Virginia Political Economy

Pessimism and the Economy

In Chapter 2 Caplan expands on his ideas of biases held by voters including the pessimistic bias.  Caplan opens this section with stories of his childhood in “drug education” where teachers warned him about drugs and that his peers that would soon fall prey to them, and eventually he would too.  Obviously this was not the case but it does prove his point of the pessimistic bias most voters have, including when it comes to the economy.  The population constantly thinks we are in a worse state than our preceding generation.

            However in a recent article the government reported a job loss in November that was larger than any other month in the past three decades.  This makes 11 months running that jobs have been lost, all since the recession started in December of 2007.  Reports also stated that unemployment rose to 6.7 percent, but when factoring in those who are too discouraged to seek work, the rate rises to 12.5 percent.  So the question is are we just reporting the facts about the hard times that are currently affecting many Americans?  Or are we just conveying the current state in pessimistic light due to our bias as Caplan states?  One beneficial outcome to our pessimism is the willingness and urgency to try and improve the current state of the economy, that is if it really is that bad. 

Does Anti-Foreign Bias Affect Foreign Aid?

As we talked about in class, Caplan discusses several popular biases regarding economics, one of which is the anti-foreign bias, or “a tendency to underestimate the economic benefits of interaction with foreigners.”  He describes this bias mostly as it applies to trade with foreign nations and immigration, but also briefly mentions it in relation to foreign aid spending.  My question is: does anti-foreign bias control foreign aid spending?

As we know, the public grossly overestimates our government’s foreign aid.  According to Caplan, 41% of the public place foreign aid as one of the top two expenditures in the federal budget, when it is actually way down there with only 1.5% of the budget.  We also saw in the survey that the public rated foreign aid spending at 1.53 as a cause for economic problems, while economists and the enlightened public put it at 0.14 and 0.28, respectively.  Clearly, there is a gap between public perceptions and reality, which Caplan argues as illustrative of the anti-foreign bias.

Is the actual spending on foreign aid, then, a result of this bias?  An interesting study by the Center for Global Development rated several rich countries in a Commitment to Development Index, putting the United States at a solid 17 out of 22.  The study breaks down this “commitment” into six categories (Trade, Environment, Aid, Migration, Security, Investment, and Technology).  The U.S. actually does pretty well in trade (rank: 3) and investment (rank: 7), but gets hit hard in aid (rank: 19).  Though the U.S. easily contributes the most aid in raw numbers, it does poorly in aid as a percent of Gross National Income, with 0.16% (the highest, Norway, is at 0.95%), shown in this study referencing some OECD statistics.

It seems to me that this poor performance is a result of the anti-foreign bias present in the U.S.  Because the public is subject to anti-foreign bias, representatives must direct policy in line with these preferences in order to be reelected.  If this is the case, then there seems to be less anti-foreign bias in countries like Norway and Sweden, which both ranked highly in these studies.  Does that mean other nations are less biased than the U.S.?  It's also interesting to note that trade and investment in foreign nations seem to be strong, which I think indicates that business interests are above and not trumped by the anti-foreign bias.

Voter Ignorance Killing Democracy?

            Christopher Shea questions whether voter ignorance is killing democracy in his article http://www.salon.com/books/it/1999/11/22/voter/print.html.  He states that political scientists are taking the issue of voter ignorance very seriously, especially when surveys such as those from the Nonprofit PEW Research center demonstrate that many Americans barely know who the leaders of their own country are. He jokes that part of the reason many citizens did not know who George W. Bush was before the 2000 election was due to the fact that Gore was boring. While you may or may not agree with this, Shea broadens this argument to politics as a whole, claiming that in comparison to football and the latest reality TV shows, watching C-SPAN is really not that exciting for many Americans. The marginal cost of informing oneself through watching C-SPAN and reading articles outweighs the marginal benefits of being informed, particularly since each individual only constitutes a very small percentage of the electorate.

            Instead of informing oneself on the issues, Shea argues that most people base their votes and their answers to polls on only the “vaguest feelings about how the economy, or life, is treating them”. This relates the Hess and Ophanides’s paper, in which they argue the economy and the occurrence of war are the two largest factors in determining the reelection of incumbents. Shea realizes that the break between the link of voters and their representatives is a problem, yet democracy continues to “limp along despite rampant cluelessness”. By this, he means that the miracle of aggregation can result in an informed decision because the uninformed decisions are random. However, he notes that this may not be the case if “elites, demagogues, or the press can sway uninformed voters in one direction, thereby drowning out the votes of the informed minority”. Here he directly addresses bias, which could potentially lead to outcomes that are not optimal. Caplan argues that individuals receive some utility from their bias or ideology, and therefore can vote accordingly since the cost (small vote percentage) is so low.

  Finally, Shea suggests that part of the problem may be the increased size and responsibilities of the government. However, economists may argue that lowering the costs of informing oneself may be the answer. For example, another survey by the Nonprofit PEW Research center indicated that net users were more politically informed on election issues. (http://abcnews.go.com/Technology/Cybershake/Story?id=205539&page=1) If the government and media can continue to provide easy, quick access to unbiased information and essentially “enlighten the public” with background information, perhaps voter ignorance will decrease.

            

Massachusetts: Bribery, Corruption, Logrolling--Oh My!

I initially selected this article  from the Boston Globe, thinking it was a perfect example of the manifestation of Weingast and Moran’s model of legislative control over agencies through incentive systems of congressional committees, not to mention a rebuke to Niskanen’s “Bureaucratic Autonomy” approach. After several readings and attempts to match its assertions with those of Weingast/Moran, I realized that it wasn’t quite so clear-cut, and it actually led me to question both models of the legislative-agency relationship that we’ve studied in class.

There have been several recent incidents of corruption, bribery, logrolling, and other ethics violations in Massachusetts state and local governments, and this article states that the State Ethics Commission (read: agency) lacks adequate “tools” (read: sanctions) and laws to keep the legislature in check. Public attention to these incidents has culminated in the arrest of one Senator for bribery, led to investigations by “several agencies” into alleged monetary gifts to friends and associates of the MA State House Speaker, and inspired the establishment (by the MA governor) of a “public integrity task force” to propose ideas for new legislation to curtail this “cronyism and corruption” believed to be “rampant” by Massachusettians. The new task force recently held its “first and only public hearing,” and this public observance of sanctions should indicate (W&M) that the State Ethics Commission’s incentive system is indeed somewhat less than effective (for example: the Ethics Commission can only fine violators for up to $2,000, and also, it’s difficult to prove bribery of public officials). A former state representative attributes the problem to his belief that “state government doesn’t instill ethics and integrity,” but Weingast/Moran would probably say that it’s not morals that must be curtailed, because an effective incentive system should internalize this problem.  A different news article states that “[a]fter 60 days, the task force will make recommendations to strengthen current laws, regulations, investigative and enforcement mechanisms, and penalties…” . An interesting thing to note is that the twelve-member committee has four members from the legislature, including the chairman (D) and a another member (R) of the Massachusetts Senate Ethics Committee, in addition to the chairman (D) and another member (R) of the Massachusetts House Ethics Committee.

Now to my ponderings. Again--Weingast and Moran assert that congressional committees possess sufficient rewards and sanctions to essentially constrain the output/actions of pertinent bureaus/agencies, and the power to slap the hands of those bureaus when their actions fail to satisfy the preferences of the congressional committee members. That’s all well and good, but in the case of this article, it’s an agency that is seeking greater powers (sanctions) to suppress a renegade legislature.

Maybe Weingast & Moran’s empirical evidence for Congressional Dominance is not as impressive as I initially believed. Though it’s still more convincing than Niskanen’s presuppositions, I think both are incomplete to a degree, in that they are kind of one-sided and inflexible… Nothing in the U.S. government is a one-way street—remember those good ol’ checks-and-balances between the three branches? It occurred to me that the two theories of the agency-legislative relationship don’t have to be mutually exclusive. Yes, the Legislature has power over Agencies, but the agencies are supposed to have power over the Legislature as well. But, this is more complicated than it may sound. 

W&M should have specified to which agencies they were referring in their paper: not all agencies are created equal. They all fall under the heading of the executive branch of the federal government, but there are two kinds of agencies themselves: the executive agencies of the fifteen executive departments, plus the independent agencies, which are generally created by Congress and assigned responsibilities and powers through "enabling statutes" that “define the scope of an agency's authority.” And by the way, the FTC, which serves as the focus of W&M’s analysis, is one of these independent agencies -- i.e. it was established by Congress (created through the Federal Trade Commission Act in 1914), and thus Congress should have control over its behavior--by design. And yes, W&M demonstrate that it does indeed have this control. I should note, to their credit, that in W&M’s paper, they substantiate the viability of the five observations of legislative-agency behavior to Niskanen’s model, and acknowledge that Niskanen argues that sometimes these bureaus can break free of their creator: “…third, the high cost of passing new legislation to redirect agency policy limits congressional action in all but the most important cases. The resulting bureaucratic insulation afford bureaucrats a degree of discretion which, in turn, is used to pursue their own private goals rather than the public purposes for which they were originally created. According to Dodd and Schott, for example, the federal bureaucracy is ‘in many respects a prodigal child. Although born of congressional intent, it has taken on a life of its own and has matured to a point where its muscle and brawn can be turned against its creator.’”(p.768 of our W&M article).

To substantiate two of my claims about checks and balances being a two-way street between the legislative and executive branches, my mention that “several agencies” were investigating the allegations against the Massachusetts House Speaker is an example of a check of the executive branch over congress to hold “committee inquiries and hearings.” An opposing check of the legislative branch on the executive branch is the allowance for “Congressional membership on governmental commissions,” which I mentioned with the note of legislative presence on the new oversight task force/committee.

One thing I don’t understand is why Weingast and Moran never mentioned anything about the Administrative Procedure Act which primarily “establishes the protocols for agency rulemaking and decisions in agency enforcement proceedings.” I would think that should play a role in the amount of oversight Congress is allowed to inflict.

Bias or Bussiness?

Remember the Dubai Ports World Controversy back in 2006?  This one really upset me with it happened because of how ridiculous it was.  Now looking back on it with the help of Public Choice theory I can see two different ways to interpret the result of the congressional vote which forced the UAE based company who bought the rights to manage port security in New York from a british company.  Concerns were brought up by officials in the Bush administration that allowing a foreign company to be in charge of security for a vital resourse like a port was too risky.  This is obviously not a policy created from sound reasoning because foreign companies which have controlled port security have done fine in the past and there was also no outcry while the British company that preceded Dubai Ports World was doing its job.  Also, the actual employees on the ground like security guards were all Americans and the company had to follow regulations set down by the Americans who hired them.   

So why this unnecessary government intervention in a perfectly legitimate transaction.  My first inclination then was foreign bias, specifically one against arabs/muslims in the wake of 9/11.  It would explain why people were upset with an arab company running the security but not a british one.

But maybe there is an alternative way to interpret this.  Dubai Ports World ended up having to sell its rights in the US to AIG, an American company.  Could this be considered some form of rent-seeking where specific senators who had the ability to suggest this legislation were given an incentive to do so by corprate interests?  The bill  effectivly created 'rent' by interfering with the market and creating the necessity for Dubai Ports World to sell its assets to an American company.  This would also be explained by the timing of the outrage  - right after Dubai Ports World won the contract over AIG...    

Implications and eradication of racial bias

According to Caplan, bias is kind of a big deal when it comes to rational irrationality. In the recent election, racial bias was definitely something to consider and, though it didn't prevent Barack Obama from being elected, it was no doubt an important factor that some voters deliberated about. As Caplan explored the effect of an education in economics on opinions held by the public about policy, one can also explore the effects of education in race on opinions held by the public about racial bias in this country. According to the Gallup poll, "6% of voters say they [were] less likely to vote for Barack Obama because of his race." To help inform voters about race, racial inequality, and their implications on the 2008 election, news organizations like CNN are attempted to "enlighten the public" through websites like Black America Web and television series, Black in America. Whether or not these attepmts caused a decrease in the racial bias in unclear, however, according to the Gallup poll, during the month of July, 39% of the white vote supported Obama as their candidate of choice; that percentage grew to 43% by the end of the election in November. While it's not certain about the coorelation between racial bias and education in this example, it's an interesting idea to consider, and one that would make Caplan proud.

A new twist on Public Goods: Irrational solutions?

Early in our class we discussed Public Goods and how they are often underprovided because of the incentive for Free Riding.  More recently we have discussed Caplan's ideas about bias and how it can lead to inefficent behaviour.  This article discusses the effect that biases based around ethnicity can effect the provision of public goods.  In part of the paper the dictator game is played with members of a community with the majority chosing the non-dominant strategy which is to allocate to yourself all the money and give none to other players.

If you are not familiar with the Dictator game, it is a common economics game where a experiementer gives a sum of money to a player designated as the 'dictator'.  The dictator is then given the option to distribute the money however he chooses between himself and other players.  Homo Economicus obviously would do a quick maximation and walk away with all of it.  Incidentily, the only time when test results come anywhere close to matching this prediction is when its played in economics classes.

Why do people act so irrationaly in such a simple game?  Bias, perhaps caused by ideology, some sense of fairness, or, in forms of the game where the dictator is not anonomous, a fear of retribution or upseting someone else.  The official line is that bias and ideology has no place in good economic activity because it leads to non-optimal outcomes - but maybe, just maybe, there is a place for bias and irrationality in economics.

The paper continue to explain how there is varriance in public good provision in two different communities, one with a heterogenous ethinic make up and one with a homogenous one.  Non-economic factors seem to have made a positive change in the amount of public goods provided.  

Perhaps people's biases when it comes to morals, ideology, and identity can help solve prisonor's dilema situations that currently cause non-optimal solutions as in the case of public goods.  If people hold biases like a religiously incumbent duty or dedication to a national ideology or even just a personal moral creed they might then choose not to free ride even when monitoring and enforcement and absent.       

Anti-foreign bias: should the economists go back to school?

Caplan talks about the different biases that exist amongst the American public which include the anti-market bias, make work bias, pessimistic bias, and the anti-foreign bias which is the tendency to underestimate the benefits of interactions with foreigners.  In this post I will play devils advocate and propose a alternative to the bias people feel towards interactions with foreigners, thus proving that the economist may lie farther from the truth with regards to the productivity of foreign labor in our economy.  In the case of the

United States

we can all agree that most of the foreign interaction comes with immigrants from

Mexico

.  On the Center for Immigration website they say: “Overall, nearly one in three immigrants is an illegal alien. Half of Mexican and Central American immigrants and one-third of South American immigrants are illegal.”  I would suggest that in the eyes of the U.S public, the bias towards foreigners is not so much concerned with the tax paying, legal immigrants working the jobs that many Americans do not want, but rather the illegal ones who are felt to be a drain on healthcare public education, police and fire protection, public transportation, and other services.  In an article published by The Hill, Robert Rector posits that after all the benefits and costs are weight against each other immigrants come out as a net loss to economic productivity.  He quantifies the loss to the American taxpayer over a ten year period to be around four trillion dollars.  He does, however, admit the difficulty of quantifying the gains foreign labor affords

U.S.

productivity at the bottom line.  I open this question to the class: do economists tend, regarding the trade of labor, to believe, regardless of the numbers of illegal immigrants, that our economy is still better off?

Hurricane Ike and the Anti-Market Bias

    Caplan’s discussion of the anti-market bias reminded me of the situation a couple months ago when Hurricane Ike hit Texas and sparked hysteria about the potential for gas shortages.  As the article states, some gas stations in the Southeast were charging over $6 a gallon at the time.  Shameless exploitation of a natural disaster for profit, right?  Caplan would likely disagree and argue that the market mechanism will set the optimal price, even in an extreme situation like a hurricane. 
    After the hurricane hit, the drop in supply led state officials throughout the Southeast to declare emergency laws against price gouging.  Anyone who remembers shifting supply and demand graphs in ECON201 can see that if the price is not allowed to rise, there will be a shortage of gas.  The public’s biases, though, prevented it from understanding this hidden effect of anti-price gouging laws.  Because of the anti-market bias, people saw gas that was twice as expensive as before and felt compassion for the “overcharged” consumer and disdain for the “greedy” businessman. 
    Evidence of this bias is on blatant display in this quote from Mark Plowden, communications director for the South Carolina attorney general:  “Fear of price gouging is bad in the state right now…Public panic can cause a run on the pump, creating more panic, so we are trying to control for the situation.”  The government was actually trying to prevent consumers from exacerbating gas shortages by lowering the cost of gas.  A similar situation occurred after Hurricane Katrina when gas shortages were even more severe.  In situations like these, laws against price gouging can have serious effects.  Suppose the market sets gas prices at $10 a gallon, and a family is trying to leave the disaster area as quickly as possible.  They will only fill up their tank with as much gas as they need to get out of the area.  But if the government tells gas stations that they can’t set prices above $2, the family might decide to fill up all the way, and the next family, whose tank is empty, might be out of luck.  During Ike, Caplan’s idea of anti-market bias led the public and government officials to underestimate the ability of market prices to ration scarce resources.  Enlightened preferences would have helped the consumer by letting the price rise naturally and allocating gas more efficiently. 

The Stock Market and the Miracle of Aggregation

http://www.nytimes.com/2008/12/05/business/economy/05markets.html?ref=business

Why do we put so much faith in the stock market as an economic indicator? Why does the stock market have any sort of stable pattern? After all, the stock market indicators (Dow, Nasdaq, ect) are just publicized sales records of thousands, millions of investors. If you ask anyone if they can predict the behavior of the market, they will shrug their shoulders and tell you some phrase like “animal spirits”.

And it’s true, the stock market may fluctuate a lot from hour to hour, even day to day, but as a general trend, the stock market tends to be a fairly decent indicator of economic prosperity and decline both at the macro level and the micro level.

This may have something to do with the miracle of aggregation. Although one single person may not be able to predict accurately how the economy or certain companies are faring or going to fare, with enough investors – the mistaken signals are randomly distributed and cancel out. Leaving us with a somewhat accurate picture of the economic present and future well-being of certain companies.