Category Archives: public choice

A proposal to move that will go nowhere

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National Review reports,

Senator Josh Hawley (R., Mo.) will introduce legislation on Wednesday that would move the majority of the federal bureaucracy out of Washington D.C. to economically depressed areas. . .

Under the bill, the Department of Agriculture would be relocated to Hawley’s home state of Missouri while the Department of Education would move to Blackburn’s Tennessee, in order to disperse the economic benefits associated with relatively high-paying government jobs that currently accrue to just a few zip codes.

As I see it, the economic argument for this is sound. It seems like a great way to redistribute wealth from the DC area, which is now one of the wealthiest areas in the country, to poorer areas.

But there really is a Deep State, and there is simply no way that a mere elected official like Hawley is going to get anywhere butting up against it.

The party changes, the policy doesn’t

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Matt Grossman writes,

once they’re in power, the two parties tend to move policy only marginally in the direction they want and the effects of those policy changes are often smaller than anticipated. Republicans’ increased political power did not reverse either the size or scope of state government through the 1990s and 2000s.

Pointer from Tyler Cowen.

What would explain this?

1. Tyler suggests the median voter theorem, which is that parties compete for centrist voters. But I am not sure that the median voter in all of these states wants big government.

2. My ;ate father’s favorite political scientist, Murray Edelman, would have said that politicians satisfy their base on symbolic issues, but they satisfy interest groups on substantive issues. In fact, Grossman points out that

Republicans were especially effective at passing legislation across multiple states on social issues like education, abortion and guns.

This fits with a Public Choice story, in which the interest groups dominate regardless. Teachers’ unions want more spending on education, and they get it.

3. One can argue that this is consistent with an increase in affective polarization (people having an emotional stake in political outcomes) without strong differences on policy.

An economic idea to promote housing development

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Anup Malani writes,

New residents are willing to pay significantly more for additional housing than it costs to build it. They could compensate existing property owners for the reduction in prices caused by new construction and still gain from moving to the city. Such a compromise is possible until the point at which new construction reduces the value of existing homeowners’ property by an amount greater than the value it affords new residents. Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to that resident’s benefit to the city’s economy.

This sounds like a Coasian problem. Malani’s solution is to charge new residents an above-normal property tax rate and to return the proceeds to affected residents in the form of lower property taxes, while getting rid of the regulations that inhibit new development in order to protect incumbent residents. My thoughts:

1. In theory, this is sound economics. By replacing quantity rationing of new development with price rationing, you reduce deadweight loss.

2. In our area, developers are charged by the local jurisdiction for the costs they impose on infrastructure, so the basic mechanism is in place to include additional taxes. Then these taxes on developers would be passed on to the new residents.

3. In practice, it might prove difficult or impossible to eliminate the regulatory impediments to new development, so that high taxes on new residents (or on developers) would just be an additional deterrent to new construction.

4. In practice, it is likely to be very difficult to target the tax reductions to the most-affected residents. If you spread the tax reductions across many residents, each household only receives a minimal, meaningless amount. If you target only a few residents, then a lot of effort has to go into the process for determining who is most effected by the new development and how much they should receive.

John Quiggin’s neoclassical economics

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Tyler Cowen writes,

John Quiggin, Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly. The third lesson, however, is government failure, and you won’t find much about that here. Still, I found this to be a well-done book rather than a polemic.

I also received a review copy of the book. No, the term “Public Choice” is nowhere to be found in the index.

It is straight neoclassical economics, which, as you know, I find frustrating.

Suppose that in baseball, every time a batter makes an out we call it “batter failure.” By that definition, Mike Trout is guilty of “batter failure” more than half the time. A really naive manager would replace Mike Trout with a pinch-hitter. But if you know anything about baseball, you know that pinch-hitting for Mike Trout is pretty unwise.

Neoclassical economics takes the naive approach. It suggests pinch-hitting for markets without making any estimate of the pinch-hitter’s propensity to fail.

A non-virtue of nationalism

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Alberto Mingardi writes (in an email to followers of the Bruno Leoni Institute that he heads),

Nationalism, as political rhetoric, is quite incompatible with a concept which is key to classical liberal. That of the sovereignty of the consumer, as it has been called perhaps with an infelicitous term. It is difficult to ‘nationalize’ consumers, very easy to ‘nationalize’ producers.

In Specialization and Trade, I pointed out that we are much more concerned with conditions in the one market in which we produce than with conditions in any one of many markets in which we consume. If we are going to use our political voice in a market, it is going to be as a producer rather than as a consumer. Economic nationalism, by strengthening political voice rather than markets, is bound to favor producers rather than consumers. In short, Mingardi has a point.

Bipartisan cronyism on housing finance

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Norbert Michel writes,

The witnesses supporting the bipartisan approach represent the following groups: the Housing Policy Council, the National Low Income Housing Coalition, the National Association of Realtors, the Mortgage Bankers Association, the National Association of Home Builders, the Community Home Lender Association, the National Association of Federally-Insured Credit Unions, and the U.S. Mortgage Insurers.

He refers to a bipartisan housing finance “reform” bill. With that list of rent-seekers in support, you know that one should pray that the bill never passes.

A question on the President’s tariffs

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From a reader:

What’s the best case you can make for Trump’s tariffs?

This is one of the harder questions that I have been asked.

First of all, the phrase “Trump’s tariffs” hits me the wrong way. It should be the job of Congress to set tariffs. They should never have passed whatever legislation it is that gives the President the authority to set tariffs.

But trying to be charitable:

1. Maybe he is really using them as economic sanctions. Think of them as a way to reward friends (by giving exemptions) and punish enemies (by not doing so). The problem with trying to justify the tariffs this way is that the victims of the sanctions are people in both the U.S. and other countries, not the leaders of other countries. If you are going to give the President any points for this, you have to believe that economic sanctions have great symbolic meaning and that this symbolism will affect other governments’ behavior. Not easy to buy that.

2. Maybe tariffs are an example of the “least-harm principle,” which is that if somebody is committed to doing something bad, you hope that they pick the tactic that does the least harm.

I first formulated the principle my senior year at Swarthmore Colleg, which was when the Lettuce Boycott became the cause du jour on campus. Some of my fellow econ majors wanted to raise objections to the left’s insistence that the dining hall only serve union-picked lettuce. I suggested that we should not bother, since there were so many bigger issues around. “It’s the least significant issue they could have chosen. We should be happy that this is what they are focused on. Call it the least-harm principle of knee-jerk liberalism.”

So, maybe the tariffs are the least-harm way for Mr. Trump to satisfy the trade-nationalists in his coalition.

Brink Lindsey and Steve Teles push liberaltarianism

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the point of convergence is where anti-statism and egalitarianism meet

That is from their new book, The Captured Economy. They discuss four areas in which public policy exacerbates inequality: housing finance subsidies, intellectual property protection, occupational licensing, and urban land-use regulation. Thus, these are four areas in which a libertarian preference for less government and a progressive preference for less inequality can be served by the same policy changes–hence the “convergence.”

I found much to like in the book, particularly the discussion of the financial crisis, which puts more of the blame where I think it belongs and less on the places where I think it does not belong. In fact, I found the discussion so congenial that I did a search for “Kling” to see if I was in the footnotes somewhere, but I wasn’t.

I quibble when they write,

Of the four case studies we examined, only with respect to financial regulation do we see the usual left-right debate of bigger versus smaller government.

As an anecdote, early in the Trump Administration I attended a three-hour session on financial regulation at the Treasury Department, with about 50 economists in the room, predominantly on the right of course. At one point, the official running the session asked for a show of hands on the question of whether banks were required to hold too much capital, not enough capital, or the right amount. Overwhelmingly, our hands went up for “not enough capital.” So I think that Teles and Lindsey are wrong to imply that the reason that we are stuck with the financial policy we have is that the left and the right cannot agree.

Among economists, left and right agree that it would be good policy to require banks to be less levered. Just as we agree that it would be good policy to build more housing in high-income cities.

Lindsey and Teles are quite aware that on these issues where economists mostly agree, there are public-choice problems. That is what they mean by the title “captured economy.” In the latter part of the book, they talk about ways of getting around these public-choice problems. They reject both the libertarian solution (shrink government) and the progressive solution (regulate campaign finance).

I would describe their suggested alternative political approaches as scenarios rather than as solutions. I am not very optimistic that their scenarios can be realized.