Virginia Political Economy

basketball and chemistry

I was looking at contracts of NBA basketball players, and I was considering how effective it is to reward these players by their stat output.  Those in the NBA who have amazing statistics are judged positively and giving large contracts because of their output.  It would make much less sense to look at their lifelong history of effort and to award these players by how hard they work.  It would be ineffective and costly.

However, basketball players are not judged by one sole output method.  Point guards and centers are not graded by the same method even though they play the same game.  Likewise, players who play the same position are not always judged by similar methods as some guards are rewarded for their ability to score and others on their ability to defend.  The point here is that even though we are judging players by their output it is most effective to do this by multiple methods.

I think this is the same for college classes.  One example of mine (not personal at all) is the first and second semester chemistry classes.  Tests were taken in very small time slots and always multiple choices.  Is this an effective way to judge students.  I think a more diverse judging system would be a little more time costly but would show much more effectively the knowledge that a student possesses.  This may be a reason that teachers will have sections of tests that differ, and this may also explain why classes will have both tests and papers.  These methods of viewing students are broader, and thus are more effective way to judge them by their output.

GM Already Got a Bailout?

In case you forgot, the 1st attempt to pass the Wall Street bailout failed, leading to the largest single-day drop in the stock market, ever. Our own Bruce Reynolds, speaking to his Econ of China class, said something similar to,"If we don’t pass another one soon, remember this day as the one that started the Second Great Depression.” In class, we spoke about how the 1st bailout failed because the median voter and its constituents voted against it. But then a revised version passed just a few days later with some add-ons to make the median voter happy.

When I was writing my last post about GM’s unusual rent-seeking activity and its hope for a bailout, I came across this article revealing how GM might benefit from the original bailout plan. The revised bailout included a tax credit of up to $7,500 for purchases of plug-in cars that travel much further without gasoline than today’s hybrids (what does this have to do with banks?). Under the public interest view of regulation, we might postulate that this credit stems from Congress’ desire for us to drive cars that burn less gas and gas money, break our dependence on foreign oil, and help fight global warming. But considering Stigler’s view where regulation is acquired by an industry and designed and operated for its benefit, this tax credit certainly fits the alternate view. Incentivizing the purchase of plug-ins over hybrids or regular cars is an example of the state incentivizing a substitute. How does it benefit the automaker industry? Well, GM has been developing its own lithium-ion based plug-in, the Chevy Volt, for years, and it is expected to appear in dealerships in fall 2010 and cost between 30 and 40 thousand dollars. GM Spokesman Dave Barthmuss admits the benefit openly, “These kinds of tax credits will make it more attractive to an early adopter to put one of these vehicles in their garage.” 

With the Chevy Volt fully qualifying for this credit, this regulation isn’t just about the public interest, it directly benefits the struggling GM and its one and only hope to enter the environmentally-friendly auto market after a gas-guzzling past. I wonder how large GM’s rent seeking expenditures, probably of the normal lobbyist variety, were in this effort.  Also, considering Weingast and Moran’s theory about committees, I wonder how much former Chairman of the Energy and Commerce Committee John Dingell represented the obviously active interest group in his district, GM, with this tax credit. As the article’s author writes in the opening line, “The pork barrel has gone high-tech."

Land of frozen lakes and elections

Ahh Minnesota! Home sweet home... land of lakes, the mall of america and dramatic ballot recounts?? That's right, folks. The Senate race between democrat Al Franken and republican incumbent Norm Coleman is still tangled up in a recount of contentested and discarded ballots full of smudges and ambiguous arrows, keeping the final results as frozen as the snow already blanketing the ground (pardon that comparison... as a Minnesotan, I am obligated to reference the weather at least once).

Results this close rarely occur. Out of the 2.9 million Minnesota votes cast on or before November 4, there is only a difference between Franken and Coleman by 200-some votes! This got me thinking about what Caplan would say about the situation. Under the miracle of aggregation, the informed people should decide the election. So does that mean there is only a pathetic little group of 200 people in Minnesota who actually know what they're doing? I certainly hope that's not the case. Perhaps the extremely slim margin is a result of people's biased action and systematic errors. The election pitted Franken, a  professional comedian and relatively inexperienced candidate against Coleman, one of Minnesota's more unpopular senators. It is rational that people voted in a biased fashion ... the perceived cost of biased voting was almost zero, because a person only has one vote and neither candidate was particularly desirable. Unfortunately, nobody knew that the election would come down to only 200 votes!

Looks like the voters were just being rationally irrational... including, apparently, ignorant of how to fill out a ballot correctly. Enjoy!  

Worker Mobility Through Layoffs

http://www.nytimes.com/2008/11/29/business/29chrysler.html?hp

 

One of the major critiques of Tiebout’s essay on consumer-voters is that he assumes workers are perfectly mobile, while this is not reflected in reality. However, today’s marketplace of jobs is moving more and more towards Tiebout’s view of worker mobility.

Even in the economic turmoil we are currently engaged in, it is comforting that a company like Chrystler is engaging in “free market layoffs”, offering severance packages to whomever will take them instead of just firing workers. As the article says, many people are taking the packages to pay for their move to a place with better employment opportunities.

Instead of looking at an article like this and thinking “Oh no, job loss!”, we can look at the positive economic implications. These sorts of job severance packages mean that workers are more mobile, which means that wages will not be artificially high or low in certain areas due to supply and demand imbalance from mobility restraints. Furthermore, this should mean that utility would be maximized (or at least more so then with stagnant workers) among consumer-voters, with each locality having the optimal amount of people.

War & Election - Russia 2000

    Patrick Cockburn linked war success to Putin’s upcoming election in his 2000 article, Moscow Election  Just seven weeks before the Russian election, Putin proclaimed military success. Cockburn essentially made the same argument as Hess and Orphanides in their paper “War Politics: An Economic, Rational-Voter Framework”. The ideas from Hess and Orphanides discussion about the effects of the economy and war on reelection in the United States were also relevant in this election in Russia.

      Hess and Orphanides discuss the interaction of the leader’s ability to manage the economy and whether or not the country is at war. They argue that the probability of war should be constant across economic and electoral cycles, yet they are not. Cockburn reflects this argument in his statement, “the momentum behind the war…always came from the Kremlin’s determination to win the Duma elections last December, and the presidential election in seven weeks time. Mr. Putin, unknown when appointed in March, is now firm favourite to win the presidency”. Cockburn clearly links the war effort to the reelection of Putin. In relation to Anderson and Tullison’s paper “Political Influence on Civil War”, Putin would be characterized as a vote maximizer, and he ended up winning the election with 52% of the votes.

Rent Seeking?

When I think of rent-seeking, I think of Mueller’s example of airlines hiring lobbyists to win profitable prizes from Congress like extra routes behind closed doors.  But recently, government prizes have taken the unorthodox form of bailouts, and as a result, companies are exhibiting rent seeking behavior one might consider unorthodox.  Last week, Congress chastised US Automaker executives for traveling to Congressional hearings via private jet.  Asking for multi-billion dollar loans to save their struggling companies, they were like beggars arriving at soup kitchens in Bentleys.  Although the CEOs were following security protocol, Ford and Chrysler chiefs have pledged to not fly privately to next week’s follow-up hearing in an appeal to the government.  Additionally, GM is contemplating the drop of Pontiac, Saab, Saturn and Hummer “as part of a plan to win $12 billion of U.S. government loans.”                                                              

In my opinion, these proposed attempts to cut costs are rent-seeking behaviors promoted to obtain government prizes, albeit uncharacteristic of classic examples.  While it's ironic that cutting costs is a form of rent seeking which usually consists of expenditures, it's a reflection of the country’s unusual economic position--with government giving unprecedented loans to public corporations and proposing additional billions in stimulus packages.  The question is are these rent-seeking behaviors socially wasteful?  The choice to not fly privately probably isn’t, unless the cost of security threats and arranging new transportation is greater than the benefit of a cheaper ticket.  But what really worries me is GM’s idea to drop four of its brands.  If this is carried out solely for a bailout which GM does not end up receiving, the action will be socially-wasteful.  Perhaps GM should have cut costs to stay alive when the possibility of a bailout didn’t exist…

Voters Too Stupid?

This election, all eyes were on the numbers.  The number of voter turnouts.  Newscasters, journalists, politicians, and celebrities were all pushing for more of the population to get out there and vote.  Before the numbers could even be verified, newspapers wrote articles on the record breaking turnout, a turnout which in reality proved to be about average in comparison to years past.  Why do people abstain from voting?  In class we looked at this and saw that people abstain because they feel indifferent between the two candidates, they feel alienated by them, or they see that the marginal benefit of voting does not exceed their marginal cost.  It seems somewhat logical not to waste the time and money it costs to vote (commute time, gas money, time that could have been used making money, etc) when the chances of one person’s vote mattering (forcing for breaking a tie) is slim to none.  When looking at voters, this article, http://www.washingtonpost.com/wp-dyn/content/article/2008/11/25/AR2008112502104_2.html?hpid=opinionsbox1, from the Washington Post takes a different angle.  This journalist looked at a report from the Intercollegiate Studies Institute that found that an alarming number of Americans don’t know their civics.  A quiz which included questions from politics, history, and government was administered.  “Out of 2500 American quiz-takers, including college students, elected officials and other randomly selected citizens, nearly 1800 flunked.”  This doesn’t seem that unlikely; it isn’t that difficult for the average American to avoid these topics altogether from high school on.  The report attributes passive activities, such as watching television (including TV news) and talking on the phone” with the diminishing of civic knowledge.  On the other hand “Actively pursuing information through print media, and participating in high-level conversations – even, potentially, blogging – makes one smarter.”  So hats off to Professor Coppock for making us better Americans!  I ask how the ignorance of Americans plays into our voting?  I wonder if a massive education program was instituted for all Americans, what the effect would be on voting.  On the one hand, people who understand the issues may feel more equipped to vote and thus voter turnout would rise.  This may affect the median voter and thus how our candidates might present themselves on certain issues.  At the same time, if citizens were more educated about how the elective process works, they may understand that their vote does not have much of a chance to affect the outcome and thus not vote.  This increase in abstentions may change the median voter as well.  Either way, it seems sad that more Americans knew that Paula Abdul was a judge on American Idol than knew what

Lincoln

’s Gettysburg Address was.

Fair Trade or Free Trade?

Some of the topics discussed in this article we have discussed in class, like tariffs and quotas and the discussion of free trade in Caplan's book, however, I think the overall discussion and how it is presented makes this article very interesting.  His main argument states that prosperous countries like the U.S. and Great Britain are advising poor countries to encourage free trade to become prosperous.  This would be great for all of the countries that are already prosperous, but he doesn't think this would be the best course of action for poor countries.  He gives numerous examples of how countries like the US, Great Britain, and South Korea all became prosperous by doing the exact opposite of what the WTO (World Trade Organization) is advising them to do: all markets all the time.

He believes that the only way for these countries to prosper is to impose tariffs, subsidies, and quotas that will allow their industries to grow before bringing them into the open market.  He claims that if they open up to free trade now they will surely be crushed by currently bigger and more efficient industries. In this scenario, tariffs and subsidies are beneficial to an economy until that economy grows and becomes prominent. So the question here is, Is there enough evidence to conclude that "fair trade" is more beneficial to poor countries as opposed to free trade?  Surely this isn't the only factor that determines whether a country is poor or not but I think it warrants some consideration when discussing ways to decrease world-wide poverty.

Congressman Represents Politically Responsive Interest Group

In March of 2007, Senator John D. Rockefellar, IV of West Virginia sponsored (introduced) the Railroad Competition and Service Improvement Act, a bill that, among other things, aimed to ensure competition in the rail industry. But, why would Senator Rockefellar of West Virginia and cosponsors like Senators Jon Tester and Max Baucus of Montana be in favor of more railroad competition? Simply stated, it is because trains are fueled by coal, and Montana is home to 25% of the nation's coal reserves while West Virginia is home to 8%. In other words, these Senators represent two of the top four coal mining states in the U.S. (Montana being #1 and West Virginia #4). So, increased railroad competition means more coal use and a stronger coal industry, a plus from which these state economies would benefit.

Weingast & Marshall would see the Senators' sponsorships as Congressmen representing a politically responsive interest group in their state. If coal interests were not powerful in West Virginia and Montana then these Senators would be busy working on other legislation that adheres to a more politically responsive group. But, obviously, coal interests dominate others in these States, thus Senators Rockefellar, Tester, and Baukus have responded to them. And they must respond, for these interests are strong enough to deny or ensure their re-election.

At this website, you will find an overview of the bill and its sponsors:  http://www.opencongress.org/bill/110-s953/show

Also, here is a map of the U.S. that shows coal mining areas and a chart of the top coal-mining states:  http://www.ket.org/Trips/Coal/AGSMM/agsmmwhere.html

 

Outlook Bad for Auto Aid Pleas

This article describes the current status of the automobile industry bailout situation as of yesterday. Of course, most of you have probably been following this in the news, but I preface my comments with a brief summary. So, the “big three” automaking companies—GM, Ford, and Chrysler—are experiencing a lot of financial trouble, crying about how they’ve suffered at the hands of high gas prices and blaming the Fannie Mae and Freddie Mac situation for the alleged inability of potential customers to get car loans, and threatening that their demise would have the same fate for 3 million jobs tied to their industry. The heads of these companies and the president of the United Auto Workers have been entreating Congress to loan them $25 billion (trying to capture regulation in the form of subsidies/loans, a la Stigler) out of the $700 billion of bailout money allocated towards mitigating the financial crisis at hand. Their rent seeking actions have been met with considerable opposition which primarily argues that that the financial system is the bigger issue right now. Obviously the congressmen from Michigan are trying hard to secure auto bailout money since, according to Stigler’s claims, if these Congressmen did not vote in the best interest of these industrial giants, those agencies possess the resources to ensure that they aren’t reelected. But unfortunately for the domestic automobile industry, not enough congressmen are fueled by this incentive—therefore it’s highly unlikely that any legislation will pass in their favor, and this is affirmed by Harry Reid, the Senate Majority leader.

What has not been widely reported in the news is the fact that Congress already gave $25 billion to the automobile industry in September towards the development of fuel-efficient cars. The Secretary of the Treasury, Henry Paulson, and the majority of Congress shook their heads at the proposal to siphon away funding from the financial bailout money, but a bipartisan Senate group has proposed a compromise that would allow the Big Three to reallocate that September funding to help pay their bills. (I learned from a different article that Harry Reid has proposed logrolling aid for ailing auto companies with a separate “economic recovery package” at some point in the future. Additionally, Chairman Barney Frank of the House Financial Services Committee has proposed an alternative rescue plan which would draw funding from taxpayers but require their eventual reimbursement—with interest.)

I’m most worried about the fact that, even if these automakers do receive money from somewhere, they are losing money so rapidly that I think it would be impossible to repay any loans granted them, not to mention the fact that the jobs at stake would therefore be lost anyway. The first article states that “G.M. and Chrysler both say they could be out of money by early next year,” It’s my personal belief that these firms are helping to suck down our economy, and the market wants them gone so we should let that happen, even if it means the economy will get even worse before it gets better. There is no way to propel the economy forward if we keep pouring money into inefficient firms that do not provide products or services that appeal to consumers. Eventually, new firms will arise that offer a radically different product and society will reap the benefits.

(Side note: SNL just featured a skit about this, which you can probably watch on youtube)