Topic: Cato Publications

New at Cato Unbound: Inequality Denialism = Global Warming Denialism?

The Earth is heating up, and so is the conversation on income inequality at Cato Unbound! University of Oregon economist and proprietor of the popular econo-blog, Economist’s View, writes:

This debate reminds me of the debate over global warming, though using the word “debate” implies there is more disagreement than there really is.

[…]

The inequality debate appears to be unfolding similarly with those who would like to avoid policies to address inequality, policies such as more progressive taxation, hoping to keep the first question open as long as possible or claiming that the rise in inequality is the inevitable result of natural market forces and we should not interfere.

Cornell University economist Richard Burkhauser takes exception:

I give Mark Thoma high marks for raising the rhetorical stakes in this debate to the point where those who remain more skeptical of the evidence for substantial increases in income inequality since 1989 are relegated to the status of contrarian ideologues unwilling to sign onto Mr. Gore’s “Inconvenient Truth.” But isn’t this a bit much, even for a true believer?

Burkhauser goes on to argue that there has been no detectable increase in inequality within the bottom 99 percent of the income distribution. But, “what about that other 1 percent?” Burkhauser inquires:

Here Reynolds and [Gary] Burtless strongly disagree. Reynolds argues that even including that 1 percent in the mix there has been no great increase in income inequality since 1988 and Burtless offers counter proof based on other data sets. I am not yet sure who is right between them, but I am very sure that Thoma is wrong. It is still reasonable to be skeptical of both arguments.

Stay tuned for more from Burtless, Reynolds, and Krueger and Perri.

How Big-Government Conservatism Brought Down the Republican Revolution

For conservatives generally and the Republican Party in particular, now is a time of intense soul-searching. For the first time in a dozen years, Republicans have lost control of Congress. As a result, they are being forced to reexamine who they are and what they stand for. Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution, a new book by Cato scholar Michael D. Tanner, provides an incisive analysis of the roots and core beliefs of big-government conservatism and the major currents that fueled its growth—neoconservatism, the Religious Right, supply-side economics, national greatness conservatism, and Newt Gingrich–style technophilia—and offers a detailed critique of its policies on a wide range of issues.  Leviathan on the Right is a clear warning that, unless conservatives return to their small-government roots, the electoral defeat of 2006 is just the beginning.

Why the United States Must Leave Iraq

The U.S. military occupation of Iraq has already cost more than 3,000 American lives and $350 billion. In “Escaping the Trap: Why the United States Must Leave Iraq,” Cato scholar Ted Galen Carpenter argues for a rapid and comprehensive withdrawal from Iraq. “It is time to admit that the Iraq mission has failed and cut our losses. We need an exit strategy that is measured in months, not years.” Carpenter also examines alternative prescriptions offered by opponents of immediate withdrawal—gradual or partial withdrawal, escalation, and partitioning—and concludes that they are unrealistic, expensive, and insufficient to stem the violence in Iraq.

New at Cato Unbound: Alan Reynolds’ Income Distribution Heresies

In a speech yesterday, Federal Reserve Chairman Ben Bernanke worried that rising income inequality may make Joe and Joanne Lunchbox “less willing to accept the dynamism … so essential to economic progress,” which would be bad. ”Bernanke Warns of Economic Inequality,” Forbes’ headline tolls. 

Bernanke is evidently sold on what economists call the ”skill based technical change” hypothesis, which basically says that new technology has increased the productivity, and thus the wages, of high-skilled workers faster than it has for low-skilled workers. Bernanke sagely advises us not to look to globalization as the source of increasing inequality, and urges a broader diffusion of the kinds of skills that really pay off in today’s economy.

But is there actually something to be worried about? Is income inequality really widening at all? Are the incomes of the wealthiest increasing faster than those of the rest of us?

As it happens, those are the question of this month’s edition of Cato Unbound, “Interrogating Inequality,” which kicks off today!

It turns out these questions are a lot harder than they seem, and the answers turn on which set of government statistics — each with its own special biases — one consults. In this month’s lead essay, “Income Distribution Heresies,” Cato’s own Alan Reynolds — who set off a firestorm of controversy with a Wall Street Journal op-ed last month disputing the received wisdom about growing inequality — clarifies and refines his argument that massively increasing income inequality is an illusion. Replying to Reynolds, we’ll have the Brookings Institution’s Gary Burtless, University of Oregon economist and econ-blogger Mark Thoma, Cornell University inequality specialist Richard Burkhauser, and the Germano-Italian econo-duo Dirk Krueger and Fabrizio Perri, of the Universities of Pennsylvania and Minnesota (and the Minneapolis Fed), respectively.

So … is the specter of rising income inequality a statistical quirk or not? What’s really going on, income distribution-wise? Why not pay more attention to the wealth and consumption numbers, in any case? Only Cato Unbound readers will really be in the know.

Paduda Cuts (Closer) to the Heart of the Matter…

…when he responds to my post thus:

I think this is because libertarians don’t believe in health insurance as a means to help people with health conditions pay their bills.

I would put it this way:

Insurance is a voluntary arrangement where consumers agree to subsidize each other. By definition, sick people have higher medical expenses. Thus, some seek to charge healthy people more than they cost to insure, so that insurers can reduce the premiums they charge to the sick.

There are lots of reasons why healthy people may agree to that. They may be very risk-averse, and so they are willing to pay more than they cost to insure. They may be altruistic, deriving satisfaction from knowing that their higher premiums are making coverage more affordable for others. Or they may precommit to such subsidies before it is known who in the insurance pool will develop a chronic illness (read: guaranteed renewable insurance).

As a libertarian, I have no problem with the healthy subsidizing the sick via private health insurance — so long as the arrangement is voluntary. But problems arise when public policy tries to get healthy consumers to provide, shall we say, “extra-voluntary” subsidies:

  • The healthy people eventually figure out that they are being over-charged, and they bolt. That makes the risk pool less-healthy, premiums rise, and more healthy people leave. Lather, rinse, repeat, and you’ve got your very own adverse selection death spiral.
  • The insurers realize they can’t make money off the sick people, so they avoid diabetics and such as if they had the plague. 
  • And it doesn’t help the situation that forced subsidies lead to greater moral hazard among the very people who already use lots of medical care. That just fuels the first two responses.

So to tweak Paduda’s characterization, libertarians think private insurance is a wonderful vehicle for voluntary subsidies and a lousy vehicle for forced subsidies.

In a world without such forced subsidies, Paduda is correct that we would purchase a lot less health insurance. And I find this comment instructive:

[I]nsurance would not be available at any kind of affordable price for anyone who really needs it if Cannon’s prescription becomes reality” [emphasis in original].

Sick people don’t need insurance. Insurance doesn’t make sick people healthy. They need medical care. They may even need subsidies. So why not try to provide them those things, rather than wreck the markets for both health insurance and health care?

Many equate insurance with subsidy. In fact, one is a subset of the other.

Aqua Teen Overreaction Force?

Boston officials investigating this week’s marketing campaign gone awry should be sure to include themselves in the scrutiny, asking if they overreacted to the incident.

A In case you missed the story, Cartoon Network, a division of Time Warner’s Turner Broadcasting, recently launched a “guerrilla marketing campaign” to promote its new adult-audience cartoon Aqua Teen Hunger Force. As part of the campaign, the network hired New York marketing firm Interference Inc. to place notepad-sized, electronically lit signs of the show’s “mooninite” characters in unusual locations around urban areas.

The campaign received little notice in New York, Los Angeles, Chicago, Atlanta, Seattle, Portland, San Francisco, Philadelphia, and Austin, Texas. But in Boston, public officials treated the signs as a possible terrorist threat, closing bridges, subway stations, roadways, and even part of the Charles River while bomb squads removed the signs.

Once the nature of the signs became known, Boston mayor Thomas Menino issued a press release blasting the campaign:

It is outrageous, in a post-9/11 world, that a company would use this type of marketing scheme. I am prepared to take any and all legal action against Turner Broadcasting and its affiliates for any and all expenses incurred during the response to today’s incidents.

Estimates for those expenses have already topped $1 million.

Boston officials’ initial concern is understandable and appropriate. Seeing an out-of-place object containing batteries, circuitry, and glowing lights is unsettling in these times and it should be investigated. But at what point should Boston officials have realized that the signs posed no threat, and called off the bomb squads?

This raises an issue that we often discuss here at Cato, and that has become especially important in the post-9/11 era: should we be more concerned about Type-1 errors (false positives) or Type-2 errors (false negatives)?

Detection systems, whether mechanical (burglar alarms, ultrasounds) or human (analysts, emergency services workers) are rarely error-free. Often, we have to decide whether we want a very sensitive detection system that likely will detect any real problem but also subjects us to Type-1 errors, or else a less sensitive system that likely won’t give us many false alarms but may also miss a real problem.

Boston officials’ bomb-squad response to the mooninite signs is a perfect example of a Type-1 error produced by a highly sensitive detection system. I suspect that government officials would defend the high sensitivity, saying “it’s better to be safe than sorry.”

But Type-1 errors can end up making us feel very sorry. The current Iraq War can be considered a Type-1 error resulting from the Bush administration’s high sensitivity to the threat posed by Saddam Hussein’s regime.

Or consider the 2002 Beltway sniper attacks, during which local schools publicized that they were in “lockdown mode” and keeping schoolchildren indoors — that is, they went into “better safe than sorry” mode. The snipers later told police that the schools’ pronouncements enticed the snipers to try to kill a child, and they ultimately wounded a 13-year-old as he arrived at his Bowie, Md., middle school.

For an excellent discussion of why 9/11 should not lead us to be too accepting of Type-1 errors, read Ohio State University national security professor John Mueller’s article “A False Sense of Insecurity?

The Libertarian Vote: New Returns Trickle In

Don’t miss the latest from David Kirby and me on the libertarian vote. In Cato Policy Report (pdf; less attractive HTML version here) we report the results of our Zogby International poll of 2006 voters.

In the Zogby survey, 15 percent of voters gave libertarian answers to our three questions. And those libertarian-leaning voters showed the same shift away from Republican candidates that we had identified in the 2004 election. Clearly, “two more years of war, wiretapping, and welfare-state social spending” had not brought back any of the wandering libertarians.

We did some new tests in the Zogby survey. We asked voters to identify themselves ideologically. Full results are in the article, but most respondents whom we identified as libertarian described themselves as “conservative” (41 percent) or “moderate” (31 percent). Only 9 percent called themselves “libertarian.”

But … when we asked half the respondents, “Would you describe yourself as fiscally conservative and socially liberal?” we were quite surprised that fully 59 percent said yes. And when we asked the other half of the sample, “Would you describe yourself as fiscally conservative and socially liberal, also known as libertarian?” we knew the number would go down. But it only went down to 44 percent. So 44 percent of American voters are willing to label themselves as “libertarian” if it’s defined as “fiscally conservative and socially liberal.”

We point out to Republican strategists:

After the 2000 election Karl Rove was convinced that 4 million Christian evangelicals had stayed home, and he was determined to get them to the polls in 2004. By our calculations, Republicans carried the libertarian vote by 5.5 million votes in the off-year election of 2002 and by only 2.9 million votes in 2006. That’s a swing of 2.6 million libertarian voters. Remember, it takes two new base voters to replace one swing voter who switches from one party to the other. Rove and his colleagues should have been watching out for the libertarian vote as well.

Read the article.

But wait, there’s more!

Since that article was written, David Kirby (whose number-crunching skills prove that you can actually learn something useful at the Kennedy School of Government) has analyzed newly released data from the American National Election Studies, the gold standard of public opinion research. ANES’s 2006 survey once again found that 16 percent of voters held libertarian values. And David found the following shifts from the 2002 midterm elections:

How Libertarians Voted

House              2002                2006 
D candidate       23                     46 
R candidate       70                     54 

In other words, among libertarians, the margin for Republican House candidates dropped from 47 to 8 points, a 39-point swing. (Note: ANES asked the question a slightly different way, so that votes for third-party or independent candidates were not recorded in 2006. Libertarian voters seem to vote for alternative candidates at a higher rate than other voters.)

Turning to the upper chamber,

Senate             2002                2006 
D candidate       15                     48 
R candidate       74                     52 

Among libertarians, the margin for Republican Senate candidates dropped from 59 to 4 points, a 54-point swing.

As we noted in the Cato Policy Report article, “To put this in perspective, front-page stories since the election have reported the dramatic 7-point shift of white conservative evangelicals away from the Republicans. The libertarian vote is about the same size as the religious right vote measured in exit polls, and it is subject to swings more than three times as large.”

We reiterate our advice above to Karl Rove, and invite Democratic strategists to look carefully at the gift that Republicans are offering them.