Markets and 'markets', continued

Dean Baker writes:

The key flaw in the stance that most progressives have taken on economic issues is that they have accepted a framing whereby conservatives are assumed to support market outcomes, while progressives want to rely on the government. This framing leads progressives to futilely lash out against markets,rather than examining the factors that lead to undesirable market outcomes. The market is just a tool, and in fact a very useful one. It makes no more sense to lash out against markets than to lash out against the wheel. The reality is that conservatives have been quite actively using the power of the government to shape market outcomes in ways that redistribute income upward.

This is from the preface to The Conservative Nanny State published last year and available as a free download. I'm not sure I'd go along with all Mr Baker's suggestions, but the book is well worth reading.

Tax breaks for the rich

I've long been suspicious and wary of the way in which most western countries subsidise home ownership. Partly because the subsidies are paid out in ways that divert funds from more productive investment; partly because they make it difficult for even hard-working ordinary people who aren't lucky enough to inherit property, to own a house; and partly because the wider economy begins to rely on unrealistically appreciating house values - so much so that government has a vested interest in continuing to prop them up.

Writing about the US, David Morris says:

For all but the very rich, houses represent the single largest source of lifetime financial savings. A low rate of home ownership, and the resulting low rate of savings, is particularly high among blacks and Hispanics. In 2005, government provided $150 billion to homeowners in tax subsidies. But the way the subsidies were structured did little to raise home ownership among these groups. Why not replace the housing tax deductions with a level refundable tax credit? .... Economists Richard Green ... and Kerry Vandell ... have examined such a system and predicted that it could increase overall home ownership by 3 to 5 percentage points. Even more impressive, a housing tax credit could increase home ownership by up to 8 percentage points among the lowest-income households.

Robert Brenner, in the Guardian writes that, following the crash and recession of 2000-01:

central banks turned again to the inflation of asset prices. By reducing real short-term interest rates to zero for three years, they facilitated an explosion of household borrowing that contributed to, and fed on, rocketing house prices. Inflated household wealth enabled increased consumer spending that, in turn, drove the expansion. Personal consumption plus residential investment accounted for 90-100% of the growth of GDP in the first five years of the current cycle. However, the housing sector alone was responsible for raising the growth of GDP by more than 40%, obscuring just how weak the recovery was.The rise in demand revived the economy.

Unfortunately, it's difficult to see how this merry-go-round can stop. Like a drug habit, or other poorly-thought out subsidies, these tax breaks become very difficult to end, even when the evidence of their woeful economic and social impacts has become obvious to all.

Regulation and big business

One of the ways in which big business and its pals in government conspire against small businesses and ordinary people is by manipulating the regulatory environment.

Oligopoly Watch asks why large corporations in the US are asking the Government for more regulation. Part of the answer is that:

[w]hat big corporations want is for the federal government to set standards that will overrule even tougher state standards. These has been a rise in regulation from a growing number of states, led by California, to make up for the gaps in regulation presided over the Bush administration, which has systematically weakened rules and defunded regulatory agencies.

As well, though, regulations can be used as unfair, non-tariff barriers to trade:

[W]hy is Altria (Philip Morris) calling for the regulations of cigarettes and General Electric and Phillips joining to push for more regulation of light bulbs? Pure self-interest, a new strategy in an old war, one of getting the government to help big companies maintain market share. All of the new regulations will be used to set a barrier to entry for smaller (usually Chinese) companies into the market. In these cases, it is easier for the established players to conform to a higher level of regulation....

When I worked in the agricultural policy area I saw a lot of this. In one memorable example involving European Union legislation in the UK:

A snail farmer was told to tile his packing room, which was classed as an abattoir, up to the ceiling to catch the blood. BBC 1 TV Country File 8 February 1998

This sort of thing happens not only because government and big business are inevitably biased against smaller concerns, but also because they are government is more comfortable, and sees a larger role for itself, in regulating processes and activities, rather than outcomes. Ordinary people are the losers.

Trumping ideology

Reviewing Super Crunchers, by Ian Ayres, the Economist (dated 13 September)says:

The sheer quantity of data and the computer power now available make it possible for automated processes to surpass human experts in fields as diverse as rating wines, writing film dialogue and choosing titles for books.

Even the occasional government is accepting that properly analysed data trump ideological conviction. Mr Ayres sings the praises of Mexico's Progresa/Oportunidades programme, which gave assistance to poor people only if their children attended health clinics and schools. It was tried out on 506 randomly selected villages. The results were so convincing that the programme was expanded 100-fold despite a change of government.

The merit, it seems to me of such a policy approach is that unsuccessful experiments will be terminated: it's genuinely Policy as if Outcomes Mattered.

Charisma-driven politics

Discussing British politics, the Bagehot column in the current Economist (subscription, probably) hits the nail on the head:

[P]olicy is a decreasingly important factor in politics generally—certainly compared with the genuinely ideological clashes of the 1980s. Part of the explanation for that trend is that Labour and the Tories now agree about so much, even if they conceal their similarity by narcissistically inflating small differences. [Prime Minister] Brown's omnivorous pilfering of everyone else's best ideas is blurring the distinction more than ever (which hurts the Lib Dems, since this coalescence has made grumpy Labour and Tory voters readier to switch straight to the other big party). Part of it is the influence of digital media on how political opinions are formed. That has made having a charismatic and ideally photogenic leader vital....

It's no bad thing, in my view, that ideology's influence is lessening. I'd prefer though that policy were instead driven by outcomes rather than visual imagery.

Interesting

From Harper's Index:

Percentage of American adults held in either prisons or mental institutions in 1953 and today, respectively: 0.67, 0.68

Percentage of these adults in 1953 who were in mental institutions: 75

Percentage today who are in prisons: 97

Source: Harper's Magazine, April 2007 (page 17)

Those figures might go a long way toward explaining the rise in crime rates over the past five decades. Currently, despite talk of 'joined-up government', mental health and crime are seen in the west as two almost wholly distinct policy remits. It's certainly convenient, administratively, to do so. But in doing so do we optimize social welfare? I don't know what projects a Social Policy Bond regime aiming to reduce crime would stimulate, but investors would at least have incentives to explore the linkages and answer such questions.

The Political Class

Writing about the Political Class in Britain, Peter Oborne says:

Unlike the old Establishment, the Political Class depends directly or indirectly on the state for its special privileges, career structure and increasingly for its financial support. This visceral connection distinguishes it from all previous British governing elites, which were connected much more closely to civil society and were frequently hostile or indifferent to central government. Until recent times members of British ruling elites owed their status to the position they occupied outside Westminster. Today, in an important reversal, it is the position they occupy in Westminster that grants them their status in civil society. The Political Class is distinguished from earlier governing elites by a lack of experience of and connection with other ways of life.

A complex economy and the division of labour explain much of this disconnect between politicians and the citizens they are supposed to represent. Is there any way of closing the gap? One way might be to adopt one of the principles of a Social Policy Bond regime: debate policy in terms of targeted, explicit outcomes. Currently when our politicians talk to us it's often about funding arrangements, institutional structures, or the activities of government agencies. And what they talk to us about is often equally peripheral: people or events for which there is compelling tv footage; anecdotes and images that support an agenda that isn't always clear to us, the public.

A Social Policy Bond regime would recast political debate. Social and environmental outcomes would be the starting point of politics. Politicians would have to choose between such outcomes but in doing so they would consult ordinary people, who could participate in policymaking because they understand its terms. Compromises and trade-offs would still have to be made; there would still be pressure on resources and there would still be disagreements about priorities. But policy outcomes - unlike the arcana of current politics - are things that ordinary people can understand. Their participation in policymaking could help close the ever-widening divide between government and the people.

Is war inevitable?

More from Professor Colin Gray:

War is a part of the human condition, it is not a problem that can be solved. However, it is a condition some of the worst features of which can be alleviated by law, custom, norms and plain self-interest. Another Bloody Century (page 379)

I am a little more optimistic. I think that if war's negative impacts can be satisfactorily defined, then targeted for reduction and sufficient incentives can be put in place, then wars can be reduced in number and scale. As Gray explains elsewhere (page 385), "Warfare is social and cultural, as well as political and strategic, behaviour. As such it must reflect the characteristics of the communities that wage it." These characteristics are deep-seated and pervasive, which means that solution need to be long term in nature. Diverse, adaptive and focused approaches will be required. Gray's pessimism is justifiable if we confine ourselves to thinking about government-implemented measures. But a Conflict Reduction Bond regime could work, in ways that we cannot necessarily foresee. The main difficulty, it seems to me, is in defining exactly what we want to achieve: terrible though war is, some types of 'peace' are even worse.

Money politics

Al Gore writes:

After a long and detailed review of all the polling information and careful testing of potential TV commercials, the anticipated response from my opponent's campaign and the planned response to the response, my campaign advisers made a recommendation and prediction that surprised me with its specificity: "If you run this ad at this many 'points' [a measure of the size of the advertising buy], and if Ashe responds as we anticipate, and then we purchase this many points to air our response to his response, the net result after three weeks will be an increase of 8.5 percent in your lead in the polls."

I authorized the plan and was astonished when three weeks later my lead had increased by exactly 8.5 percent. Though pleased, of course, for my own campaign, I had a sense of foreboding for what this revealed about our democracy. Clearly, at least to some degree, the "consent of the governed" was becoming a commodity to be purchased by the highest bidder. The Assault on Reason quoted in the NYRB by Michael Tomasky

Gore was writing about his first Senate race, in 1984. I suspect his, and our, cynicism will have grown since then. The growing gap between politician and ordinary person is self-enlarging. Our non-involvement in politics enhances the role of the Public Relations people and lobbyists, which creates yet more voter apathy.

One of the advantages of a Social Policy Bond regime is that it would express its goals in terms of outcomes that are meaningful to real people, as distinct from corporations and their agents. Transparency - consulting with voters about their goals - would be built into the system from the start.

Private schools for the poor

James Tooley, Professor of Education at the University of Newcastle-0n-Tyne, has researched private schools for the very poor in developing countries. Typically these are small, shabby operations, sometimes occupying a sinlge classroom, staffed in some cases by just the teacher-proprietor and an assisant. Fees can be less than ten US cents per day. Despite the fears of some aid organizations, these schools:

...everywhere were outperforming the government schools in the key curriculum subjects – even after controlling for background variables.

Even when the per pupil teacher cost was calculated "private schools came out less expensive: In the government schools in Lagos State, for instance, per pupil teacher costs were nearly two and a half times higher in government than in private schools."

For me, these results point to the need to solutions beyond the control of the public sector. It is not, or doesn't have to be, a case of government versus private sector, though that is unfortunately how research like this is often interpreted. Rather it indicates the need to abandon ideology when targeting broad social goals, such as universal literacy for a developing country.

Helping people, not activities

If you put a rat with a two-degree fever into a very hot room, the rat activates its cooling mechanisms to keep its body temperature two degrees above normal. If you put it into a cooler room, it activates heat-conservation mechanisms to maintain that two-degree fever. Body temperature is carefully regulated even during fever; the thermostat is just set a bit higher. Why we get sick (page 27)

Fever, in other words, is not the problem, but the body's attempt to defend against infection, and medications that block fever 'interfere with the normal mechanisms that regulate the body's response to infection, with results that may be fatal.' This sort of adapative behaviour can apply to our social and environmental problems. Sometimes, not always, government intervention can accentuate and entrench the problem. Farm subsidies (this blog, passim) are a classic example, but thankfully we are becoming a little more cautious about rushing in to address the presenting problem whenever there's a crisis.

So the current Economist (subscription) recognises that markets can regulate more effectively than government when dealing with the subprime lending turmoil:

Shares of the most egregious mortgage lenders have plunged and dozens have gone bust. Loan-underwriting standards are tighter. The riskiest subprime securities have almost no takers. These spasms are how the market cleans up its mistakes and learns not to repeat them. That sounds cold-hearted, but pain is a necessary part of this correction. When politicians seek to deaden that pain and supplant those lessons with hasty fixes of their own, they almost always blunder.

If there's a general approach to such interventions, I would opt to aim for broad, objectively verifiable outcomes that are meaningful to natural persons, as distinct from corporations. Faced with, say, a plunge in agricultural product prices, the efficient approach would be to help farmers in their capacity as human beings rather than as farmers. Let the market decide on how people deploy their land, labour and capital. It does it more efficiently, because more adaptively, than government ever can. A government's duty is not to bail out inefficient industries, nor to maintain abstract economic growth figures, but to help its citizens.

Scandalous

From the Global Subsidies Initiative:

The United States Government Accountability Office (GOA) has found that the U.S. Department of Agriculture (USDA) is paying millions of dollars in farms subsidies to thousands of deceased individuals. ...

“The USDA ... does not have the management controls to verify that it is not making payments to deceased individuals.” ...

[D]uring the 1999-2005 period, some $1.1 billion in farms subsidies were paid in the names of 172, 801 deceased individuals, some of whom had been dead for seven years or more. The USDA relies on the farm subsidy recipients to notify them of any changes, including a death, which may change an estates’ eligibility to receive subsidies.

Cheese-based dogfood versus WMD

Ending the chapter on Weapons of Mass Destruction in his book, Another Bloody Century, Colin Gray writes:

War, allegedly, can hardly be an instrument of policy if it would entail mass slaughter, especially reciprocal mass slaughter. Alas, that all too reasonable point of view is not correct. Nuclear strategy is not an oxymoron.... [The] persisting lore of war applies no less to WMD than to all other kinds of weapons.

Professor Gray's pessimism is probably justified. The proliferation and use of WMDs seems to be another of those social problems that everybody wants to solve, but for which we are bereft of solutions. With WMD, any solution needs a long lead time. If more and more people begin to see their use as thinkable, then stopping their use become more and more difficult.

There's no clear solution. We need to mobilize the ingenuity of people who, if they weren't busy trying to maximize sales of cheddar-based dogfood, would just as happily devote their talents to reducing the risk of nuclear war. It comes down to incentives. There are excellent people working for a more peaceful world. But we need more of them, and we need them to have more resources at their disposal. Many of our social and environmental problems are currently solved as a byproduct of the private sector and its income- and wealth- generating activities. Others are the responsibility of the public sector which, for whatever reasons, functions by rewarding activities rather than outcomes. This can work, if we know in advance those activities that will ensure the desired outcome. But for seemingly intractable problems, like war, we don't, and that's why Conflict Reduction Bonds could be helpful. Conflict Reduction Bonds would reward people for bringing about peace, however they do so.

There are no easily specified solutions to nuclear proliferation, or the use of WMD, but that's no reason not to encourage people to find them. We need diverse, adaptive programmes - the sort that government or supra-governmental bodies like the United Nations, find hard to support, but that a Conflict Reduction Bond regime would stimulate.