James Heckman and southern racism–updated

30 Mar 2014 3 Comments

by Jim Rose in labour economics, Public Choice Tags: , , ,

James Heckman is a great economist who spent two years as a teenager in the late 1950s in racist Southern States of America and returned in 1963 and in 1970. His parents when they arrived received a delegation of neighbours to explain Southern ways.

There was organised segregation in 1963 when he visited again. His 1963 visit with a college roommate from Nigeria was monitored by the local sheriff.

In Birmingham, they stayed at the black YMCA. The people there were frightened to death because he was breaking the local Jim Crow laws. Shops closed in New Orleans to avoid serving them. Heckman and his Nigerian college mate were brave young men.

In 1970, Heckman re-visited New Orleans as an academic, going back to the same places. They were completely integrated, totally changed. This rapid social change fascinated him.

The Civil Rights Act of 1964 broke the control of segregationists over their political and legal institutions.

The racial segregation collapsed because it could no longer rely on Jim Crow laws and the private violence and boycotts through the White Citizens Councils which police turned a blind eye too when they were not actively involved.

Unlike the Ku Klux Klan, the White Citizens’ Councils met openly and was seen as “pursuing the agenda of the Klan with the demeanour of the Rotary Club” by “unleashing a wave of economic reprisals against anyone, Black or white, seen as a threat to the status quo”. In Mississippi, the State Sovereignty Commission funded the Citizens’ Councils.


Deputy sheriff Price and Sheriff Rainey at their trial, 1967

Timur Kuran in “Sparks and Prairie Fires: A Theory of Unanticipated Political Revolutions,” suggested that political revolutions and large shifts in political opinion will catch us by surprise again and again because of people’s readiness to conceal their true political preferences proclivities under perceived social pressure.

Those ready to oppose racism or who were lukewarm about it, kept their opposition private until a coincidence of factors gave them the courage to bring their views into the open. In switching sides, they encouraged other hidden opponents to switch.

Fear changes sides. Genuine supporters of the old older falsify their publically professed preferences, pretending that they support the new order.

These are late-switchers. Do not trust them. These opportunists will just as easily switch back.

Plenty of people have had personal experiences of this in the 1980s and the 1990s when there was rapid changes in social and political attitudes about racism, sexism and gay rights. A few people had to stand up for what was right and a surprisingly large number quickly joined their side.

Back in the day, an old University mate of mine, Rodney Croome used to be (very bravely) protesting about reforms to the criminal law.

  • Rod even went into a police station and confessed to abominations against the order of nature, as the Tasmanian criminal code called it. It was a gender-neutral prohibition.
  • The police said they could not prosecute without the other party coming forward as the witness. He did.
  • The Tasmanian DPP then declined to prosecute on public interest grounds.

These days, Rod is campaigning for the right to marry. All inside one generation! What a great country is Australia.

I often use the rapid social change such as this with gay rights when I must listen to someone drone on telling me how preference and social roles are socially constructed. They missed the 20th century, and the 60s and the 70s at least.

When I was growing-up, racist sentiments were common. Good friends, decent upright people, disgraced themselves to go along with the crowd. I could not understand why someone would want to be so cruel just to be popular. Times have changed, thankfully.


Wild Swans and Star Trek

29 Mar 2014 1 Comment

by Jim Rose in applied price theory, development economics, economics of bureaucracy, Marxist economics, Public Choice, technological progress, television Tags: ,

About the only book I almost read in one sitting was Wild Swans. I stopped reading at 2 in the morning. This autobiography is 676 pages long. Wild Swans is the story of three generations of women and their families in 20th century China. It is the biggest grossing non-fiction paperback in publishing history.

Wild Swans starts with Jung Chang’s grandmother whose feet were bound at the age of two in 1909. She was later to be a concubine to the local warlord. Her mother was a communist revolutionary in the 1940s onwards and her own story as among other things a teenage Red Guard in the Cultural Revolution. The Guardian described Wild Swan as “For many in the west, Wild Swans was their first real insight into life under the Chinese Communist party.”

I will only mention the part of it that reminded me of Steven Cheung’s analysis of how class ridden communist societies were.

A party membership card puts you above others. That card described in enormous detail what privileges you received depending on your rank in the party.

This is exactly what happened in wild swans. Jung Chang’s father was of the 14th rank while her mother was of the 17th rank. This rank decided what food you got, your accommodation, whether your parents could live with you and even the type of seat you got on the railways.

Star Trek was supposed to be a society that had abolished money and as a post-scarcity economy because everything was available through a replicator. The type of economics it is based on is cooperative economics. To quote Captain Picard:

A lot has changed in three hundred years. People are no longer obsessed with the accumulation of ‘things’. We have eliminated hunger, want, the need for possessions.

The economics of the future is somewhat different. You see, money doesn’t exist in the 24th century… The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of Humanity.

The Ferengi and their 285 rules of acquisition were a satire on capitalism. The Ferengi was originally meant to replace the Klingons as the Federation’s arch-rival but they were far too comical.

Gene Roddenberry’s love story with socialism is the most class-ridden society I have ever seen. In Star Trek, higher ranked officers had larger cabins, and most of all they always beamed back from the planet.

Anyone who beamed down with Captain Kirk dressed in those red security officer tops were expendables. Death and accommodation were class based on Star Trek.

The U.S.S. Enterprise also spent a lot of time negotiating trade treaties and visiting planets where the Earth colonists lived in agrarian poverty with famines and preventable diseases.

Expressive voting – three case studies

29 Mar 2014 1 Comment

by Jim Rose in politics - USA, Public Choice Tags: , ,

Obama won nearly 80% of the Jewish vote. He and the Democratic Party are rather divided on support for Israel. The Republicans are more in favour of Israel.

Now see Expressive voting and identity: evidence from a case study of a group of U.S. voters, A review of Norman Podhoretz, Why are Jews Liberals? by Arye L. Hillman, Public Choice (2011).

Podhoretz describes behaviour that backs up the hypothesis that people vote expressively to affirm their identity. Podhoretz was concerned that liberal Jews vote against their self-interest.

Most of the Jews who voted for Obama did care about Israel but downplayed his anti-Israel associations; they voted for him anyway. The expressive behaviour hypothesis explains why many Jews do this. As a single vote is not decisive in most elections, the main benefit from voting is its expressive value:

  • Liberal Jews, manifesting a rational behaviour, choose the expressive utility from voting against the “Right”, which is identified with past prejudice against Jews and contemporary privilege.
  • The identity of a person who opposes privilege and cares about social justice is confirmed through the act of voting for the “Left”.

Liberal Jews support liberal principles through the low-cost actions of voting and rhetoric, so as to place themselves at the centre of society despite their higher-than-average incomes.

People also vote for parties that will never win elections for expressive reasons. Since maybe 1945, up to a quarter of UK voters knowingly vote for the Liberals and now the LDP knowing that it is usually a wasted vote. But is it?

  • Voting for a third party that will not win is a way of being a middle-of-the-road voter without voting for the socialists or the Tory party.
  • Third party votes change the identity of the median voter. The swinging voter in the UK is often an LDP voter.

To win this LDP vote, the major parties must change their policies or these voters will park their vote somewhere else while still signalling their vote is up for grabs to both sides. These voters affirm themselves as sensible middle-of-the-road voters without voting for either Labour or the Tory party.

The same happens for third-party candidates in America. They are protest votes. The major parties spend a lot of time wooing back these voters at the next election. A protest vote is very affirming to an expressive voter.

Expressive voting also offers much insight into why some democratically elected governments continued to pursue terrible wars of attrition. The unwillingness to discuss peace terms in World War I is an example. A voter might prefer peace to war but showing patriotism might outweigh this. One candidate offers a policy of appeasement, recognising the enormous cost in lives that further fighting might involve. The other candidate stands for national pride, not surrendering to bullies, and avenging past losses. A careful reflection on the costs and benefits of war or peace is what the voter does not do. What is relevant is showing patriotism and strength of purpose.

The main point is that expressive voters are not disciplined by outcomes, and that democratic choice is suspect for this reason even on the biggest of issues.

Privatisation screw-ups are the best case for privatisation

26 Mar 2014 2 Comments

by Jim Rose in entrepreneurship, politics - New Zealand, privatisation, Public Choice Tags: , ,

Governments are so bad as business owners and so incapable of running a commercial process free of politics that governments cannot even sell a state-owned enterprise for a good price under the full glare of the media and public.

Anyone can sell an asset. It is the simplest task of ownership. Hire some consultants and go for the best price. Governments lack this ability.

Privatisations are often politicised, with discounts for small buyers from the middle class, for employees and other special interests. These messy privatisations are the best case out there against state ownership of businesses.

 

“No asset sales” was the Labour Party’s most coherent slogan in the 2011 general election in New Zealand. It cannot be claimed that the more recent privatisations in New Zealand were not subject to the maximum amount of public and parliamentary scrutiny possible in a democracy. The 2011 election was said to be a referendum on asset sales.

This inability to sell state-owned enterprises for a profit and free of politics calls into question the ability of governments to make complicated day-to-day business management and entrepreneurial judgements as owners of business enterprises. Imagine the quality of the day-to-day state-owned enterprise decision making that is further away from the glare of an election?

Private asset owners have a strong incentive to sell assets at a profit as it will otherwise hurt their share price and their personal wealth. Inferior entrepreneurs and owners are punished by losses. Any assets that inferior entrepreneurs either mismanaged or sell at a bargain price will, through further buying and selling, end up in the hands of more alert entrepreneurs and owners.

There are no similar feedback and error correction measures disciplining governments as asset owners and in their day-to-day monitoring of their business portfolios. Governments who own business assets have an inherently softer budget constraint.

Beware of Greeks bearing debts

25 Mar 2014 1 Comment

by Jim Rose in global financial crisis (GFC), politics, Public Choice Tags: , , , , ,

The Greeks initially did a fine job in squeezing huge subsidies and debt write-offs! The Irish played by the rules, guaranteeing bank bond holders to which they had no obligation, but got screwed.

Arellano, Conesa, and Kehoe explain in Chronic Sovereign Debt Crises in the Eurozone, 2010–2012 that the post-GFC recession in many Eurozone countries created an incentive to gamble for redemption.

This gamble for redemption is betting that the post-2008 recession will soon end.

  • If Greece sold more bonds to smooth government spending in the interim, and if the Greek and EU economies recover, the stronger revenue growth will pay off the enlarged Greek government debt.
  • Under some circumstances, this policy is the best that a government can do for its country, but it carries a risk!
  • If the recession goes on for too long (and it did in southern Eurozone), a government will either have to stop increasing its debt or default on its bonds.

The global bond markets will anticipate this prospect of default as a country’s government debt accumulates and will seek higher and higher interest for new bonds, and importantly, to roll over existing Greek Government bonds.

EU policies that result in higher interest rates on government bonds and high costs of default provide incentives for a national government to reduce its debts and avoid sovereign default.

EU policies that result in lower interest rates and lower the cost of a sovereign default provide incentives for a government to gamble for redemption.

The interventions taken to date by the EU and the IMF – lowering the cost of borrowing and reducing default penalties, the bailouts and the 50% write-off of the existing Greek government debts – encourage southern Eurozone governments to gamble for redemption.

Greece and a few others are gambling for redemption by betting that the recession will end soon, selling more bonds to smooth government spending in the interim, and reducing the enlarged debt if their economies recover.

If the recession continues for too long, the government will have to stop increasing debt or default on its bonds. Greece has been in default in more than 50% of the time since it became independent in 1822.

A 2014 paper by Kehoe argued that if Germany and France start to get tough with Greece and charge it penal interest rates on further loans and debt rollovers, it will make it optimal for Greece to just default on its government debts and leave the Eurozone.

A resumption in economic growth is one of the few solutions that avoid these calamities.

Greece’s problem is that it is 119th in the 2014 index of economic freedom, just ahead of India. The World Bank ranks Greece 161st in the world for ease of registering property and 91st for enforcing contracts; it takes an average of 1,300 days to enforce a contract through the Greek courts. This low base says something about how Greek politics works and will work for some time to come.

The lengthy shortcomings of the Eurozone were well-known before it was formed. As Michael Bordo pointed out in 1999:

the absence of a central lender of last resort function for EMU, the lack of a central authority supervising the financial systems of EMU, unclear and inconsistent policy guidelines for the ECB, the absence of central co-ordination of fiscal policies within EMU, unduly strict criteria for domestic debt and deficits, as set out in the Maastricht rules, in the face of asymmetric shocks, and Euroland is not an optimal currency area.

Milton Friedman predicted that the Euro would not survive its first major recession.

I told you so is never a solution.

Europe has extensive experience with currency union break-ups:

  • The Latin Monetary Union joined Belgium, Italy, and Switzerland with France in 1867. The arrangement held together until the generalized breakdown of global monetary relations during World War I.
  • The Scandinavian Monetary Union was formed in 1873 by Sweden and Denmark and Norway joined two years later. This was disrupted by the suspension of convertibility and floating of the three currencies at the start of World War I. The agreement was abandoned during the global financial crisis of 1931.
  • Following the start of the Zollverein (the German customs union) in 1834, members established a German Monetary Union. A full merger of all the currencies did not arrive until after consolidation of modern Germany in 1871.
  • The only truly successful monetary union in Europe came in 1922 with the birth of the Belgium-Luxembourg Economic Union (BLEU), which remained in force until 1999.
  • After the Austro-Hungarian Empire was dismembered by the Treaty of Versailles, in an abrupt and quite chaotic manner, new five currencies were introduced.

Rather than saying the Euro cannot fail, the discussion should be about how the dissolution of currency unions is common, especially where Greece is a member. What happened? What can we learn from the past to prepare for a possible Greek departure from the Eurozone?

Why only Nixon could go to China and Clinton finish the Reagan Revolution

24 Mar 2014 Leave a comment

by Jim Rose in labour economics, politics - USA, Public Choice, war and peace, welfare reform Tags: , , , , , , ,

The secret of winning the swing vote is having policies slightly different from your opponent. Recall Tyler Cowen and Daniel Sutter’s Why Only Nixon Could Go to China in Public Choice.

 

File:Nixon Mao 1972-02-29.png

Cowen and Sutter say that a policy could depend on information – on which policies or values everyone could potentially agree, or on which agreement is impossible.

Politicians, who value both re-election and policy outcomes, realise the nature of the issue better through inside and secret information and superior analytical skills (or access to those skills), whereas voters do not have access to such information base or skills.

Only a right-wing president can credibly signal the desirability of a left-wing course of action. A left-wing president’s rapprochement with China would be dismissed as a dovish sell-out. The Nixon paradox held because citizens could vote retrospectively on the issue.

Left-wing parties adopt right-wing policies because they are good ideas that will get them re-elected. Bob Hawke, Tony Blair, and Bill Clinton were firmly camped over the middle-ground.

Only centre-left economic reformers can credibly signal the desirability of their economic reforms because of the brand name capital they invested in distributional concerns and protecting the poor.

Because of their proven record and brand name, they do not jeopardise their support or credibility by seemingly departing from their core values. They must have done so because it was the right thing to do given events and the long-term interests of the lower-income groups they represent.

Bill Clinton balanced the budget and introduced sweeping welfare reforms in 1996 after vetoing two earlier bills because this finally fulfilled his 1992 campaign promise to “end welfare as we have come to know it”. As he signed the bill on August 22, 1996, Clinton stated that the act:

gives us a chance we haven’t had before to break the cycle of dependency that has existed for millions and millions of our fellow citizens, exiling them from the world of work. It gives structure, meaning and dignity to most of our lives.

Jimmy Carter was a bigger deregulator than Reagan. Obama uses drones far more often than Bush did.

Major labour law reforms were passed in Germany under a left-wing government after decades of 10% unemployment rates and average German unemployment spells for about a year. The key part of these reforms came into play just before the global financial crisis hit and was a major reason for the unemployment rate in Germany falling despite the onset of GFC.

Why Only Nixon Could Go to China also explains why hawks such as Reagan and Begin and other right wing party leaders were able to negotiate peace treaties that eluded more dovish politicians who ran on ‘peace now’ slogans.

Reagan signed the Intermediate-Range Nuclear Forces treaty, walked with Gorbachev in Red Square and seriously offered complete mutual nuclear disarmament in Reykjavik in 1986. Any other American President who offered complete mutual nuclear disarmament would have been impeached.

https://i0.wp.com/www.reagan.utexas.edu/archives/photographs/large/c47345-10.jpg

Hawks also have the right negotiating stance. Robert Aumann argues that:

If you are ready for war, you will not need to fight. If you cry ‘peace, peace,’ you will end up fighting… What brings war is that you signal weakness and concessions.

Only then will both sides negotiate because they know that the other side is willing to walk away and perhaps not come back for a long time. Unless it gets reasonable offers that will be binding on both sides for a long time because both win more for honouring their promises rather than threatening war again soon.

Left-wing politicians can deliver economic reforms because they can deliver new voting blocs to the realignment of political coalitions. This new bloc of centre-left voters and some members of existing political and special interest groupings benefit from regrouping and joining new political coalitions that push through the reforms. An ageing society, budget deficits, technological innovations and shifts in production cost structures and in consumer demand can all make the existing political coalitions less rewarding than in the past.

Vote buying in Thailand and the Philippines

23 Mar 2014 Leave a comment

by Jim Rose in constitutional political economy, development economics, Public Choice Tags: , , , ,

Paying for votes is common in the Philippines and Thailand. The Thai Prime Minister, on the eve of the East Asian crisis, was the rural politician Banharn Silpa-archa. His nickname was Mr. Mobile ATM because of all the bribes he handed out.

Politicians are corrupt partly because developing country politics is ‘retail politics’: helping people with small loans, mediating disputes and getting children into better schools or universities.

A vicious circle develops. Politicians take bribes to build a war chest to bribe their voters to re-elect them. More honest politicians do not win office unless they stoop to paying cash for votes.

Japan is similar. LDP politicians have personal support networks that are 50,000 or more strong which are based on giving and receiving personal favours over their entire term of office.

Robert Tollison wrote a paper on the price of votes and the history of open vote trading in Great Britain and the United States prior to the 20th century.

Tollison found that the winners from the introduction of secret ballots were the middle class because the working class could no longer sell their votes to the rich.

Because the poor tend to face extremely high costs of organization, it may have been technically possible, although economically inefficient, to organize as a bloc of voters in order to secure net wealth transfers to themselves as a group.

From the standpoint of the individual poor voter, a more attractive alternative than tilting at the windmills of redistribution would have been to sell his vote to the highest bidder…

After the passage of the secret ballot in 1872 in Great Britain, the percentage of Commons seats held by landed interests dropped like a rock.

The Thai and Filipino middle classes hate the way the votes of the rural poor can be bought with bribes (and public services paid by taxing the middle class in the cities).

The Japanese, Thai and Philippine parliaments all have multi-member constituencies where the 3, 4 or 12 candidates with the most votes are elected.

This election system forces candidates from the same party to run against each other and build personal support networks to win elections off their own mantle.

This splitting of voter support works well for incumbents who have personal name recognition and a war chest based on bribes extorted during their previous term to fund cash for votes to win re-election.

The Arab Spring – will there ever be a successful popular revolution?

23 Mar 2014 1 Comment

by Jim Rose in Gordon Tullock, political change, Public Choice Tags: , , , , , ,

The Arab Spring is a good example of Gordon Tullock’s consideration of revolutions as palace coups that sometimes occur against the background of street protests. For Tullock, the puzzle is not that popular revolutions are so rare, but that they happen at all.

The role of street protests in the Arab Spring was to throw in the possibility of mutinies and desertions in the army and police. Previous alliances are thrown into doubt especially as the autocrat is old and sick, but had been for many years grooming his young son to inherit his power.

Ordinary citizens obey dictators because if they don’t, they are highly unlikely to make any difference in any revolt and could get killed during the uprising even if it succeeds. Worse awaits them if the revolt fails.

To stay in power, Tullock considers that an autocrat needs a moderately competent secret police willing to torture and kill, and a policy of rewarding generously those who betray coup plotters. Of course, the plotters must be shot.

Autocrats are fundamentally insecure. Wintrobe wrote of the “Dictator’s Dilemma” – the problem facing any ruler of knowing how much support he has among the general population, as well as among smaller groups with the power to depose him. Most dictators are overthrown by the higher officials of their own regime.

Most dictators do not anoint a formal successor while they are in office. Tullock argued that as soon as a likely successor emerges, loyal retainers start to form alliances with that person and may see private advantage in bringing his anointed day forward. Can’t have that.

More than a few autocrats were murdered in their sleep. To his very last day, Stalin locked his bedroom door because he did not trust the bodyguards who had been with him since the 1920s.

As for the populace, the autocrat must use both the carrot and the stick to buy loyalty. It is tricky to get the right mix of repression and co-optation due to lack of information. So dictators pay very high wages to select groups to secure their loyalty, especially the military and police. The communist party of the USSR started with 100,000 members in 1920. By the early 1980s, co-optation left it with 26 million members with the ensuing privileges.

Perfectly ordinary regular armed forces, with no counterinsurgency doctrine or training whatsoever, have in the past regularly defeated insurgents by using well-proven methods.

The simple starting point is that insurgents are not the only ones who can intimidate or terrorise civilians.

For instance, whenever insurgents are believed to be present in a village, small town, or city district, the local notables can be compelled to surrender them to the authorities, under the threat of escalating punishments, all the way to mass executions. That is how the Ottoman Empire controlled entire provinces with a few feared janissaries and a squadron or two of cavalry.

Terrible reprisals to deter any form of resistance were standard operating procedure for the German armed forces in the Second World War. Compare occupied France with the U.S. in Iraq:

  • German officers walked around occupied France with no more than side-arms because any mischief would be dealt with by savage reprisals.
  • American forces in Iraq bunker down and move in convoys because they do not launch reprisals.

On the side-lines, even better, watching it all on TV is the safest place for most to be in a popular revolution, uprising or insurgency.

Unless you control key military resources in the capital, what you do personally does not matter to the success of the revolution. Sticking your neck out can get you shot at or perhaps tortured. A classic ‘free rider’ dilemma.

If you must get involved, the best place to be in a mounting revolution is to be a ‘late switcher’. Switch sides when you are sure of joining the winning side. Back the winner just as he is about to win.

One reason for those post-revolution and post-coup purges is the small number of people actually involved in overthrowing the old autocrat and who actually stuck their necks out while plotting the coup do not trust their Johnny-come-lately new allies. They turn on these late-switchers before they change sides again to support a further coup of their own or a counter-coup.

People power in Manila in 1986 had a lot to do with late switching in a coup plot.

Originally, a military coup was planned by General Ramos and Defence Minister Enrile against the dying Marcos.

The coup plotters feared for their lives under Imelda. The plot was uncovered. Assassins were dispatched.

Ramos and Enrile gave up on forming a military junta and threw their lot with Cory Aquino and her popular movement in the hope that the army would split or hold off until the lay of the land was clearer, which the army did. That 1986 military coup and the coup attempts in succeeding years were staffed by different cabals of these late switchers.

Yeltsin on that tank in Moscow with a loud hailer was great TV, but remember he was calling for the army and security forces to switch sides or at least stay neutral. They did.

The mid-1980s Russian leaders were old and sick, so many ambitious younger army officers and nomenklatura saw their main chance if they boxed real clever and switched sides just at the right moment.

After every change of leadership in the USSR, there is a redistribution of patronage. Perestroika and Glasnost were, on closer inspection, another round of these reallocations of patronage. Patronage to their own entourages are routine for new autocrats throughout history.

Every Russian leader had his own reform initiatives after entering office and had periodic anti-corruption purges to redistribute the rents of high government offices and state-owned enterprise management positions to the up-and-comers he could trust more. Like Khrushchev, Gorbachev also wanted to transfer resources away from the military. Gorbachev went further and wanted to stop bleeding money and resources to the communist satellite states of Eastern Europe.

It also should be always remembered that Qadaffi got his main chance to take over when he was a mere Colonel Qadaffi leading a small group of junior officers. Colonels control strategic components of the military but are not as well paid as those in the autocrat’s inner circle.

Generals are often close to the leadership; their appointments are usually somewhat political and benefit from generous patronage from the autocrat. They have little to gain but their life to lose in a coup plot.

Enough military coups are led by more junior officers seizing their main chance. This make their generals nervous enough about their own survival in a colonels’ coup to strike first and displace the current autocrat before they are the next to be arrested and share his fate. There is then a post-coup realignment of patronage to buy off the junior officers.

Nasser did not believe that he, as a lieutenant-colonel, would be accepted by the Egyptian people and so he and the Free Officers Movement selected a general to be their nominal boss and lead the coup in 1952. Nasser did not become Prime Minister until 1954 after a spell as a minister and then as Deputy Prime Minister.

What appears to be a popular uprising is normally a split within the government. The Arab Spring, not by coincidence, occurred during a succession crisis in Egypt. President Mubarak has been very old and sick for a long time. Gamal Mubarak was old enough to covet the presidency but would have a large entourage of his own that would take many of the lucrative posts from his father’s retainers and courtiers.

A few autocrats call elections and retire abroad. The gratitude of the populace and the uncertain identity of his successors creates a big enough break in the traffic to allow the dictator to get to the airport alive.

Obama, Iran, Tom Schelling and the Bomb

22 Mar 2014 1 Comment

by Jim Rose in Public Choice, Thomas Schelling, war and peace Tags: , , , ,

If Obama was interested in peace, he should pay more attention to the writings of Thomas Schelling.

Schelling said that he did not know of any way to stop the Iranians from acquiring nuclear weapons and it is therefore important to have sophisticated enemies.

  • It took the U.S. 15 years after World War II to think seriously about the security of its nuclear weapons.
  • Before that, U.S. nuclear weapons did not even have combination locks, let alone complex electronic security codes!
  • Now, most nuclear weapons will not detonate even if given the right codes unless they are at their designated targets.

The Soviet Union always had civilian officials in charge of nuclear weapons, and never let an aircraft carrying these weapons out of Soviet airspace. China has a separate army unit for this purpose too.

What are the safeguards against theft, sabotage or unauthorised use, and how will the Iranian weapons be protected? Iran must learn from this. Schelling’s and Herman Kahn’s writings in the early 1960s on nuclear wars starting through accidents and misunderstandings led them to work with Kubrick on the script of Dr. Stangelove.

The ayatollahs do not want their own nation wiped off the map. They know that Israel has enough nuclear weapons and delivery systems to destroy Iran in retaliation for any attack. This would deter them.

The government of Iran is repulsive, but it has never given evidence that it is suicidal. In all likelihood, rhetoric about wiping Israel off the map is ideological blather.

Any government in Tehran would have to realise that an attack on America would be a regime-extinguishing event. Such an attack would be suicide, both politically and literally. 

The United States managed to deter some unpleasant and unpredictable people, including Stalin and Mao Zedong, from using nuclear weapons during the Cold War despite the USA’s own best efforts to provoke them from time to time. Israel and Iran may have noticed the success of that strategy too.

The USSR and China also played the ‘I am a crazy ideological zealot’ card too. Remember Mao and Khrushchev.

  • China became a nuclear power under Mao Zedong, a leader who exceeded even Stalin’s record of genocide. Mao’s publicly enunciated views on nuclear warfare were also alarming in the extreme.
  • China also emerged as a nuclear power on the eve of the Cultural Revolution. China, during that orgy of fanaticism, makes today’s Iran look like a normal, even sedate, country.

The Iranian mullahs take full political advantage of appearing to be mad and unpredictable. Iran’s leaders have nonetheless exhibited remarkably well timed moments of prudence and pragmatism. They have even fully reversed course when confronted with defeat such as when they started to really lose their war with Iraq.

Iran could always go for nuclear latency: the condition of a country possessing the technology to quickly build nuclear weapons without having actually yet done so. This avoids the costs and risks by refraining from exercising the overt nuclear capability option.

Because such latent capability is not proscribed by the Nuclear Non-Proliferation Treaty, a work-around of the treaty is sometimes called the “Japan Option”. Japan is a clear case of a big advanced country with the complete technical prowess and nuclear materials to develop a nuclear weapon quickly.

A country does not test weapons nor declare its latent nuclear potential. Yet just keep the resources for a latent nuclear potential on hand for a crash programme.

Schelling defined diplomacy as being based on having some control over something that the other country wants. There must be something each has to bargain over.

No communications should be sent to Iran; there should be no informal dialogues. Wait for Iran to come to you because you have something they want. Only then will it become serious in striking a bargain.

Tax reforms lead to higher taxes

22 Mar 2014 3 Comments

by Jim Rose in constitutional political economy, James Buchanan, Public Choice, public economics, taxation Tags: , , , , , ,

After the 1970s tax revolts and California’s Proposition 13, Buchanan and Brennan wrote The Power to Tax. Their message was that if you don’t always trust governments, beware of efficient taxes.

More efficient taxes make it easier for government to extract more tax revenue from the population with less resistance. Taxes can be made more efficient by broadening tax bases and removing loopholes while lowering marginal rates. A GST that replaces a web of sales taxes is a common example. The GST always goes up over time, never down over time. Most tax reforms are revenue neutral.

When Brennan said at a tax reform conference in Australia 20 years or so ago that efficient taxes and tax reforms are both bad because they lead to higher taxes and a larger government, no one understood him.

Idealists all, the audience including me assumed they were advising a benevolent government, not a revenue-maximising leviathan government – a beast that needed to be staved with constitutional constraints on the number and size of tax bases and tax instruments.

Fiscal arrangements were analysed by Buchanan and Brennan in The Power to Tax in terms of the preferences of citizen-taxpayers who are permitted at some constitutional level of choice to select the fiscal institutions they are to be subject to over an uncertain future.

Those in elected office are assumed to exploit the power assigned to them to the maximum possible extent: government is a revenue-maximising leviathan.

Buchanan and Brennan were all for inefficient tax systems because they do not raise as much revenue. A government that cannot raise much revenue cannot grow very large.

Gary Becker and Casey Mulligan attributed the growth in the size of governments in the 20th century to demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from the taxed to the subsidised, shifts in political power among taxed groups, and shifts in political power among the subsidised groups:

An improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending.

Tax reform saved the late 20th century welfare state by raising the same or more revenue with less taxpayer resistance. Taxes are very efficient in the Nordic countries – high tax rates on labour income and consumption but lower on capital income. And light regulation too.

The intriguing public choice history of the Kyoto protocol

21 Mar 2014 Leave a comment

by Jim Rose in climate change, environmental economics, Public Choice Tags: , , ,

The US Senate voted 95-0 in July 1997 that the Kyoto Protocol would not be ratified because it excluded certain developing countries, including India and China, from having to comply with new emissions standards.

Disregarding the Senate Resolution, Vice President Al Gore symbolically signed the Protocol on November 12, 1998.

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Knowing that the Kyoto Protocol would not be passed without the inclusion of developing countries in some way, Clinton did not even send the Protocol to the U.S. Senate for ratification. Clinton had 801 days in office to submit it, but did not. As it was going to be rejected, it cost him nothing to sign it and he won the support of expressive voters. Bush was criticised for not doing what Clinton also failed to do.

The EU made demands that the USA would not accept so that the treaty would not include the USA. This allowed EU ministers to look good to expressive voters back home by standing staunch and not compromising.

US non-participation made participation cheaper for the EU because the USA would not be competing for carbon credits, so the price of carbon would be much less.

There was an emergency night time meeting to save the Copenhagen Summit called by Gordon Brown. He was joined by Obama, Sarkozy, Merkel and PM Hatoyama of Japan. To make a point, China sent a rather out-spoken vice foreign minister of foreign affairs. He was the smartest guy in the room.

Due deference to experts in public policy making

19 Mar 2014 Leave a comment

by Jim Rose in climate change, environmental economics, Public Choice Tags: , , , , , , ,

I caught Sir Paul Nurse’s Attack on Science on cable recently. He was exploring why people were unwilling to accept the word of science.

Sir Paul believes that people should defer to experts. He named two expert consensuses: global warming and GMOs.

In his 2012 Dimbleby Lecture Sir Paul called for a re-opening of the debate about GM crops based on scientific facts and analysis:

“We need to consider what the science has to say about risks and benefits, uncoloured by commercial interests and ideological opinion.

It is not acceptable if we deny the world’s poorest access to ways that could help their food security, if that denial is based on fashion and ill-informed opinion rather than good science.”

Many activists, without blinking an eye, will reject the science of GMOs but will hound from the temple anyone who defies another consensus they agree with.

Sir Paul interviewed James Delingpole. After they agreed that science does not proceed on the basis of consensus, Sir Paul asked Delingpole why he rejected the scientific consensus on global warming but accepted the scientific consensus on cancer.

Delingpole said he did not accept the analogy, but he was otherwise flat-footed. I suggest the following answer:

  1. Medicine proceeds on the basis of double blind trials and other small field experiments. Control and treatment groups are used before any treatment is applied widely. Medicine is not perfect as was the case with the misdiagnosis of the causes of stomach ulcers.
  1. The lag between cause and effect are short as would be the case if you rejected emergency treatment after a car accident or cancer treatment.
  1. Medicine tests the efficacy of invasive treatments, weighs side-effects and encourages adaptation and prevention.
  1. The staying power of self-interest in medicine is well-known: much higher rates of surgery when there is fee for service and much lower rates of surgery if the patient is a doctor’s wife. The efforts of the medical profession to suppress new entry to inflate their own incomes are well-known.

Ken Arrow in the early 1960s famously concluded that virtually all the special features of the medical care industry could “be explained as social adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment”.

  1. Physicians may not agree on the medical condition causing the symptoms the patient presents.
  2. Even if physicians agree on their diagnoses, they often do not agree on the efficacy of alternative responses — for example, surgery or medical management for lower-back pain.
  3. Third, information on diagnosis and likely consequences of treatment are asymmetrically allocated between providers and patients.
  4. The reason patients seek advice and treatment in the first place is that they expect physicians to have vastly superior knowledge about the proper diagnosis and efficacy of treatment.

Like all experts, doctors can advise you of the options open to you.

You must weigh those options in light of the costs and benefits to you and those costs and benefits are known only to you.

An old mate, who was in his thirties, had to consider back surgery that had a 10% chance of leaving him in a wheelchair for life. Experts cannot tell you what to do with those odds. After months of terrible pain and incapacity, his back slowly recovered without the surgery.

Most of the debate over global warming is explained by uncertainty about both the extent and incidence of global warming and the efficacy of prevention versus adaptation.

Trade is a powerful force for peace in the Ukraine

18 Mar 2014 Leave a comment

by Jim Rose in liberalism, Public Choice, war and peace Tags: , , , ,

Russian TV is starting to spin a Putin back-down in the Ukraine. Channel surfing, I came cross a Russian TV story alluding to Russians that the revenues from the Russian gas pipelines across the Ukraine to the EU are a major lifeline of the Russian economy.

The mere threat of repeated sabotage of these gas pipelines to Western Europe are an easy way to hurt Russia if it overplays its hand. That was the round-about topic of the TV story.

Trade was a powerful force for peace and is a defence against war, as the great Manchester liberal Richard Cobden championed in mid-19th century.

Both Russia and China have much more to lose and much less to gain from war because of their extensive trade links with their neighbours and their former Cold War rivals, including with each other. China’s extensive trade and investment links with Taiwan are the best guarantee of peace between them.

As Joseph Schumpeter observed, when free trade prevails, “no class” gains from forcible expansion: “foreign raw materials and food stuffs are as accessible to each nation as though they were in its own territory”. Patrick McDonald recently called free trade the invisible hand of peace.

What global warming will cost us if we do nothing

18 Mar 2014 1 Comment

by Jim Rose in David Friedman, economics of climate change, environmental economics, Public Choice Tags: , , ,

David Friedman at Ideas delved into the best estimate of the global cost of global warming – by William Nordhaus – $4.1 trillion this century. This is $48 billion a year – 1/20th of one per cent of world income! Friedman then asked this:

Friedman’s even better argument on the social costs of global warming is that the costs of unlikely but catastrophic risks are included in the social cost arithmetic to make the problem serious. Without including them, global warming up to about a 2-degree warming provides a net benefit.

My Photo

Friedman shows great insight when he goes on to say that there is “no similar attempt to take account of low probability, high cost consequences of preventing global warming”.

That low probability, high cost consequence, which will occur sooner or later, is the next ice age. The next ice age could include a drop in sea levels of three hundred feet and half a mile of ice over the top of London and Chicago. That would bring a new meaning to climate change refugees. We are in a relatively warm period – an interglacial – in an ice age that started two million years ago.

Friedman asked whether “It is at least possible that global warming is all that is preventing the interglacial from ending”.

The great tactical victory of environmentalists is keeping the debate on the science going because even if the science is right, the economic costs are small.

How much will global warming cost is the correct question for policy debate. Let the science be settled!

Economists have no more expertise to judge the science of global warming than they do in judging the science behind the inevitability of super volcanoes going off again such as the one just north of me. The Yellow stone national park super volcano is 50,000 years overdue, by the way.

Economists can comment on the likely consequences, intended and unintended, of different choices and the constraints that different national and international institutional frameworks place on what policy choices might be made.

The chances of India, China and the rest of the Third World agreeing to forego or even slow their economic development to fight global warming is zero even before you consider the international collective action, verification and free rider problems. Adaptation and ‘richer is safer’ are the only game in town whichever way the climate goes!

On throwing the rascals out

18 Mar 2014 Leave a comment

by Jim Rose in Joseph Schumpeter, Public Choice, Richard Posner Tags: , , , , ,

“American democracy,” writes Richard Posner, “enables the adult population, at very little cost in time, money or distraction from private pursuits commercial or otherwise, to punish at least the flagrant mistakes and misfeasances of officialdom, to assure an orderly succession of at least minimally competent officials, to generate feedback to the officials concerning the consequences of their policies, to prevent officials from (or punish them for) entirely ignoring the interests of the governed, and to prevent serious misalignments between government action and public opinion.”

Too many, in Richard Posner’s view, want to remake democracy with the faculty workshop as their model. Such deliberation has demanding requirements for popular participation in the democratic process, including a high level of knowledge and analytical sophistication and an absence, or at least severe curtailment, of self-interested motives.

Much empirical research demonstrates that citizens have astonishingly low levels of political knowledge. Most lack very basic knowledge of political parties, candidates and issues, much less the sophisticated knowledge necessary to meet the demands of a deliberative democracy.

Posner champions Joseph Schumpeter’s view of democracy as a superior alternative to the unrealistic visions of deliberative democracy.

Schumpeter disputed the widely held view that democracy was a process by which the electorate identified the common good, and that politicians carried this out:

  • The people’s ignorance and superficiality meant that they were manipulated by politicians who set the agenda.
  • Although periodic votes legitimise governments and keep them accountable, their policy programmes are very much seen as their own and not that of the people, and the participatory role for individuals is limited.

Schumpeter’s theory of democratic participation is that voters have the ability to replace political leaders through periodic elections. Citizens do have sufficient knowledge and sophistication to vote out leaders who are performing poorly or contrary to their wishes. The power of the electorate to turn elected officials out of office at the next election gives elected officials an incentive to adopt policies that do not outrage public opinion and administer the policies with some minimum honesty and competence.

The outcome of Schumpeterian democracy in the 20th century, where governments are voted out rather than voted in, is that most of modern public spending is income transfers that grew to the levels they are because of support from the average voter.

Political parties on the Left and Right that delivered efficient increments and streamlinings in the size and shape of government were elected, and then thrown out from time to time, in turn, because they became tired and flabby or just plain out of touch.

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