Topic: Political Philosophy

Democracy vs. Innovation

Over at the Library of Economics and Liberty, Duke political science chair Michael Munger has a real gem of an essay lucidly explaining why democracy, which caters to the median voter, won’t produce innovation, which is created by bets with long odds by risk-takers on the fringe.

For political decisions, “good” simply means what most people think is good, and everyone has to accept the same thing. In markets, the good is decided by individuals, and we each get what we choose. This matters more than you might think. I don’t just mean that in markets you need money and in politics you need good hair and an entourage. Rather, the very nature of choices, and who chooses, is different in the two settings.

That part’s not very funny, but most of the essay is. So if you like your political economy at once weird and crystal clear, do check it out.

Islam and Enlightenment

Let me start by saying that I was not and am not a supporter of the Iraq war, and personally I’m an old-fashioned skeptic about religion. But I was appalled to hear Seyyed Hossein Nasr, a leading Islamic scholar, declare on an NPR interview show on Tuesday that the Pope’s statements “themselves are acts of violence.”

Interviewer Diane Rehm wanted to make sure what she’d heard. She asked him, “You’re saying that the language itself is an act of violence?” “Of course it is,” Nasr replied. Discussing the violent reaction to the Pope’s quotation, he declared, “He who uses the sword shall perish by the sword.”

Later in the show, Rehm read a quotation from a column by Anne Applebaum, who wrote that westerners of all political stripes “can all unite in our support for freedom of speech - surely the Pope is allowed to quote from medieval texts - and of the press. And we can also unite, loudly, in our condemnation of violent, unprovoked attacks on churches, embassies and elderly nuns.”

Asked for his reaction, Nasr said that such violence was “not unprovoked–it is provoked.” “Because words are violence?” asked Rehm. “Of course,” replied Nasr, “of course.”

I want to be careful not to pick out obscure members or adherents of any philosophy and draw large conclusions from them. But Nasr is not so obscure. He’s a distinguished professor at a leading American university. He holds a Ph.D. in the history of science and philosophy from Harvard and is the author of more than 20 books, from publishers including Oxford University Press. His university held a conference honoring him, titled Beacon of Knowledge. The website of the Seyyed Hossein Nasr Foundation declares him “one of the most important and foremost scholars of Islamic, religious and comparative studies in the world today.” So it seems fair to say that Nasr is not an oddity; he’s a recognized Islamic scholar.

And that’s why it’s so shocking to hear the claim that words “are acts of violence” from such a distinguished scholar. A scholar, we might note, who teaches at George Washington University, named in honor of the great Enlightenment statesman. I don’t want to believe that we are faced with a clash of civilizations, much less World War III. But if Islamic scholars who teach at great American universities believe that violent attacks “on churches, embassies and elderly nuns” are “provoked” by the words of a religious leader in a university speech a thousand miles away, then we certainly have a clash of world views.

The west went through the wars of religion and emerged with a modern understanding of toleration. We have learned through bitter experience that we can worship God without forcing everyone else to worship in the same way. We allow our neighbors to practice their religion, we practice our own or none at all, we criticize views we deem unsound, and we accept that our own views and faith will also be subject to criticism.

What we forswear is violence in response to words. In the present crisis we should seek peaceful dialogue between Muslims and Christians, not to mention Jews and freethinkers and all the others who share our world. But we who live in Enlightenment societies should not apologize for the fact that freedom of thought and freedom of speech sometimes lead to hurtful words.

Instead, we should reaffirm our own commitment to free speech - “hate speech” laws, anyone? - and urge Muslims to appreciate the benefits of liberal values, such as liberty and prosperity and social harmony. And we should hold Muslim leaders to the same standards we expect of western leaders, both civil and religious: we expect them to condemn, yes, “unprovoked” violence.

Cross-posted from Comment is free.

Klein on Medicare Meets Mephistopheles

No one is going to accuse the American Prospect’s Ezra Klein of being a libertarian.  (Oh, wait.  I think I did once.) 

Which makes it all the more impressive that he was able to say such kind things about the Cato Institute’s latest health policy book, Medicare Meets Mephistopheles:

[T]he book is actually quite good. I’d happily recommend it to anyone with a basic grasp on health care and a desire to learn a bit more about Medicare. Hyman is a felicitous and fun writer, and he conveys an impressive amount of history and data in as accessible and absorbable a manner as one could hope. I know how tricky it is to make health care a quick and gripping read, and I tip my hat to anyone who is capable of enriching the debate and educating readers by doing so.

Full disclosure: Klein was less enamored with Hyman’s analysis and recommendations.  (Readers can find those comments in Klein’s post over at Tapped.)  Hopefully, Klein will raise his concerns at the Medicare Meets Mephistopheles book forum this Thursday.

More on the Ideological Neutrality of Behavioral Economics

Below, Mark links to a fascinating-looking paper pointing out that government regulators are human, too, and therefore subject to the same cognitive foibles as the rest of us.

It might seem pretty surprising to Cato-style classical liberals that this sort of application of behavioral research didn’t immediately leap out to researchers. But on reflection, it makes sense that the first bunch of policy implications to be suggested from a new area of research will tend to reflect the ideological preferences of the investigators. This need not imply any kind of willful axe-grinding bias. This kind of unwitting bias, in fact, illustrates a few of the main points of behavioral economics: We don’t have unbounded cognitive capacities, the mind uses lots of quick and dirty rules of thumb, and we can’t count on those speedy cognitive tricks to conform to canonical standards of rationality. Even brilliant economists and sage government regulators simplify the complexity of the real world by passing it through sometimes shoddy ideological filters — even while attempting to draw out the implications of that very phenomenon.

Here are a couple more examples of papers drawing on behavioral research that don’t have an obvious ideological tendency. In a paper under review at Public Choice, “Behavioral Economics and Perverse Effects of the Welfare State” [doc], Bryan Caplan and Scott Beaullier write:

Critics often argue that government poverty programs perversely make the poor worse off by discouraging labor force participation, encouraging out-of-wedlock births, and so on. However, basic microeconomic theory tells us that you cannot make an agent worse off by expanding his choice set. The current paper argues that familiar findings in behavioral economics can be used to resolve this paradox. Insofar as the standard rational actor model is wrong, additional choices can make agents worse off. More importantly, existing empirical evidence suggests that the poor deviate from the rational actor model to an unusually large degree. The paper then considers the policy implications of our alternative perspective.

The policy implications would make Charles Murray smile. And here is a working paper by Daniel Benjamin, Sebastian Brown, and Jesse Shapiro showing that

… higher cognitive ability — especially mathematical ability — is predictive of much lower levels of small-stakes risk aversion and short-run impatience. For example, we calculate that a one-standard-deviation increase in measured mathematical ability is associated with an increase of about 8 percentage points in the probability of behaving in a risk-neutral fashion over small stakes (as against a mean probability of about 10%) and an increase of about 10 percentage points in the probability of behaving patiently over shortrun trade-offs (with a mean of about 28%).

And what are we to make of that? The authors somewhat tepidly suggest that better education might improve poor cognitive ability a bit, though they recognize that differences in ability run deeper than differences in schooling. More intriguingly, their results go to the heart of the currently raging inequality debate. Because the more “cognitively able” are less likely to make errors relative normative standards of risk and expected utility, they’re likely to do better at choosing the elements of an investment portfolio:

Our results also suggest additional reasons why the overall returns to cognitive ability may be underestimated by focusing solely on the labor market returns … we might conjecture that a one-standard-deviation increase in cognitive ability is worth about 0.3% of lifetime wealth due to improved portfolio allocation alone. Since portfolio choice is only one of many important household decisions that are affected by cognitive ability, the total value of cognitive ability’s effect on decision-making could be quite substantial.

If changes in the economy have increased the payoff to the decisions affected by cognitive ability, that might explain some changes in wealth inequality.

Behavioral economics done right is just good science. The real peril is in the transition over the gap from psychology to policy. Big philosophical and ideological assumptions lurk in the gap. It’s very important to make those assumptions explicit, and defend them. Unfortunately, that’s too rarely done

Regulation News Pegs!!

In the public relations racket, they’re called “news pegs” — current events that can be used to promote your research. As editor of Regulation, I sometimes get the complaint that my publication is “interesting, but it doesn’t have a lot of news pegs.”

So how about this — two Regulation news pegs in one day!

Peg 1: Should we tax nonprofit hospitals?

Decades ago, Congress awarded tax-exempt status to private nonprofit hospitals in return for the hospitals agreeing to treat indigent patients who would otherwise rely on taxpayer-provided healthcare services. But this “grand bargain” is now under Capitol Hill scrutiny following the discovery that for-profit, non–tax exempt hospitals provide roughly the same amount of free medical care to the poor. Today’s NPR program Marketplace discusses the congressional hearings.

All of this should come as no surprise to readers of Regulation. In the summer issue, Guy David of Penn and Lorens Helmchen of Illinois-Chicago lay out this very problem and ask (pdf), why is the government giving one type of tax treatment to some hospitals and another type to others?

Peg 2: Soft Paternalism

For several years I’ve believed that one of the most important intellectual challenges to libertarian ideas is behavioral economics — the empirical field of study that suggests people often do not act rationally and thus markets do not maximize public welfare.

The current issue of the New Yorker contains an article by John Cassidy on behavioral and neuroeconomics that confirms my view. In the article, Cassidy writes that “most economists agree that, left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all.  Neuroeconomics potentially challenges both parts of this argument.”

The regulatory prescriptions that follow from this research are often described as “soft” or “libertarian” paternalism.  The basic notion is that government should require certain behaviors as a default rule (for example the purchase of health insurance or particpation in 401k saving plans) but allow people to opt out if they prefer.

But government actors appear to be no more rational than economic actors — and it is quite possible that soft paternalism could be more detrimental to public welfare than the private choices studied by behavioral economics. Harvard economics professor Ed Glaeser states this case (pdf) in the summer issue of Regulation.

Pork or Bags of Cash?

I’ve been noodling through a government reform thought experiment, but can’t seem to reach a conclusion. See what you think…

The reform would address that most nefarious dynamic: When the benefits of government spending are concentrated and the costs are dispersed, government will grow and spending will increase.

Mancur Olson described this dynamic more than 40 years ago in The Logic of Collective Action. Steve Slivinski, in his new book Buck Wild, summarizes Olson’s idea as follows:

Olson pointed out that the disparity in incentives between taxpayers and what we now call “special interests” results from an inherent disadvantage of the larger group (i.e., taxpayers) compared to the smaller group (i.e., recipients of public dollars) in its ability to organize to defend its interests. It is this inherent bias in favor of the small special interest groups that provides a very robust explanation of why we still have Big Government, even though many taxpayers would prefer smaller government. “It would be in the best interest of those groups who are organizing to increase their own gains by whatever means possible,” writes Olson. “This would include choosing policies that, though inefficient for the society as a whole, were advantageous for the organized groups because the costs of the policies fell disproportionately on the unorganized.”

To borrow an example from Steve’s book, the National Endowment for the Arts had a 2004 grant budget of $47.4 million — equal to about 0.01% of income taxes. The NEA awarded 1,970 grants that year, so the average grant amount was $24,000. Grant recipients would thus have considerably more financial incentive to lobby for continuing the NEA than individual taxpayers, who on average contribute less than a buck per year to the program, would have to lobby for discontinuing it.

This dynamic is made worse by the common belief that if a government program is cut, its money will be rerouted to some other program instead of returned to taxpayers. Consider, for instance, the lightly-trafficked regional airport in my hometown, which is using a forthcoming, large federal grant to finance a major expansion of its runway. When local residents complained that the expansion was a waste of taxpayers’ money, project defenders responded that the federal government would spend it in some wasteful fashion anyway, so why not do so locally?

The “organized group” that gains the most from Olson’s dynamic is politicians. Because they control the public fisc, they receive the entreaties and gratitude of special interests, and they parlay that gratitude into campaign contributions and electoral support. The result is that politicians and special interests mutually benefit from this dynamic while taxpayers are stuck with the bill.

Nor does the dynamic require bad actors. Special interests can act on the sincere belief that their causes benefit society, and politicians can share that belief or else be brought to embrace it by the quasi-Darwinian forces of elections. In short, Olson’s dynamic appears to be a natural part of the political system.

Unfortunately, it’s a very costly part, as Duke University’s Mike Munger described earlier this summer in an essay on (Will Wilkinson discusses Munger’s essay here, and Munger chats about it on Russ Roberts’ EconTalk here.) Special interests — whether units of government or private entities — will invest resources in lobbying and other efforts to gain the government money. Those investments, in aggregate, may pay off for the special interest (because the government money received offsets the cost of the successful and unsuccessful lobbying efforts), but significant resources are wasted from the perspective of society.

To understand this, suppose a special interest spends L dollars a year on lobbying, and that lobbying yields G dollars in government money. If L < G, the special interest will continue its lobbying, because the cost is offset by the government money received. But the cost to society for the special interest obtaining G is G + L (because society ultimately funds the special interest) + various deadweight losses D from taxation.

 Hopefully, the benefit purchased by the grant will outweigh G + L + D. But there are many cases where that appears not to be the case — consider Ted Stevens’ $231 million “Bridge to Nowhere” for the 50 people of Gravina Island, Alaska. So, society is stuck with paying G + L + D for a benefit that sometimes isn’t even worth G.

Government spending, in theory, is supposed to be for public goods — goods for the benefit of the general public that are not sufficiently provided through private markets because they are neither rivalrous nor exclusive. (There are all sorts of fights over how to understand “sufficiently,” but we need not worry with that here.) However, projects like the Bridge to Nowhere and other instances of pork-barrel spending are better understood as either club goods (goods that are exclusive) or private goods (goods that are rivalrous and exclusive).Neither of those latter two categories of goods seems an appropriate candidate for government provision — or, at least, for federal government provision. Yet it is those two groups of goods for which special interests are willing to spend L in order to gain G.

Can we somehow break up this dynamic, reduce L, and increase the likelihood that public spending goes to true public goods instead of dubious club and private goods?

To do so, we would have to overcome Olson’s dynamic. That would require:

  1. assuring that the money saved from foregone spending is returned to taxpayers (or, at least, to the public),
  2. reshaping the budget system so that politicians are politically rewarded for the money they save, and
  3. aggregating special interest “pork” spending so that taxpayers will have greater incentive to organize.

Hence, my thought experiment: What if individual politicians were given the choice between spending the money allocated to pork barrel spending on actual projects, or handing that money directly to their constituents?

Think about this on the federal level. In essence, each congressional district has its own pork fund (funded in accordance with the congressman seniority, party affiliation, political favors, etc.) that it divvies up among local and national special interests. What would happen if each congressman were given the choice of, instead of simply funding pork, handing out some or all of the money to his constituents?

Public choice analysis asserts that the congressman would follow whichever course of action is most likely to get him reelected. If the politician’s laundry list includes some meritorious public goods that would benefit his community (and thus earn his constituents’ gratitude), he would direct some of the money to those goods. He may also continue to fund some of the club and private goods, if he believes enough voters have a strong-enough preference for them.

But, I suspect, the congressman would detect a strong voter preference for receiving bags of cash instead of dubious-value government goods and services. And that intense preference, I think, would reduce pork barrel spending. That, in turn, would reduce special interests’ incentives to pursue that money, which would reduce L.

But is my suspicion wrong? Would politicians prefer to hand out cash to large numbers of constituents or cut the ribbon for Bridges to Nowhere (after handing out cash to construction companies)?

Moreover, if I am right that handing out cash to constituents is more appealing, would the unintended consequences of this reform (e.g., politicians using the handouts to redistribute wealth to the median voter) be worse than its benefits?


Welcome to the Blackout Period! NOT

Today McCain-Feingold’s 60-day window on electioneering communications opens. Perhaps a better metaphor would be that the window slams shut.

An electioneering communication is a broadcast ad that mentions a candidate for federal office. Until election day you cannot sponsor an electioneering communication unless you meet certain conditions specified by federal election law.

Practically, this part of McCain-Feingold means business corporations, labor unions, many interest groups (which are incorporated), and groups that receive money from corporations or unions may not fund ads mentioning candidates for federal office. The same groups also may not sponsor ads urging citizens to contact their member of Congress about an issue if that member is running for re-election.

Defenders of McCain-Feingold (and a majority of the U.S. Supreme Court) have argued that the electioneering communication rules do not prohibit political speech. After all, these groups can simply form a political action committee or use other available alternatives to sponsor the advertising.

Maybe, maybe not. In 2000, a donor gave the NAACP a multi-million dollar gift that was used to fund ads criticizing a candidate for federal office, George W. Bush. Under McCain-Feingold, the NAACP would have had to raise that multi-million dollar donation under federal law including disclosure requirements and contribution limits. Raising money under those constraints is much harder than receiving a single gift from one donor. Given those difficulties, the NAACP might well have not raised as much money with a PAC as they did in 2000 from that one contributor. Of course, funds that are not raised cannot be spent on political speech.

Jim Bopp, Jr., a leading First Amendment lawyer, has recently noted other ways McCain-Feingold discourages speech:

 “As one who represents advocacy groups, I have seen first hand that the burdens and undesirability of each available alternative [for example, PACs]  is such that the vast majority of advocacy groups have abandoned issue advertising during the blackout periods… One of the key considerations is that to avail oneself of one of these alternatives requires (1) hiring expert legal assistance to design and implement such strategies and (2) exposing your organization to heightened scrutiny by the FEC, press, and offended public officials.  As a result, only the wealthiest, most sophisticated, and most insistent have assumed these burdens and risks.  The vast majority of advocacy groups have just dropped out – to the everlasting joy of incumbent politicians who face less scrutiny from the general public for what they do to us and for us in office.  A prohibition indeed!”

I am reminded of Frederic Bastiat’s essay on “The Seen and the Unseen.” Americans see the political world after McCain-Feingold. Electoral ads continue to run, and no one has been sentenced to a re-education camp. They conclude that nothing all that bad has happened to free speech.

Americans do not see the political speech that would have existed if McCain-Feingold had not been enacted. They thus discount the possibility that the speech that may not exist in the future may be their own and that blackout periods now may portend a longer night to come.