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Orthodoxy, trade and the developmental state

I love the internet. I love what it’s becoming, what it’s capable of becoming. A few years ago, the blogosphere (I hate that word) was dominated by enthusiastic amateurs. That is, it was filled with people who, in so far as they had any speciality, had it in entirely separate fields, but were interested in the topics they wrote about. It still is, and that’s great. Public debate is always good.

But now we are seeing professional thinkers stepping into the arena. University professors are emerging from their ivory towers and using the web to debate each other in the public sphere. That is freakin’ awesome. Here’s a recent example …

Patricia Cohen, of the New York Times, wrote this piece: In Economics Departments, a Growing Will to Debate Fundamental Assumptions. In it she quoted the views of, among others, Alan Blinder (Princeton), David Card (U.C. Berkley) and Dani Rodrik (Harvard).

It elicited quite a response in the various academic blogs. Three of them that are worth checking out:

It’s that last one by Don Boudreaux that I want to focus on. In it, he criticised the views of Dani Rodrik in particular and issued Dani a challenge.

Dani Rodrik replied: What’s different about international trade?

Brad DeLong (U.C. Berkley) was watching and gave his opinion: Don Boudreaux vs. Dani Rodrik on Industrial Policy: I Call This One for Don–I Think It’s a Knockout

Dani Rodrik then updated his original post with a rebuff to Brad DeLong.

Brad DeLong stepped up with a more lengthy post: DeLong Smackdown Watch: Dani Rodrik Strikes Back

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Paul Wolfowitz and the World Bank

I think that Wolfowitz was a tainted choice to head the World Bank from the get-go; an architect of the Iraq war was never going to be a popular choice among Europeans. To some extent, I see a parallel between the US choosing Paul Wolfowitz to lead the World Bank and John Howard choosing Peter Hollingworth to be Governor-General of Australia. Both were seen as placing an ideological choice into a role that is, in theory, meant to be above ideology. In both cases, ideological opponents complained loudly, but could do nothing until a moral slight could be held against the appointee.

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Libertarianism, inequality and cultural homogeneity

Andrew Norton doesn’t think much of this article by Christine Wallace in the Griffith Review, in which she argues that the Coalition under Howard has instigated libertarian policies by stealth. He calls it “a dozen or so pages of ignorance and silliness,” citing this paragraph from page 8 in particular:

The libertarian logic is that, since personal freedom and the existence of free markets are inextricably entwined, and since – as Bork puts it – “vigorous” economies are vulnerable to being “enfeebled” by particular cultural practices, then the champions of personal freedom have a licence to police cultural practices – in the interests of freedom and economic vigour. Thus libertarians can reason that difference (for example, multiculturalism, homosexuality) must be eliminated so that the economy can function better – reasoning that is absurd, to say the least.

A commenter on Andrew’s blog also highlighted this bit on the previous page:

The central difference between the Howard Government and the Hawke/Keating Governments is that the Labor governments saw a crucial role for the public sector … especially in relation to issues of economic inequality; about which libertarians are unconcerned.

First a confession: I’ve not read more than two or three pages of Christine’s article. Still, if the blogosphere isn’t a place for partially informed comment, I don’t know what is. In the interests of fairness, though, I will disagree (slightly) once with Andrew and once with Christine …

In the paragraph that drew Andrew’s ire, Christine argues that the libertarian pursuit of free markets justifies cultural homogeneity. Andrew’s implicit criticism certainly seems to make sense: why should free markets and cultural heterogeneity be mutually exclusive? But it is worth noting that Christine may – at least to some extent – have an unpleasant point. For a market to operate efficiently requires trust between its participants. A market can certainly operate without trust if institutions are sufficiently advanced and corruption-free, but the enforcement costs they impose are a classic form of market failure, along with moral hazard and adverse selection. Even with good institutions, market efficiency is optimised by increasing trust. However, as Andrew Leigh has observed for Australia [here and here] and Robert Putnam has found for the USA [here], ethno-linguistic diversity breeds mistrust. In so far as they proxy for culture, Chrstine’s point at least partially stands.

Now back to Christine. She reckons that libertarians are unconcerned about inequality. It’s obviously a generalisation, but even in general, it’s misleading. While I’m sure that libertarians are not concerned about inequality per se, I’m equally sure that they are concerned with unwarranted inequality. Classic theory of the firm suggests that in perfectly competitive markets, a person’s wage will equal the value of their marginal product. Presuming (safely enough) that different occupations have different marginal products (so an engineer will contribute more to a firm’s profits than a cleaner), if people at the top of the pile are being paid more than their marginal product and people at the bottom are being paid less than theirs, a libertarian would oppose the excess inequality that resulted.

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The man whose name is anathema

Peter Martin, currently the economics editor of The Canberra Times, has got a nice little piece on labour productivity in Australia over here.

It’s fascinating for two reasons. The first is that growth in labour productivity in Australia has stalled – it may even be as low as 0% for the current financial year – and this slow-down coincides neatly with the Coalition’s Work Choices program. I’m not convinced that one necessarily caused the other. At the very least, I would have expected some sort of lag between Work Choices coming into effect and any change in productivity growth. Nevertheless, it looks ugly for the Howard government and they’re clearly doing their darndest to avoid drawing attention to it.

The second fascinating thing is that, even though this raises the question of whether Keating’s enterprise bargaining system was better in terms of promoting productivity growth, nobody – on either side of Australian politics – will dare mention this possibility. For the coalition, this makes perfect sense. They don’t want to acknowledge anything about the previous Labor government that was “better” than under them. For the Labor party, though, it’s far sadder. They’re clearly working under the assumption that invoking the name of Keating will tar them with the 1991 recession. It’s sad, because they’re just as clearly throwing away the best piece of evidence they have for Labor’s economic-management credentials.

In case anyone is interested, here is a graph from ABS data that Peter included in his piece, showing clearly that the quarterly change in labour productivity has turned negative for the last two quarters:

Quarterly change in Australian labour productivity

Recognising the probable noise in quarterly data, Peter also includes this graph of a four-year rolling average courtesy of Saul Eslake at ANZ:

Four-year rolling average of changes in Australian and American labour productivity

Paul Keating, speaking to the ABC’s Eleanor Hall in the week leading up to the recent budget, justified enterprise bargaining over individual contracts thus:

On this floor at the ABC here, there must be 150 people. If you went out there and said to them, look we’re going to make an agreement for the next three years or four with the ABC and we want 3 per cent productivity a year out of it, or 2 per cent productivity, together you could all do something.

But if they just take Eleanor Hall by herself and say, you will give us an increase in productivity, how can you, individually? How can you? What are you going to do, talk louder? Talk more? Be at work earlier?

For reference, the latest Australian federal budget can be found here. The section relevant to Peter Martin’s commentary is Budget Paper 1, statement 4.

Update – 14 May 2007 – In response to Andrew Norton:

Andrew is absolutely right that a firm is concerned principally with profit, but there are always two ways to get more of the stuff. You can do the same at a lower cost (as he speaks of), or you can do more, with the value of the extra done being more than the extra cost it requires.

Assuming that the amount of labour employed remains the same in both cases, the first possibility does not increase worker productivity; it only shifts a greater proportion of the output away from labour and into firm profits. The second possibility increases worker productivity, with an ambiguous effect on the labour/capital shares of output.

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US Trade policy

It seems that the White House has managed to agree with some key Congressional Democrats (presumably the speaker and the Ways and Means committee) on a trade policy framework, allowing them to move forward on a number of deals. See reporting from:

It seems to include items on labour standards, environmental protection (or possibly just require the enforcement of already-agreed-to environmental standards), allowing developing countries slightly easier access to some generic medications, a guarantee that US ports will continue to be owned and operated by US companies, and increased funding for training US workers affected adversely by trade.

I’m not sure how I feel about these things. I would need to see some more specific details than the tantalising hints that the journalists drop throughout their pieces. At a rough guess without seeing the details, and reserving the right to change my opinion, I support the environmental protections, partially support the labour support requirements (I’d support the right of workers to unionise, for example, but not US-imposed minimum wages or working conditions [*]), support easing access to generic drugs and absolutely oppose restricting the operation of US ports to US companies.

[*] I do generally support minimum work condition requirements and – absent a proper tax system that can provide appropriate subsidies to the poor – a minimum wage, but I do not support the US imposing any particular work conditions or minimum wages on other countries. It should be up to the people of those countries to make up their own minds.

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Why I like Andrew Leigh

The man just talks sense. He argues that:

we can save a lot of Australians the bother of filling out an annual tax return. In August, the ATO would simply send you a statement saying what they think you owe. If you agree with it, if you have no complex income, and if you don’t want to claim any deductions, you do nothing. Of course, if you want to claim your deductions, you’re welcome to do so.
…
Simplifying tax-filing should appeal to politicians of all political stripes. Whether you think tax rates should be lower or higher, you should support lowering the compliance burden.

His primary article is here.

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Modelling bribery in elections

This article on Reuters about Chinese villagers complaining that they were no longer receiving bribes from candidates in local elections got me thinking about how best to model bribery in an election process.  I’ve not done any research at this point, so I wouldn’t be the least bit surprised if someone had already done this in considerably more detail, but here are some initial thoughts …

Assume that the local government offers no public goods or public services to the voters, but instead acts either as a gatekeeper for business permits or as a guide through an externally imposed beauracracy. In either case, further assume that elected officials make a lot of money through bribery and in particular, more than their outside options.

The candidate that hands out the most to the voters wins the election and gets the bribes from business. Without a credible commitment between the candidates to not give handouts, the incentive will always be to give a handout and the only stable equilibrium will be for everyone to give a handout.

If the size of the bribe from business is universally known ex ante, or if it is uncertain but it’s expected value is commonly known and the candidates are risk-neutral, the candidates will all give handouts until their expected return matches their outside options. The result (a coin-toss since all candidates handed out the same amount) will be that the guy who wins the election gets a bucket of money, the voters each get a bit and the other candidates all lose money. e.g. Outside option for all candidates = 0, (Expected) Bribe from business = 100, Number of candidates = 4, Number of voters = 1000. Each candidate will give each voter 0.025 (so each voter will get 0.1 and the total handouts to voters will be 100). The candidate who wins will get 75 (100 – 25) and the candidates who lose will get -25.

I’ve assumed above that all candidates are the same in a) their risk aversion; b) their expectation of the value of the bribe from business; and c) their outside option. If the expected bribe and outside options are common but candidates vary in their level of risk aversion, the least risk averse candidate will win. If candidates vary only on their expected bribe, the candidate with the largest expectation will win. If candidates vary only in their outside option, the candidate with the lowest outside option will win.

Obvious extensions would be to include not just ex ante handouts but promises of handouts ex post and to suppose that some (or all) of the candidates also owned the businesses that would have to pay the bribes.

As always, any thoughts or comments are welcome.

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The benefits and perceived costs of immigration

This article discussing migration to Britain, the benefits it brings and British reaction to it, was recently on the front page of the FT. Some key points:

Britain’s willingness to absorb migrants … have brought “undoubted economic benefits”, John Reid, home secretary, said last year. By helping to fill skills shortages and keeping a lid on wage inflation, immigrants have helped produce stronger economic growth.

[However,] 47 per cent of Britons believe migration by workers within the EU has been negative for the economy and only 19 per cent think it has been good. Asked whether there should be stricter controls to prevent workers from central and eastern Europe entering the country, 76 per cent of Britons agreed.

A friend of mine questioned whether these two sentences from the article were contradictory:

The Bank of England believes that the large influx of migrant workers has contributed to lower inflation by helping to contain wage growth. David Blanchflower, a member of the Bank’s monetary policy committee, said last month there was little evidence that immigrants from eastern Europe had depressed the wages or employment chances of British workers.

They’re not – they’re saying that migrants have caused wage growth to fall (first sentence) but it has remained positive (second sentence), meaning that wages themselves are not falling – but it does raise a key point in understanding why people feel economically cheated in an environment of high immigration.

Suppose that Price Inflation tomorrow is equal to Wage Growth today minus a bit related to “real” growth in the economy (which is plausible), but when considering their Wage Growth today, workers compare it to Price Inflation today. Then we might have (all figures are percentages):

Inflation today: 2

Without immigrants
Wage Growth today: 3
Perceived benefit: 3-2 = 1
Inflation tomorrow: (3-n)
Actual benefit: 3 – (3-n) = n

With immigrants
Wage Growth today: 1
Perceived benefit: 1-2 = -1 (!)
Inflation tomorrow: (1-n*)
Actual benefit: 1 – (1-n*) = n*

If you also suppose, as the BoE clearly believes, that the ‘n’ actually increases with immigration (n* > n), then people are unambiguously better off with immigrants coming in, but believe that they are worse off.

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History of US Legislative and Executive power

Following the recent (midterm) US elections and looking at this article over at the Economist, I was fascinated by the graphic they provided at the bottom detailing periods of Democrat and Republican control over the House of Representatives and the Senate. The obvious missing information was on presidential control, so I did one up myself. You can grab it (as an Excel spreadsheet) here.

It’s interesting to note that since 1901, the Democrats have generally been dominant in the House of Representatives (64.8% of overall control) and the Senate (57.4%), but the Republicans have maintained a slight upper hand in the Presidency (48.1% Democrat).

Americans do seem to prefer having just one party in control at a time (59.3% of the time all three are under the control of the same party rather than the 25% that would have been expected by pure chance).

Update: I have redone this following the 2008 election here.