Posted by Marc Hodak on May 18, 2007 under Invisible trade-offs | 
Russell Roberts does an excellent job dissecting a common argument for government regulation by breaking it down in terms its components. Specifically, he goes after the imbedded assumptions of this statement:
…perhaps you are uncomfortable with the idea of government intervening to assist the financially stupid. But I think there are many cases of the financially, legally or scientifically stupid asking the government to restrict their choices.
Russ breaks it down like this: When advocating government intervention on such grounds, one is implicitly assuming that the government has the good intent, capability, and incentives to actually do what it has nominally set out to do.
The first error is that “the government” is a thinking entity capable of intent. Russell dissents by calling the government a “sausage factory of legislation.” Even this, I think, dramatically understates the fragmentation of government “intent.” Don’t forget the executive branch. Whatever remains of the original good intent after the ‘sausage factory‘ process has turned it into a law, it is quickly discarded by the bureaucracy needed to implement it. At that point, intent has been boiled down to rules that every single person must follow. Anyone who has had to jump through the hoops set up by the bureaucracy to comply with its requirements knows that this is not a system where good intent is institutionalized.
As for government capabilities, consider for a moment the knowledge possessed by the most enlightened, empathetic bureaucrat versus that of the average person actually involved in a transaction. What are the odds that the bureaucrat will really understand the particular issues and tradeoffs you face better than you or whatever advisor you might bring into the transaction? Sure, the odds are there. It’s possible that a government agent might know what is good for you better than you do, but it would be a gross understatement to suggest she might not. Especially when you consider that the government’s agent is not an expert at anything other than following specific rules that cannot, by design, account for the particular concerns you, as an individual, might bring to a particular transaction. As Russ pointed out, lending rules may prevent loans that shouldn’t happen, but they certainly also prevent loans that would be mutually beneficial to borrower and lender. What is the proportion of each type? That would be an interesting question, but it is never even asked by legislators, which brings us to incentives.
By far, the most problematic area in regulation and enforcement is incentives. Every single agent of government is as much a slave to their personal incentives as we are to ours. Laws are made by people seeking votes. Thus, they are shaped by institutions with political clout, including those being regulated. The resulting rules are enforced by people just like you and me. Many of these bureaucrats are honest and diligent, but many are not. The problem is that, unlike a business subject to market discipline, there is no mechanism to keep a check on those in government who have the power to make your life as difficult as possible in order to make their lives as easy as possible. And, for all the theorizing about the potential economic benefits of certain regulations, there is no market test for government, other than the coarse, often undetectable reactions of market agents leaving the regulatory regime.
There is one more thing about the statement that Russ left unchallenged: the magic word “asking.” Who are the people “asking” to be regulated? A commenter to Russell’s post put it very well by suggesting that people who want to be regulated could simply be given the ability to opt in, or the rest of us given the ability to opt out. For instance, I think I can deal pretty well with nearly perfect freedom in my financial transactions, subject to the normal protections of anti-fraud laws. I have an MBA in finance. I may not always know what I’m doing financially speaking, but does Congress know better? Does the bureaucrat with the power? But my choices are limited and my costs are higher because of financial regulations “protecting” me. For me, as well as most people, the costs associated with that loss of freedom, with the inability to truly “ask” for the government’s protection, is very high. How high? I’d like to know. But the legislators imposing those costs don’t even ask what they are, let alone provide them in good faith in weighing the costs and benefits of the mandates.
Posted by Marc Hodak on May 17, 2007 under Collectivist instinct |
Less than 24 hours after predicting the end of large-scale experiments in central planning, I got a vivid reminder of what is going on in Venezuela.
“We are building socialism and fighting capitalism!” says co-op leader Juan Nava, standing amid wooden shacks on what used to be Mr. Lecuna’s land.
Much of this story could have been directly lifted from the accounts of collectivization in Russia, Hungary, China, and North Korea.
The government bills land reform as a way to make Venezuela self-sufficient in food. But so far, the effect has been to undercut production of beef, sugar and other foods, as productive land is handed to city dwellers with no knowledge of farming. Established farmers and ranchers, fearing their land may be seized next, are cutting investment in their operations to a minimum.
The chaos in the countryside has contributed to shortages in basic items like milk and meat, a paradox in a country enjoying an economic boom traceable to high oil prices.
Collectivizing property is a lot like a civil war between rich and poor, with the government backing the poor. As in all wars, the first victim is truth.
Mr. Ch?�vez blames the shortages on “speculation” by distributors and producers. Agriculture Minister Elias Jaua recently called a news conference to deny there’s been any decline in food production during the eight years of Ch?�vez rule.
This lie goes all the way down.
Co-op members have uprooted about 540 acres of sugar cane planted by the former owner, Mr. Lecuna. The co-op’s Mr. Nava, a wiry former construction worker in plastic sandals, says members have planted 60 acres of plantains, a figure he ups later in the interview to 170. Lecuna ranch hands say it’s 10 acres at most.
The government stopped supplying agricultural data in 2005. Does anyone believe this time things will be different? Here is an open letter signed by dozens of academics and NGOs observing Chavez from the outside.
When we see a nation rising up and thwarting all attempts to derail people’s government, the inspiration and motivation we derive is inexpressible.
More than they know.
Posted by Marc Hodak on May 16, 2007 under Patterns without intention |
Don Boudreaux writes a magnificent update on how markets under property rights solve what Hayek called the knowledge problem of economics.
There are precious few people who any longer believe that central planning can satisfy even the most basic needs of any society. Unfortunately, most of them are running for President.
But seriously, it has been 60+ years since Hayek published his theory about why central planning was bound to fail. In that time, dozens of live experiments in central planning have been tried, some resulting in the privation and famine deaths of millions of souls. Still, very few people are taught economics, or its knowledge problem, or its solution. So, while the big experiments in central planning are hopefully over for good, we no doubt have many little, live experiments ahead.
Posted by Marc Hodak on under Economics |
Here is what I read in Economist’s View yesterday. It’s part of a dialogue between an ‘economist’ and Joe Public about globalization:
Economist: “You’re right, I and almost all other economists think there have been gains. We debate the size of the gains, but not their existence. So it turns out that globalization has, overall, increased the amount of goods and services that we have. If we distribute the gains right, then everybody, every single person, could have more today than they had in in the past.”
Joe: “Who cares what everyone could have. I could have a yacht if Bill Gates gives me one, but that ain’t gonna happen. I don’t live in your imaginary world.”
Econ: “But here’s the point, the costs of globalization that have fallen on you and others don’t have to be so large, but somehow we have to redistribute…”
Joe: “Yeah, yeah, whatever, I’ve heard all that before. Take from the winners, give to the losers. You guys ever actually look at who owns the politicians? What were economists thinking in the 1990s when they were pushing this stuff?”
At this point, the author, Mark Thoma, unwittingly surrenders his voice as an economist, and begins providing the view of a policy wonk. It’s his prerogative to do this switcharoo, but it bothers me that he maintains the veneer of “economist” throughout the rest of the conversation. It’s not just him, lots of economists do it. Paul Krugman comes to mind. Many others.
Me, I like maintaining a distinction. An economist constructs a model that says A leads to more B. The model is presumably based on theory and evidence. Once one begins to discuss the desirability of B or A, regardless of what the model says, competing values enter the discussion, and it transforms into a political discussion.
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Posted by Marc Hodak on May 15, 2007 under Executive compensation |
Yesterday’s WSJ had an article on what boards are doing about compensation consultants. The concern among governance critics is that a major HR firm’s executive compensation practice, which might earn $200K to $300K in a year, might be influenced by that firm’s much larger, other HR practices, which could easily earn ten times that amount. Directors should be concerned, the theory goes, that the executive comp advice they get from a consultant may be colored by his colleague’s desire to sell much larger projects, and the need to keep the top guy “happy.” So, what board experiments are currently keeping the governance critics happy?
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Posted by Marc Hodak on May 14, 2007 under Unintended consequences |
Glenn Whitman wrote a wonderful essay called Slavery, Snakes, and Switching. This essay is a compendium of unintended consequences. Here are a few:
* Subsidizing slavery: Several Western charities learned about children in central Africa taken away from their villages and sold into slavery. These charites raised a considerable amount of money to buy the freedom of many of these slaves. They also inadvertently created an incentive to capture more children for eventual sale. Many of the kids they freed may not have been captured in the first place if they had not made the funding available to pay for them.
* Making health care less affordable: Every state mandates specific levels of care that must be provided by insurance companies–cancer care, psychiatric care, acupuncture, etc. Politicians want to claim that they are providing the best coverage possible to their people. What the people end up with, however, is a crisis of uninsured. The mandates basically force “Cadillac” coverage on everyone. If you can only afford “Chevy” coverage, you may have little choice but to go without.
* Paying for snakes: An Italian town paid its people for dead snakes in an effort to provide incentives to get rid of the snakes. What they got was more snakes. People began growing the snakes in order to kill them and turn them in.
Read the whole thing! The article provides a very interesting framework around the economics of unintended consequences.
(HT: Cafe Hayek)
Posted by Marc Hodak on May 11, 2007 under Unintended consequences |
This morning, I was involved in a roundtable discussion on “Business and Society” hosted by the Aspen Institute. It was held in the boardroom of the Rockefeller Foundation, and we held our meeting beneath John D’s benevolent gaze.
The discussion was about how one measures business success. It wasn’t long before one of the participants mentioned externalities, and everyone was nodding. In our schools, kids are routinely taught about externalities before they even understand how incentives are internalized in the basic logic of supply and demand. I began to note that externalities were very difficult to quantify relative to the costs of mitigating them, and that not all externalities are bad. Sensing that “uh huh, so what” reaction one generally gets to economic theory, I searched for a concrete example. Rockefeller himself handed one to me–on a silver platter, of course.
Pointing to his portrait, I asked, “How many ‘save-the-whales’ types think of Rockefeller as a hero, or as someone who preserved the U.S. forests?” I noted that everyone had heard stories of how Rockefeller made his fortune by inventing Big Oil. He was practically Mr. Externality. People also remember him as doing a lot of good through his philanthropies, as if that kind of offset his bad business behavior. But he saved the whales and the forests not as a philanthropist, but as a consequence of building Standard Oil.
In the 19th century, whale oil was the most popular lamp fuel before kerosene came along, and wood was the most common fuel for heating homes. Most people prone to considering externalities as a significant basis for concern, including many around the table that morning, tend to also absorb the Malthusian implications of the disaster that awaited whales and forests if Rockefeller’s cheaper and better substitute hadn’t come along.
Posted by Marc Hodak on May 10, 2007 under Uncategorized |
When I was tapped by a kind, but apparently desperate dean to teach corporate governance at NYU, I decided it was time to actually read up on it. I knew plenty about the financial and compensation aspects governance, but I figured there was some law involved, too, and went on a hunt for sources. I stumbled onto some papers by Stephen Bainbridge and never looked back.
Professor Bainbridge has just published a book on Sarbanes-Oxley. He says it’s aimed at the business person. I just ordered mine, so we’ll see. But as a business person who has read a number of his papers, I can assure you he’s a writer who cares about his audience. And at $12, it’s a lot cheaper than one of his corporate law texts.
Posted by Marc Hodak on May 9, 2007 under Unintended consequences |
Today’s WSJ had a front page article on Sweden’s disability subsidies. It began with the story of Lotta Landstrom who has been collecting said subsidies because her doctor said she is allergic to electricity.
Along with hundreds of other Swedes diagnosed with the condition in recent years, she came to rely on state-funded sick pay.
Well, the Swedish government, tired of watching the number of disabled climbing to the highest in the world, 13% of their population, is tightening up on these benefits and working to get “sick” people back into the work force where they can contribute to the tax pool instead of just drawing from it. The idea of significantly retrenching their disability benefits is not on the radar of the Swedes. They don’t want to be like the U.S.
Here’s the thing: I believe Lotta. I honestly think she is allergic to electricity. The girl chooses to live by lamplight in one of the coldest places in civilization when no one is watching. I could be wrong. We’re pretty far away from each other. The basic problem is that a generous disability subsidy is no different from paying people to be sick, and there is no reliable way to distinguish the truly sick from the scammers. The more forgiving we are about someone like Lotta, the more open we are to someone like Henrik, who says
he relied on state support for four years after suffering a slipped disc. The pain didn’t stop the big, brawny invalid from moonlighting as a night club bouncer on weekends, though. “There are no controls,” he scoffs, admitting that it was easy to scam the government.
So, what’s an earnest Swedish policy maker to do?
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Posted by Marc Hodak on May 8, 2007 under Collectivist instinct |
Today’s New York Sun had an article about The Beacon School’s problems with the government regarding unauthorized class trips they took to Cuba. I can sympathize with their silly entanglements the government, but not with their ultimate motivation:
A 2004 graduate of Beacon, David Goodman, dismissed claims that the teacher who took students to Cuba this year, Nathan Turner, was anti-American, but said he taught history with a ” Howard Zinn kind of look at the world.”
“He is off the charts liberal,” Mr. Goodman, who said he has liberal views, said. “A lot of the school is like that. I came out of there feeling that it was too leftist and they weren’t giving you enough of a general history.”
One might think this is par for the course at a New York public school, but my son jokes about having to read Howard Zinn in his private school, as well. Some joke.
Most New York liberals will say that history can’t be taught without a political slant, much the way that creationists don’t think biology is a “value-free” science. Objectivity is impossible, they figure, so you might as well offer a perspective that is “right” (as in “left”). My son’s school readily admits that they offer an “alternative” (read “left”) perspective on history, but they say they expect their students to challenge it. I will grant that they allow students to challenge their perspective, but to “expect” your average New York high school student to challenge a teacher’s liberal slant on a subject is, I think, hysterically disingenuous.
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