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Brooks Wilson's Economics Blog: October 2010

Friday, October 29, 2010

A Conflict of Visions: Ideology Revealed

In Conflict of Visions, Thomas Sowell argues that two different visions touching the nature of man, the acquisition of knowledge and social decision making explains many differences between individuals’ stances on policy.  These visions are so powerful that they affect how people view the same evidence, explaining why these visions have persisted for more than two hundred years.

I believe that Hedengren, Klein, and Milton, provide evidence supporting Sowell’s hypothesis in, Economist Petitions": Ideology Revealed, published in the Econ Journal Watch.  They examined 35 petitions signed by economists between 1994 and 2009.  Based on their analysis, they classified fifteen petitions as liberty augmenting, thirteen as liberty reducing, and seven as other.  They conclude
The most notable finding of this investigation is that virtually every single economist who is active in signing petitions leans heavily in one direction or the other. The pictures tell the story better than words can, but here are some facts put into words:

• The 63 economists who signed at least eight liberal petitions lent a grand total of 564 signatures to liberal petitions, but their signatures on interventionist petitions amounted to just  five!

• The 102 economists who signed at least four interventionist petitions lent a grand total of 461 signatures to interventionist petitions, but their signatures on liberal petitions amounted to just sixteen!

• There were 589 economists who signed at least three liberal petitions, but only one also signed at least three interventionist petitions (and that individual, Malcolm Robinson, signed only three of each kind). Meanwhile, there were 230 economists who signed at least three interventionist petitions.

• In fact, among the 589 who signed at least three liberal petitions, there were, besides the aforementioned Malcolm Robinson, only two individuals who also signed at least two interventionist petitions, Carl F. Christ and Peter Crampton. But these two each leaned heavily in the liberal direction, signing five liberal and just two interventionist petitions. It is fair to say that Malcolm Robinson is the only exception to the finding that economists who are active in signing petitions lean heavily one way or the other.

• Twenty-five Nobel-prize economists were among the set of signatories. Five of them signed at least three liberal petitions—Vernon Smith, Milton Friedman, Edward Prescott, Thomas Schelling, and Robert E. Lucas Jr.—and among those five economists there was not a single interventionist signature.

• Six other Nobel economists signed at least two interventionist petitions—Kenneth Arrow, Joseph Stiglitz, Robert Solow, George Akerlof, Lawrence Klein, and Daniel McFadden—and among those six economists there were just three liberal signatures.

Our investigation shows just how fundamental ideas about liberty and government intervention really are in the thinking of economists—or at least those who like to sign petitions.
All five of the signatures on freedom reducing petitions by the 63 economists who signed at least eight freedom augmenting petitions were on a petition supporting cap-and-trade legislation.  The 102 economists who signed at least four freedom reducing petitions signed only sixteen freedom augmenting petitions.  Six of the signatures were added to a petition that opposed marijuana prohibition, four that supported increased immigration, three that opposed protectionism, two that opposed green protectionism, and one that supported prediction markets. 

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Wednesday, October 27, 2010

Nordhaus and a Carbon Tax

The slow growth of the economy, high levels of deficits, and mounting government debt are all pressing issues.  William Nordhaus, the Sterling Professor of Economics at Yale, describes how a properly instituted carbon tax improves all three problems in “Carbon Taxes to Move Toward Fiscal Sustainability” for The Economists’ Voice
The desirable features of any tax are that it raises revenues in a manner that has minimal distortionary effect on the economy and reinforces other objectives of national policy. The following are the major reasons that a carbon tax meets these objectives. I will provide these in a summary form. The background literature provided below explains these in greater detail.

· A carbon tax can raise a substantial amount of revenue over the coming decades.

· It is an instrument that has been used in other countries and is well understood.· It is virtually the only tax under consideration that will increase economic efficiency because it reduces the output of an undesirable activity (carbon dioxide emissions)…

· The carbon tax will move a long way toward implementing Congress’s and the Administration’s goals for climate change policy…

· A carbon tax will help meet international commitments that the U.S. has undertaken to reduce its carbon dioxide and other greenhouse gas emissions. 

· A carbon tax will have substantial public health benefits because it will reduce harmful emissions, particularly those associated with burning coal.

· A carbon tax can buttress or replace many inefficient regulatory initiatives and will thereby provide yet another improvement in economic efficiency.

· A carbon tax could supplement ore replace the cap-and-trade approach to limiting emissions…
If I believed that carbon dioxide emissions were the cause of recent global warming, that the cost of unfettered carbon dioxide emissions were catastrophic or even very high, and that U.S. action would spur others to act similarly, I would certainly support the proposal.

As it is, it has value but as a replacement to current tax systems.  Even if carbon dioxides are not a serious problem, carbon based fuels emit other pollutants that are harmful if not catastrophic in nature as noted by Nordhaus.  While it might be more efficient to target each carbon based pollutant, it might be simpler to target carbon based fuels.  Also as noted, a carbon tax could and should replace “many inefficient regulatory initiatives.”  Sign Nordhaus up for the Pigou Club and sign me up too.
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Monday, October 25, 2010

Blinder on Fiscal Policy

Alan Blinder, a Princeton economist and former vice chairman of the Federal Reserve Board defends Obama administration fiscal policy and suggest further use of deficit spending to spur private sector activity in “Our Fiscal Policy Paradox”.  The efficacy of fiscal policy is hotly debated and not yet empirically resolved and this article was not meant to contribute to that debate, but that was not Blinders intention.  He does a great job of explaining the argument for expansionary fiscal policy.

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Friday, October 22, 2010

Most Outrageous Political Statements

My blog is dedicated to economics, but I couldn’t pass up pointing out a couple of over-the-top statements made by candidates for federal office.   

Senator Harry Reid said “but for me, we'd be in a worldwide depression.” 

Congressional candidate Stephen Broden said a violent uprising “is not the first option,” but it “on the table.”

If these statements reflect the quality of candidates and not just the stress of campaigns, we may be in trouble.

See “GOP Criticizes Reid's Worldwide Depression Remark” and “Republican congressional candidate says violent overthrow of government is 'on the table'” for details.

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Privatize the Corporation for Public Broadcasting

The Corporation for Public Broadcasting (CPB) was established in 1967 with the signing of the Public Broadcasting Act. In 1969, formed the Public Broadcasting Service (PBS) and one year later, the National Public Radio (NPR). The authorizing act required that the CPB maintain "strict adherence to objectivity and balance in all programs or series of programs of a controversial nature." Despite the controversy surrounding the firing of Juan Williams (See “Juan Williams and the Meaning of Bigotry” for details and a defense of Williams), I believe that the CPB has conscientiously and rather successfully complied with the mandated.

The CPB is governed by a nine person board that is appointed by the president and confirmed by the Senate. Each member of the board serves a six year term. In 2009, four members were Republicans, four Democrats, and one independent.

In 2009, the CPB was funded by the federal government to the tune of $400. Historically, this funding has ranged between 15% and 20% of total operating revenue. State and local taxes have funded an additional 25% to 29%. Private sources have competed the funding. CBS and NPR are also funded by a combination of public and private sources.

Given enormous deficits and mounting debt at all levels of government, taxpayers should demand more care in government budgeting. I suggest that the CPB be completely privatized. The president's and senate’s time should not be spent selecting board members or considering is budgetary needs. There is no longer a need for taxpayers to subsidize television and radio programming in today’s broadcasting market if there ever was one.
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Tuesday, October 19, 2010

Ethanol and Catch-22

Farmers, ethanol producers and workers remind me of a character in Joseph Heller’s “Catch-22.”
Major Major's father was a sober God-fearing man whose idea of a good joke was to lie about his age. He was a long-limbed farmer, a God-fearing, freedom-loving, law-abiding rugged individualist who held that federal aid to anyone but farmers was creeping socialism.
Those involved in ethanol production are generally conservative and religious, qualities that are not offensive, but they should keep their hands off taxpayers’ wallets.  The government through the EPA is bailing out ethanol producers by mandating that gasoline consuers buy more of the blend that a Wall Street Journal writer observes “is more expensive than gas, gets worse mileage than gas, increases carbon emissions more than gas does, and that few consumers would willingly buy unless required by law. (“The Ethanol Bailout:EPA does the industry another big favor.”).  The write sagaciously observes
Scenes from a bailout: Last week, the Environmental Protection Agency decided to make the ethanol lobby's guaranteed "market" even larger. Shares in Archer Daniels Midland, the second largest U.S. ethanol maker, rose to a near 28-month high. Midwest Democrats in tight races got a political bump. Maybe for the first time in history, Exxon and the Natural Resources Defense Council shook out on the same side of an issue—in opposition.

Such wonders were possible because the EPA lifted the cap on how much ethanol is allowed to be mixed into gasoline to meet the annual consumption mandates in the 2007 energy bill, which will rise to 36 billion gallons by 2022. Until last week, this per-gallon "blend wall" stood at 10%, because ethanol is highly corrosive and can damage engines and exhaust systems and impair other features. The practical problem with this industrial planning is that Americans don't use enough gas to meet the mandates.

So the EPA decided that more ethanol should be mixed with less gas, lifting the cap to 15% for model years 2007 and later, or about one out of seven cars and light trucks currently on the road. The decision came in the nick of time for the ethanol industry, which is at market saturation and producing a glut that the government is not requiring anyone to buy. "We have lots of gallons of ethanol chasing too few gallons of gasoline," Renewable Fuels Association president Bob Dinneen told the New York Times in May.
The added emphasis is mine. 

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Portents of Things to Come?

(HT Drudge Report)  Two articles highlight financial problems in France and Greece.  I believe that they illustrate how difficult it is for a government to cut government spending.  Given the size of our deficits and the growing unfunded entitlements, I fear that the United States is headed for similar social conflict.  From France, some protesters are not concerned with the consequences of mounting deficits (“French strikers, marchers defy Sarkozy on pensions.”)
PARIS (Reuters) - Striking public sector workers disrupted travel across France on Tuesday and sporadic violence flared at protest marches as opponents of President Nicolas Sarkozy's pension reform made a last-ditch attempt to stop it.

Refinery workers, airport staff, train drivers, teachers, postal workers and guards who supply cash machines went on strike and students set off rowdy protests in a day of action against plans to raise the minimum retirement age to 62 from 60.

At least a million protesters demonstrated in cities across France in the biggest and most persistent challenge to economic reforms anywhere in Europe, where governments are struggling to curb budget deficits and reduce debt mountains.

"To hell with the national debt. We'll give them nothing and we don't give a damn about their AAA!" read one protest sign, referring to the AAA credit rating the government says could be at risk unless it gets its pension shortfall under control.
From Greece, budget cuts are also protested (“Riot police, protesters clash at Acropolis.”)
Greece is in the midst of a tough austerity program which has cut public workers' salaries and trimmed pensions in an effort to pull the country out of a severe debt crisis. The austerity plan has led to a series of strikes and demonstrations as workers' unions protest the cutbacks.

Guards and workers at archaeological sites have long been complaining they are owed months of back pay, and they have shut down the Acropolis before in protest, though usually only for a few hours at a time.

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Friday, October 15, 2010

Monetary Easing?

Jon Hilsenrath wrote a good article for the Wall Street Journal describing remarks by Federal Reserve Chairman Ben Bernanke (“Bernanke Makes Case for Further Fed Moves to Boost Economy”).  Bernanke believes that inflation is well contained and economic activity is weak justifying monetary easing (actions by the Fed Open Market Committee to increase economic activity).  Bernanke suggested that the Fed might purchase long-term Treasury bonds to push down long-term interest rates.  He also suggested that the Fed would proceed with caution because of uncertainty about the program’s effectiveness. 

Let me reassert my belief that short-term policy instruments are not as effective as sometimes advertised and my belief that policy should focus on creating long-term growth.Replace this text with...
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Wednesday, October 13, 2010

Whitlock on the NCAA and Cunningham on Whitlock and the NCAA

The contractual relationship between the NCAA and amateur athletes is the center of the sanctions imposed on USC by the NCAA.  Many, probably the majority of sports fans who have not played football or basketball at a major college, blame Bush for violating the contract.  Jason Whitlock leans into the wind blaming the exploitative nature of the contract and not Bush in “Expose the NCAA, not the athletes” an article that compares the NCAA contract to slavery and Jim Crow South based on a paragraph of Walter Byers, a former NCAA president (1951-1988) in this book, “Unsportsmanlike Conduct: Exploiting the Student-Athlete.”  Whitlock quotes Byers
Byers wrote: “Today the NCAA Presidents Commission is preoccupied with tightening a few loose bolts in a worn machine, firmly committed to the neo-plantation belief that the enormous proceeds from college games belong to the overseers (administrators) and supervisors (coaches). The plantation workers performing in the arena may only receive those benefits authorized by the overseers.”
Carson Cunningham, a historian, takes umbrage with Whitlock’s comparison in “Whitlock Wrong to Compare NCAA with Slavery” by describing some abuses of slavery including the lynching of two men, William Crawford and Sam Smith, who opposing slavery, abuses that he believes renders Whitlock’s comparison offensive. 
In the article, which would be laughable if it weren't so sadly off-base, Mr. Whitlock declared, "Reggie Bush is Kunta Kinte, a runaway slave." Seriously? The same Reggie Bush who is slated to make about $8 million this season, who recently won a Super Bowl, and who buys multi-million-dollar property? If so, I'm sure Kunta Kinte could relate, as well as Mr. Crawford and Mr. Smith.

Mr. Whitlock also said, "At some point, we can recognize that an investigative journalism award and individual career advancement do not justify pretending there is some honor in safeguarding the NCAA's plantation. ... Call me when the phony moralizing stops and we, the media, quit demonizing black kids for cashing in like white men." Ahh, race-baiting at its best. Bravo, Mr. Whitlock.

Cunningham does not blindly endorse the NCAA model noting

…it has some wonderful elements to go along with numerous flaws. But that's not the point. The point is that nothing about the NCAA model even remotely approaches slavery.
My students who enjoy sports should read both articles and decide for themselves but I found the article informative and humorous if purposefully irreverent.  I am not offended by the comparison of NCAA regulations to slavery, or the Jim Crow South just as I am not offended by comparisons of Hitler to Noriega or Franco.  The latter three were dictators who were not afraid to deprive civil rights from the citizens they governed, fix elections, intimidate political rivals, or limit the press, but only one started a world war and conducted the Holocaust. 

Whitlock’s triplet, slavery, the Jim Crow South, and the NCAA contract are are systems of economic exploitation even though the NCAA contract is involves less offensie.  The NCAA exploits the large difference between what colleges can offer a young athlete and their next best alternative, their opportunity cost.  Being grossly underpaid and attending a big name school and maintaining a chance to turn pro beats the alternative of attending a community college at the athlete’s expense or entering the low-skill job market but it isn’t fair.  Athletes should receive compensation approximating the value of what they produce; in economic terms, their wages should equal the value of their marginal product.  They don’t.

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Monday, October 11, 2010

2010 Nobel Laureates in Economics

Three economists, Peter Diamond, Dale Mortensen, and Christopher Pissarides, won the Nobel Prize in Economics for research on how economic frictions created by job search, regulation and other variables affect unemployment.  My students should note that job search is included in chapter 15, “Unemployment,” in Mankiw’s text.

In chapter 1, “Ten Principles of Economics,” Mankiw enumerates ten principles of economics, the first of which is that people face tradeoffs.  A very good article by Karl Ritter and Louise Nordstrom, AP writers published in the Chicago Tribune, “2 Americans, British-Cypriot win Nobel economics prize for job market analysis” describe a positive conclusion as stating
"One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times," the academy said.
A second conclusion is that the longer search time leads to a better matching of jobs to laborers.  The trade-off is the cost of the benefits for for more efficient job allocations. 
Diamond wrote a paper in the early 1980s that found that unemployment compensation can lead to better job matches. Workers "become more selective in the jobs they accept" because of the employment aid. And, that makes for better matches and increases efficiency, he found.
A second conclusion is that longer periods of unemployment lead to a disconnection with labor markets.  The trade-off is the loss of contact with the labor market that is part of the cost of finding a more efficient job match.
"One of the key things we found is that it is important to make sure that people do not stay unemployed too long so they don't lose their feel for the labor force," Pissarides told reporters in London. "The ways of dealing with this need not be expensive training — it could be as simple as providing work experience."

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Caplan on Immigration

I believe that most economists are mystified by the strong public sentiments against immigration.  Let me be clear that I don’t wish to nit pick with those who favor legal immigration but not illegal immigration.  If you prefer, my comments apply to illegal immigration.  Although I have not seen a survey of economists on this issue, it is my guess that a majority would claim that the cost of immigration is small or that the nation benefits from the additional resource.  Russ Roberts interviewed Bryan Caplan last week on the topic of immigration (“Caplan on Immigration”).  In the interview, Caplan is asked to defend immigration using empirical findings and economic reasoning against six of the main arguments that are used to oppose it.  The arguments are
1.  The U.S. needs restrictions on immigration in order to protect American wages.

2. Restrictions are necessary to protect the American taxpayer from abuse of the welfare state by immigrants.

3.  Restrictions to protect American culture including but not limited to the use of English.

4. Immigrants who do not understand our political system are going to damage our relatively free and prosperous economy by turning the United States into the kind of country they fled.

5. The increase in population in congested areas would harm naturally born citizens.

6.  Immigration increases crime.
After listening to the podcast, read the comments.  Caplan did not convince most of those who took the time to respond to his arguments.  As an economist, I found his arguments persuasive.
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Friday, October 8, 2010

McDonalds and Healthcare Waivers

Thirty companies and organizations including McDonald's were granted health care coverage waivers from the Department of Health and Human Resources allowing them to offer insurance plans that do not meet new health insurance guidelines of the new healthcare legislation to approximately one million workers.

The “mini-med” plans run afoul of the legislation for two reasons.  First, insurance plans must spend at least 85% of their revenue on medical care (David Leonhardt, “Health Care’s Uneven Road to a New Era”).  This is a big hurdle for insurance plans geared to young, healthy consumers.  After all, a $200 medical bill for a simple checkup is likely to have much the same administrative cost as $200,000 bill for bypass surgery.  Second, the new health care legislation requires that companies provide a minimum of $750,000 in coverage in 2011, increasing to $1.25 million in 2012, $2 million in 2013 and unlimited in 2014 (Drew Armstrong, “McDonald's, 29 other firms get health care coverage waivers”).  That amounts to a huge salary increase for low skilled workers.  The mandated increase in salary will result in less demand for low skilled workers and an increase in the price of goods and services that they produce.   Leonhardt gives a good positive description of mini-med plans and their limitations mixed with his normative views in the article linked above.  Three sentences exemplify many of my objections to healthcare reform.
…people will be required to buy insurance, to spread costs among the sick and the healthy. Second, insurers will be prohibited from cherry-picking only the healthiest customers, again to spread costs. Finally, the government will give subsidies to people, like McDonald’s workers, who can’t afford insurance on their own.
Leonhardt puts much less value on freedom and trust in markets than I do.  Words like “people will be required to buy” and “insurers will be prohibited from” make me cringe.  Who is the government to tell me what I need to buy or designing products for private companies?  Nor do I have a problem with cherry-picking of the healthiest consumers.  That leaves a market segment for insuring the chronically ill, a group more deserving of subsidies than workers who are generally young and healthy.  In fact, most analysis that I have read conclude that the young will subsidize the old and the ill.  Finally, the government may “give subsidies to people” but they do so with taxpayer money.

In regards to the reform in general, it weakens market incentives that would lead consumers to watch medical costs and providers from producing low cost products because taxpayers will subsidize insurance plans with unlimited costs.

Taxpayers and healthcare consumers would have been better served by legislation that increased market incentives.  See “More on Rationing Health Care” for a short explanation of how the tax code weakened market incentives for healthcare and a comparison of government rationing vs market rationing of healthcare. 

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Wednesday, October 6, 2010

Yamarik, Johnson and Compton on War

As my students know, I question the common conclusion that the United States government’s economic response to World War II lifted the country out of the Great Depression.  I don’t believe that the United States has benefited economically from any war beginning with the Spanish American War and our wars were or are being fought off our shores.  My conclusion is more one-sided than the economic literature.

Yamarik, Johnson and Compton in “War! What Is It Good For? A Deep Determinants Analysis of the Cost of Interstate Conflict” (Peace Economics, Peace Science and Public Policy, Vol 16, No 1, 2010) write that
…there is no clear consensus on the economic consequences of interstate wars.One line of reasoning argues that war is harmful to the economy. Simply put, war kills people, destroys property, restricts trade, and retards capital formation. Marwah and Klein (2005) find that military expenditures reduced private investment and thus lowered the growth rate for the Southern Cone of Latin America. Blomberg, Hess, and Thacker (2006) estimate that major external conflict in the previous two years has a negative contemporaneous impact on growth. Sevastianova (2009) finds that international war has a negative impact on the one- and two-year growth rate, but an insignificant impact on the longer five-year growth rate. Glick and Taylor (2010) also find a negative short-run relationship between war and growth. They estimate that the indirect cost of World Wars I and II stemming from lost trade was even greater than the direct costs associated with the loss of life.

An alternative line of reasoning argues that the macroeconomic effect of war is ambiguous, or even positive. In the short-run, wartime expenditures increase aggregate demand and the level of real GDP.4 Military research and production can increase innovation and technological progress in the long-run (Alchian, 1963; Kuznets, 1964; and Ruttan, 2006). Similarly, war can eliminate distributional coalitions, thereby reducing rent seeking, especially for the “losers” of the conflict (Olson, 1982). For the U.S., conventional wisdom is that the Second World War saved the U.S. economy from an even longer depression and planted the seeds for future prosperity.
Their empirical research adds to the literature that concludes that war is bad for an economy.  They conclude
We find that a one standard deviation increase in fatality-weighted conflict results in an average reduction in real GDP per capita of between 0.09 and 0.14 of a standard deviation. Our estimate is consistent with common sense and is fairly stable across different specifications of our cross-country regression. Most surprisingly, these results suggest that the costs of war stay with a country much longer than is implied by previous studies. Even if an economy grows quickly after a war is over, our results imply that this will not be enough to return standards of living to where they would have been in the absence of conflict. War is more than a transitory supply shock, it permanently alters the economic potential of the country.

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Political Vs. Economic Outcomes

Peter Beinart’s article, “How the GOP Could Blow It,” published the Daily Beast exemplifies a problem that I have with much of the news published by corporate media.  For every article that focuses on the economic consequences of an event, ten focus on the political consequences.

I do not mean to pick on Beinart.  I found his article as I was considering the exaggerated importance of political consequences of events relative to the economic consequences.  Beinart is a professor of political science and I teach economics.  His interest is shaped by his education and taste as is mine.  He should focus on his expertise as should I.      

Why do so many article focus on the political consequences of events and not the economic?  Maybe news producing corporations don’t understand the market and they would make more money if they focused more on reporting likely economic consequences.  This is dangerous territory for someone who believes that markets are efficient.  News producing corporations are market driven and probably select their news content based on what sells and not what an economist would like to read or thinks that people should read.  News producing organizations have a better idea of what drives their bottom line than I do.  My beef then is with consumers who do not prefer the news that I would prefer for them.Why don’t consumers want to read more about the economic consequences of news events?  Three answers come to mind.  First, consumers are illiterate about economics.  Second, there are so many contradictory views that it is impossible to conclude which ideas won and which lost.  The stimulus debate may fall into this category.  Economists’ opinions range from it didn’t work to it didn’t work because it was too small to it worked wonderfully because we would have had 14% unemployment without it.  Conversely, determining political winners is easier.  Two years ago, Democrats won and this November, Republicans will.

Meanwhile back at the ranch, Beinart argues that an anti-government Republican electoral victory followed by promised budget cuts will result in electoral losses shortly thereafter because the American middle class loves its entitlements.  I fear that Beinart is correct.  Although I am out of my area of expertise, I also believe that a similar conclusion to Beinart’s can be written for the Democrats.  The pro-government electoral victory of 2010 followed by higher taxes to pay for expanded entitlements is the cause of the pending electoral defeat of Democrats in 2010.  Voters want benefits but don’t want to pay for them. 

The economic result of the political stalemate is unsustainable deficits and an eventual debt crisis.  We will not be able to use time as a fulcrum to leverage change.  When push comes to shove, we will probably follow the European model by cutting benefits and raising taxes.

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Sunday, October 3, 2010

A Coup in Ecuador?

South American countries are not democratic in the same sense that the United States and other Western countries are as demonstrated by a recent coup attempt in Ecuador (“Ecuador in state of seige, region supports Correa”).
QUITO, Ecuador (AP) - Ecuador was under a state of siege Friday, the streets quiet with the military in charge of public order, after soldiers rescued President Rafael Correa from a hospital where he'd been surrounded by police who roughed him up and tear-gassed him earlier.

Correa and his ministers called Thursday's revolt - in which insurgents also paralyzed the nation with airport shutdowns and highway blockades - an attempt to overthrow him and not just a simple insurrection by angry security force members over a new law that would cut benefits for public servants.
With very little information (meaning I am offering little more than a guess), I interpret events differently than President Correa.  It sounds like a simple coup attempt to protest cuts in benefits for public servants, the norm in South America.  While I do not generally support coups, elections in much of South America do not deserve the public sanctity that they are given in Western countries.  Control of the press, intimidation of other candidates and electoral fraud are all standard operating procedure on the continent. 

I do not conclude that Correa is a rightwing president trying to dismantle the public sector based on campaign rhetoric and political alignment.  His second inauguration was attended by President of Argentina Cristina Fernández de Kirchner, President of Bolivia Evo Morales, President of Cuba Raúl Castro and President of Venezuela Hugo Chávez, a rather undemocratic, left of center bunch, and in his address he promised to continue the socialist revolution while railing against the media.  Even leftwing governments are limited in benefits that they can distribute to public servants.

Based on the work of North, Willis and Weingast (“Violence and Social Order”), I will propose in class that the ability of groups to seek economic rewards through the use or threat of violence is a major cause of slow growth in South American and much of the world. 

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Friday, October 1, 2010

Economic Reform in Cuba and Sanctions

The Cuban government continues to announce market reforms one drop at a time.  Breitbart reports in “Cuba to allow first US dollar home rentals in 50 years.”
Cuba is to allow some houses to be rented in US dollars for the first time in 50 years as well as the opening up of small businesses as it seeks to shed 500,000 public jobs, state media said Friday.
As central planning unwinds in Cuba, it is worthwhile reviewing the impact of our main policy for dealing with our totalitarian communist neighbor, sanctions.  Sanctions are the restriction of normal trade and financial relations between countries with the intent of changing some political or economic behavior of the target country by inflicting economic pain.  The U.S. government imposed sanctions on Cuba after the Castro regime nationalized American assets in Cuba in 1960.  Hufbauer, Schott, and Elliott whose work, Economic Sanctions Reconsidered (1990) summarized the sanction’s impact.
The US imposed significant costs on the Cuban economy with its trade and financial embargo.  Yet because the USSR was willing to assume a large portion of those costs, the embargo may have exerted a counterproductive effect on Castro, and may have helped consolidate his position in Cuba. 
The standard literature attempts to measure the economic pain inflicted by the sanctions, counter measures taken by the target country or those who oppose the sanctioning country, and they measure the policy change in the sanctioned country.  This literature does not seem to ask if the offending policy implemented by the sanctioning country is sustainable in the absence of sanctions.  The literature does not set up a control variable: the longevity of offending policy in the absence of sanctions.

The Castro regime imposed communism on the people of Cuba.  Communism replaces market generated prices and the information that those prices convey with central planning.  Central planners are unable to replicate the information conveyed in prices and therefore they fail to produce wealth (See Arch Ritter’s “Fidel’s Phenomenal Economic Fiascoes: the Top Ten” for examples of the failure of central planning).  The inability to generate wealth means that communist countries fall behind their neighbors economically and militarily.  To survive, communist countries must allow economic agents to operate in markets to grow.  Communism sows the seeds of its own destruction.  As the old saw states, “communism is the slowest, most painful road to capitalism.”  Sanctions may mask that failure.      >

Hufbauer, Schott, and Elliott wisely observe,

Sanctions also serve important domestic political purposes in addition to sometimes changing the behavior of foreign states.  As David Lloyd George, then a leader of the British political opposition, remarked of the celebrated League of Nations sanctions against Italy in 1935, “They came too late to save Abyssinia, but they are just in the nick of time to same the Government.”  The same is true today.  What president—or Kremlin leader for that matter—has not been obsessed with the need to demonstrate leadership, to take initiatives to shape world affairs, or at least to react forcefully to adverse developments?  And what president—or Kremlin leader—is eager to go to war to make his point?  The desire to be seen acting forcefully, but not to precipitate bloodshed, can easily overshadow specific foreign policy goals.
Are sanctions a peaceful road to impose change on other countries, at least peaceful in the sense that they avoid open warfare?  Are they political cover to do nothing?  Let me suggest an alternative hypothesis.  Sanctions commit sanctioning countries to a policy of confrontation.  If sanctions don’t work, perhaps sanctioning countries will be compelled to war.
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