

As the late Everett Dirksen put it, “A billion here, a billion there, and pretty soon you’re talking real money.”

How Receptive is the “Left” to Public Choice Arguments About Cronyism?

Arnold Kling writes about our new project on cronyism:

You can think of the project as having two goals. One goal would be to clarify for conservatives the distinction between being pro-market and being pro-business. I think that some progress toward this goal is possible.

The other goal would be to persuade liberals that deregulation can be a way to reduce the power of big business. On that goal, I am much less optimistic. You can talk all day about regulatory capture and how big government serves entrenched interests. And what the liberals will come back to you with is, “Yes, that is why we need campaign finance reform and to elect politicians who believe in stronger regulation.”….

I picture liberals as having an unshakable belief in the power of moral authority. That is, if you exert enough moral authority, you can overcome any problem. Or, to put it in negative terms, if any problem exists, it is because not enough moral authority has been exerted to try and solve it.

A post by Matt Yglesias from last October would seem to support Arnold’s claim that liberals are unlikely to be persuaded:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so. You want politicians and civil servants to feel worse, not better about behaving cynically.

Call me naive, but I still think that some liberals are open-minded enough to be receptive to the public choice view. Why? Because many liberals don’t apply moral-authority arguments when they talk about conventional economic problems. There, like others, they think about incentives.

When a liberal (or at least a liberal economist) sees a tragedy of the commons, he doesn’t waste his time begging fishermen to pretty please stop overfishing. Instead, he plans accordingly. He thinks about the incentives that these fishermen face and comes up with solutions (for example, Pigouvian taxes or the assignment of property rights). As I wrote back in October:

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

When it comes to government-granted privileges to entrenched interests, we shouldn’t wring our hands and beg governments to pretty-please stop pandering to the wealthy and well-connected.  We should plan accordingly. We should think of the incentives of politicians and come up with institutional solutions (for example, by forbidding politicians from handing out particular favors to particular firms or industries). If there are liberals who understand the power of incentives when it comes to microeconomics, I believe there are liberals who will understand the power of incentives when it comes to special interest politics.

There’s one more reason to be optimistic. My colleague Adam Thierer has assembled an interesting compendium of expert opinions on regulatory capture. The quotes show experts interested in grappling with incentives, not lecturing on the basis of moral authority. It is telling how many of the experts are more-naturally categorized as left-of-center than right-of-center.

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Update: Arnold Kling responds here.

New Levels of Paternalism Promoted in New York

Image via Flickr user freedryk

Earlier this week, New York City Mayor Michael Bloomberg introduced a proposal to ban the sale of sodas larger than 20 ounces by any retailers regulated by the city’s health department. This proposal has many New Yorkers upset, and even the New York Times says this would be a step too far toward paternalism.

While many agree that banning a product goes beyond the bounds of what we can tolerate from the nanny state, writers including Matt Yglesias support additional soda taxes instead. Yglesias suggests that a soda excise tax is a good idea primarily because it will raise revenue and that one good use of this revenue would be increased welfare payments.

The problem with suggesting excise taxes as revenue raisers to support welfare programs is that low-income people are those who are disproportionately hurt by these taxes. Yglesias suggests that the tax will fall in large part on tourists, but I’m not convinced that tourists drink a large percentage of sodas sold throughout the city. Further, a study of soda consumption in New York shows that people in a household at 200% of the poverty or below drink more soda than the average New Yorker. If this statistic were adjusted for the percent of income spend on soda, the results would be even more striking. This tax will also fall the hardest on those who have the strongest preferences for soda over other drinks, the same people who are the least likely to change their behavior as a result of the tax.

Paternalists may suggest that low income soda drinkers are behaving irrationally and that a higher soda tax will help them make better choices. However, it’s impossible for regulators or supporters of paternalistic policies to understand consumers’ preferences better than consumers themselves. While increased health outcomes may be an objective for policymakers, this is not to say that it is or should be everyone’s objective. Almost none of us acts in accordance with seeking the lowest risk choices in diet or any other area of life, and trying to enforce healthy choices with tax policy is going to make some people worse off with the highest burden falling on those at the low end of the income distribution.

However, a policy choice is available to policy makers not in New York but at the federal level that would decrease the deficit, make soda a little more expensive, and likely lead consumers to make healthier choices at the grocery store. Corn subsidies totaled an estimated $3.5 billion in 2010, making food made with corn products relatively cheaper than food that is less heavily subsidized. Rather than targeting a specific product, large sodas, Bloomberg should put his efforts toward advocating a more fair national food policy in which food prices more accurately reflect their true costs.

Trapped by Government Privilege

The right to operate two New York City taxi cabs has just been sold for $1 million apiece.

In order to operate a cab in New York City, the government requires drivers to affix little aluminum plates called medallions to the hoods of their cars. According to the article:

There are 13,237 medallions in the city; new ones, when issued, are sold at auction. But the medallion pool is rarely expanded, creating a scarcity that helps keep values high.

By restricting the supply of legal cabs, the policy effectively raises the price of a ride. It also leads to what Matt Yglesias calls “endemic taxi shortages in the outer boroughs.” As Felix Salmon notes, though, even if the city issued more medallions, fares wouldn’t go down since another city policy regulates those.

(Image courtesy of Stuart Miles / FreeDigitalPhotos.net)

Salmon then asserts that “utter chaos” would result if both policies were removed because riders would have to haggle with cabbies every time they rode. This seems like a rather absurd concern. Do you haggle with the local gas station operator every time you fill up? Is there utter chaos because magazine prices at newsstands are set by the market and not by regulation? Matt Yglesias adeptly dispatches with Samon’s concerns, writing:

In fact in Stockholm they’ve done what Salmon says can’t be done, and taxis are allowed to charge whatever price they like. The main solution to the problem he identifies is that most cabs are affiliated with one of a few large taxi companies that have posted fare schedules.

Let’s dig a little deeper into the economics of this. Both the price control and the medallion requirement seem to benefit cab companies at the expense of riders by raising prices above what the market would naturally bear. But as Gordon Tullock pointed out in a classic 1975 article called “The Transitional Gains Trap,” the cab operators really aren’t better off in the long run:

[T]he capital value of the monopoly profit has been fully taken into account in the industry. New entrants enter only by purchasing the medallion, with the result that they get only normal profits.

In other words, those who want to charge monopoly prices must pay dearly for the privilege of doing so. And today the going rate is about $1,000,000. This is essentially the same story with any type of rent-seeking activity. If you want the government to give you a competitive advantage against your competitors, you can ask for a subsidy or a tax on your competitors, but expect to spend a lot of money lobbying for these favors. In fact, as Tullock argues, you should expect to spend so much money that in the end, you will only make a normal profit! Indeed, that’s why protected industries like autos, steel, agriculture, and green energy do not systematically make above-normal profits. (In pointing this out, David Friedman has opined that “the government can’t even give anything away.”)

But the story gets worse. Now let’s imagine that the government tries to do the efficient thing. Let’s imagine it listens to Matt Yglesias or me and deregulates the taxi cab industry. Well you can bet that the poor person who just paid $1,000,000 for the right to charge a monopoly fare is going to be more than a little resistant to any policy change which would make his fares go to the competitive level. In fact, the political resistance would be so great that Tullock called the entire policy a “trap” concluding:

The moral of this, on the whole, depressing tale is that we should try to avoid getting into this kind of trap in the future.

Think of this the next time you hear about a proposal that is likely to benefit one group at the expense of others.