Fri, 30 September 2016
My guest today is Jason Brennan of the McDonough School of Business at Georgetown University. He is the author of Against Democracy, which is our topic for this episode. The first chapter is available on the publisher's website.
John Stuart Mill believed that getting more people involved in politics would make them smarter, more concerned for the common good, better educated, and nobler. In the intervening century and a half, we've gathered much more data on Mill's hypothesis, and the results don't look good:
The test results are now in. They are, I will hold, largely negative. I think Mill would agree. Most common forms of political engagement not only fail to educate or ennoble us but also tend to stultify and corrupt us." (p. 2)
Diana Mutz performed a study that found that people's belief that their political adversaries were evil and stupid predicted high political engagement. Many studies show similar results, where politics seems to exacerbate our biases along with our meanness and contempt for the other side.
Jason splits democratic citizens into three broad categories: Hobbits, hooligans, and Vulcans.
Hobbits are your average non-voter. They don't care or know much about politics, and they're happy to just live their normal lives without thinking about politics.
Hooligans are your typical political partisans. They are the die-hard sports fans of their preferred party. They are typically well-informed, but the information they consume is extremely biased towards their own side. They cannot pass an ideological Turing test.
Vulcans are people who see clearly through the morass of politics, understanding the arguments from both sides and possessing the social scientific knowledge necessary to select the best options. And just like the Vulcans from Star Trek, they're completely fictional! Or at least they're very rare.
While most of us like to think of ourselves as Vulcans, we're probably more like hooligans.
What if the Knowledgeable Chose our Policies?
Jason's preferred alternative to democracy is epistocracy, a system where more knowledgeable people have more control over politics. There are many forms this could take.
One way of instituting epistocracy is to impose a basic knowledge test on voters. While an econ 101 test would be desirable, it might raise objections from people who view economics as an ideological discipline. But there are many ideologically neutral facts that a voter really ought to know. For instance, someone who doesn't know which party currently holds power probably doesn't have enough information to decide which party is most fit to govern.
You could then restrict votes to only the people who pass the test, or you could weight votes from knowledgeable people more heavily.
Another option is the "enfranchisement lottery" where a random subset of the population (perhaps a few thousand) are selected to vote, but only if they undergo exercises to build their competence as voters. This is somewhat similar to how a jury trial works, where a legal decision is left to a random group of citizens, but only once they have received extensive instruction from a judge, lawyers, expert witnesses, etc.
Finally, you can set up a hybrid system with democratic and epistocratic elements. For instance, you could have a democratic body decide policy while an epistocratic body retains a veto. The Supreme Court functions in this way, since it grants a group of highly educated judges the power to overturn democratically supported laws.
Democracy is Not an End in Itself
Jason encourages his fellow philosophers to think more like social scientists. While philosophers tend to view democracy as an end in itself, social scientists are more interested in whether it has good outcomes. Does democracy promote economic growth more than other systems? Are fewer people persecuted under democracy than under other systems? Are people happier in a democratic system than they would be in an alternative system?
These are the sorts of questions we should be asking about our system of government.
Fri, 23 September 2016
Today's guest on Economics Detective Radio is Chuck Marohn, founder and president of Strong Towns.
Strong Towns is a non-profit that seeks to reform America from the ground up, starting with its towns and cities. It aims to promote healthy local economies by improving local governance.
The Growth Ponzi Scheme
Chuck began recognizing the problems in America's towns and cities when he was working as a civil engineer. He recounts a story of working in a little city in central Minnesota in the late 1990s. The city had a 300-foot pipe that had cracked, allowing ground water to leak in and overflow their treatment facility. Chuck proposed a $300,000 solution to fix the pipe. However, this was a tiny town with an annual budget of $85,000. So Chuck went to higher levels of government (the federal government, the USDA, etc.) to find someone to fund the project. They all said, "This feels like maintenance. We don't have money for maintenance, so you need to pay for this yourself." Since the feds would only fund expansion projects, Chuck devised a plan: He would propose the largest expansion project he could, then repair the pipe as part of the expansion. This wasn't so much deviousness on his part as it was standard practice in his profession. He designed a couple miles of new pipe, doubled their treatment facility, and as part of that he included repairs for the old pipe. This new project cost $2.6 million.
Everyone was happy about this project. The grant agencies were happy. The legislators issued glowing press releases and held a big ribbon cutting. Chuck got a big bonus from his company. The city was ecstatic. The only lingering problem was that this tiny city that couldn't afford to maintain 300 feet of pipe would now be left with a few miles more pipe and a larger treatment facility.
This is an example of one part of what Chuck calls the Growth Ponzi Scheme. This is when cities and towns expand in ways they can't maintain without further expansion.
There's a political reason why things like this happen. Building new infrastructure is very politically appealing. You can build a new highway and name it after a prominent politician, you can have a big ribbon-cutting ceremony, and you can get all sorts of good press for the project. Maintenance is less sexy; you close down a lane of some existing highway, delay everyone's commute, and then you don't have a ribbon-cutting or positive press for all the potholes you filled in. That's why higher levels of government have been paying for big projects and passing off the responsibility for maintaining them to local governments. These local governments become insolvent when the revenue from the initial big project runs out and the maintenance expenses come due.
This process leads to a form of development where the local tax base is not sufficient to pay for the infrastructure that supports it. When the expansion can't go on any longer, the infrastructure crumbles, the affluent people leave, and the community ends up locked in poverty.
What's Wrong with Big Box Stores?
Embracing this form of unsustainable growth has made our cities less dense and walkable. Instead we have heavily subsidized driving as a means of getting everywhere. One consequence of this has been the rise of big box stores.
The public debate on big box stores tends to miss the mark. The left says big box stores crowd out local businesses, which is true. The right says they pass the market test, offering lower prices and thus improving poor people's standard of living, which is also true.
What both miss is that these big box stores only pass the market test because they don't bear the costs of the infrastructure needed to support them. By subsidizing infrastructure, and by building our cities to be spread out and unwalkable, we make bringing groceries to the people unviable. Instead, the people drive to where groceries are.
In addition to the rise of big box stores, we've seen the demise of small town living. While small towns still exist, they used to have enough small businesses, shops, and grocers to allow a full and comfortable life without leaving the town. Today, small town life consists of driving to the regional hub, perhaps multiple times every week, to get many of your necessities.
What's Wrong with Hastings Street?
Chuck coined the term "STROAD" to push back against the interchangeable use of the terms "street" and "road."
A street is where value lives. Homes and businesses locate themselves along streets so that they can be connected to rest of the transportation network, but the street itself features narrow lanes, low speed limits, and good sidewalks because it's designed more for pedestrians and less for vehicles.
Roads, by contrast, are not meant to be valuable locations in themselves; they are optimized for transporting large volumes of traffic over long distances. They feature wider lanes and faster speed limits.
STROADs are an unhappy blend of both elements. Wide lanes and low speeds make them bad for both pedestrians and drivers. One example of a STROAD is Hastings Street in Vancouver, which tries to be a major thoroughfare for thousands of commuters during rush hour, while still catering to the many businesses along its ten-kilometer span.
Because of its high volume of traffic and many stop lights, motorists can expect to average just twenty kilometers an hour on their commutes to downtown Vancouver.
Gentrification as Part of an Organic System
Chuck wrote an article titled "The Gentrification Paradox," in which he argues that gentrification was actually a healthy part of urban development in the pre-automobile age:
The pre-automobile development pattern was an organic process. It was both incremental and complex... Gentrification – investment followed by displacement – was part of the natural order of things and, as with any organic system, it had a positive role in making things work for everyone.
Before the twentieth century, cities would gradually grow and change over time. But we've used zoning laws to turn our neighbourhoods into unchanging time capsules. Cities used to be antifragile, to borrow a term from Nassim Taleb.
In the past, poorer people would buy property on the outskirts of town, on which they would live and run small businesses. Over time, as the city grew, these outskirts would gradually come to be incorporated into the urban ecosystem. These properties would become more valuable and they would grow with the community, perhaps adding a second storey and expanding the business.
You couldn't do this today. Building codes and zoning laws make any new development into a million-dollar endeavor. People with very little capital can't start with a small property and gradually increase its value over time. This makes the modern form of urban development much less equitable than it was in the past.
Fri, 16 September 2016
Today's guest is Steve Horwitz, he is the Charles A. Dana Professor and Chair of the economics department at St. Lawrence University.
Steve recently wrote an article titled, "Make Babies, and Don't Let the Greens Guilt Trip You about It." This was a response to an argument made by the bioethicist Travis Rieder, who was recently profiled by NPR. Rieder argues that it is immoral to have children because of the burden additional humans place on the Earth, in particular because of the risk of catastrophic climate change. Here's how that NPR piece put his argument:
"Back at James Madison University, Travis Rieder explains a PowerPoint graph that seems to offer hope. Bringing down global fertility by just half a child per woman 'could be the thing that saves us,' he says. He cites a study from 2010 that looked at the impact of demographic change on global carbon emissions. It found that slowing population growth could eliminate one-fifth to one-quarter of all the carbon emissions that need to be cut by midcentury to avoid that potentially catastrophic tipping point."
The problem with this sort of reasoning is that it views human beings as consumers and not as producers and innovators. Humans are able to contribute to the division of labour and to come up with ideas. That division of labour allows everyone to become more productive.
Rieder's ideas echo those of Thomas Robert Malthus, and he is wrong for much the same reasons. Malthus anticipated a world where the diminishing returns in agriculture and exponential population growth would lead humanity to subsistence in a few generations. As Malthus predicted, populations did skyrocket, but contra Malthus, people got significantly richer too. What happened?
Innovation happened. Along with that innovation, and contributing to it, was a finer division of labour created by population growth. As Adam Smith wrote, "the division of labour is limited by the extent of the market."
Humans create resources, not by violating thermodynamics, but by discovering better ways to satisfy our needs with the physical matter that exists. Resources are subjective. To a farmer 500 years ago, striking oil was a nuisance. It would ruin his crops and destroy the value of his land. Yet today, the very same oil is a valuable resource because we've discovered how to make it useful. Julian Simon challenged the idea that we're running out of resources, declaring human innovation to be "the ultimate resource."
Rieder and other environmentalists are different from Malthus in that they worry not about more people eating too much food but about them releasing too much carbon. A lot of this comes down to our estimate of the social cost of carbon. Rieder sees this cost as being so high, it outstrips all other concerns. He expects apocalyptic changes in the Earth's climate within twenty years.
Economists are not climate scientists, we aren't trained to be able to perform our own studies on the relationship between carbon emissions and global climate. But what we can do is look at the bulk of the published research. The two things we could say about this to someone like Rieder are, first, that he seems to have based his arguments on the absolute highest estimates of the climate impact of carbon, where a reasonable person might have looked at the median estimates. And second, people who have performed meta-analyses of this literature have found evidence of publication bias towards finding a larger impact, meaning the best estimate would be somewhat below the median estimate once we correct for publication bias. If the kind of climate change Rieder sees coming in twenty years is really more like two hundred years away, it changes the argument a lot.
With the costs of climate change so far out in the future, and the costs of abatement concentrated on the present, our cost-benefit analysis needs to account for the discount factors in such long time spans. The projects that have to be sacrificed today to abate climate change over the next couple centuries have their own benefits that need to be weighed against the costs of releasing greenhouse gasses into the atmosphere. It all comes down to opportunity cost.
Fri, 9 September 2016
This week's episode of Economics Detective Radio deals with the economic thought and continuing popularity of Marx. No, not Groucho! The other Marx!
My guest on the podcast is Phil Magness, a historian who teaches at George Mason University. Phil recently wrote a piece entitled, "Commie Chic and Quantifying Marx on the Syllabus." Recently, the Open Syllabus Project released a data set including thousands of college syllabi. To many people's surprise, Marx and Engels' Communist Manifesto enjoys massive popularity!
Phil took a closer look at the numbers and reached some startling conclusions:
What could account for the popularity of The Communist Manifesto? Phil identifies two hypotheses: First, it could be the case that Marx simply is the most important thinker who has ever lived, beating out all but Plato by a wide margin. Second, Marx could be enjoying outsized popularity because university faculty outside of economics are overly enamoured with his thought.
The latter seems like the truth.
While Marxian thought does dominate some corners of philosophy, history, literary criticism, and many other subfields, we would expect classes in those areas not to focus on The Communist Manifesto but on Marx's other works. Das Kapital is in 1447 syllabi, right around Rousseau's Social Contract.
The Communist Manifesto is a political leaflet, not a work of deep scholarship. The fact that it dominates not only the works of other thinkers but also Marx's other works indicates that it is assigned primarily for its political conclusions.
How has Marx Avoided the Dustbin of History?
Marx' economic thought was rejected by economists even within his own lifetime. All of his economic analysis shared a fatal flaw: the labour theory of value.
Marx observed that capitalists earn profits above the wages paid to workers. In his framework, this would only be possible if the capitalists exploited the workers. This was met with an empirical challenge: If profits are the result of exploitation, how come profit rates aren't highest in capital-intensive industries? Instead they are relatively consistent across the entire economy.
Engels claimed that Marx would resolve this issue in the later volumes of Kapital. He even held a Prize Essay Competition to see if anyone could anticipate Marx' solution to this seemingly intractable problem. But the later volumes didn't offer a satisfactory solution.
Austrian economist Eugen von Böhm-Bawerk wrote the definitive critique of Marx, Karl Marx and the Close of His System. The marginal revolution of the 1870s, which laid the groundwork for all of modern economics, offered a simple solution to the problem that has stood the test of time: interest.
As Böhm-Bawerk points out, workers are paid when the work is performed. But capitalists only earn revenue once the final product is sold. So if production takes time, we must account for interest. A unit of currency today (gold, silver, dollars, pounds, etc.) is not worth the same as that same unit tomorrow or next year. Leaving aside inflation, people subjectively value money today over money in the future. When you adjust future revenues accordingly, profits are actually very close to zero throughout the economy.
This is the explanation that any modern economist will give you. So when a modern economist assigns Marx, it's to teach about his role in the history of economic thought, not to teach his ideas on their own merits. That's why so few economists are assigning Marx at all!
Marx the scientist may have fallen out of favour, but Marx the political theorist survived and thrived. Marx inspired the political left, and through a twist of fate his adherents came to power in Russia and spread his influence around the world.
Fri, 2 September 2016
Market urbanism is the synthesis of classical liberal economics and an appreciation for urban life. Market urbanists are interested in economic issues specific to cities, such as housing affordability and urban transportation.
Nolan wrote an article titled "Reclaiming 'Redneck' Urbanism: What Urban Planners Can Learn From Trailer Parks." As Nolan points out, trailer parks are remarkable in that they achieve very high densities with just one- and two-story construction. They do so while providing remarkably low rents of between $300 and $500, or $700 to $1,100 per month to live in brand new manufactured homes. They are also interesting in that the park managers provide a form of private governance to their tenants.
A century ago, there were many kinds of low-income housing available to people of lesser means. Low-quality apartments, denser housing, and boarding houses have largely been regulated out of existence. The remarkable thing about trailer parks is that they haven't been made illegal or untenable by regulation. The one thing trailer parks don't have is a mixture of uses, but they get around this by locating close to business areas.
Cities in Europe and Japan, which didn't adopt American-style zoning, have much higher density and more mixed-use neighbourhoods. Houston, which has taken steps to de-regulate, has seen more development of this sort recently. It seems like dense, mixed-use neighbourhoods pass the market test whenever they are allowed.
Sonia Hirt, in her book Zoned in the USA, explains why city planners became focused on separating uses. When these rules were first being adopted, industry polluted much more than it does today, so there was a health justification for separating them. But there were also superstitions, such as the idea that having children close to groceries would spread disease.
William Fischel's homevoter hypothesis states that local homeowners engage in political activism to prevent development, thus protecting their home prices. They may justify their opposition to development in terms of environmentalism or preserving local character, but homeowners stand to gain or lose a significant portion of their life savings depending on the price of their homes. This makes local politics particularly hostile to new development and denser, more affordable housing.
Meanwhile, people blame everything except land use restrictions for high housing prices. Foreign buyers have been a recent scapegoat in Vancouver, which adopted a tax on foreign buyers, thus popping its housing bubble. Airbnb is also blamed for high housing costs, though its effect is certainly negligible.
While housing is important because it is many households' largest expense, inelastic housing supplies prevent people from moving for labour opportunities. Autor, Dorn, and Hanson (2016) show how many local labour markets in America never really recovered from a trade shock with China in the early 2000's. Much of this may have been due to America's inelastic housing supply. When industries like the furniture industry were outcompeted by Chinese imports, the people who owned homes in furniture-producing towns lost both their jobs and the value of their homes. With home prices elsewhere being so high, many of these people chose to spend the rest of their lives on welfare rather than moving to find work. Ed Glaeser has written more on the costs of subsidizing home ownership.
Home ownership is a bad investment. Having a single, large asset take up a large part of one's portfolio is just bad investing, particularly when that asset's value is correlated with your labour earnings. While one can hedge one's home value against futures markets based on the Case-Shiller index, but few people do this.
Errata: I accidentally referred to The Simpsons character Frank Grimes as Rick Grimes. Rick Grimes is from The Walking Dead. Also, I wrongly said that the paper on the China shock was by Angus Deaton. Somehow I mixed him up with David Autor. Same initials, just reversed?