Sunday, January 30, 2011

Cognitive biases and blindness

Boyes makes a strong and reasonable case for the difficulty of policy making by the state, central planners or the knowledgable elite. Hayek has clearly and I think convincingly presented an analysis in Knowledge and Economics and The Use of Knowledge in Society.

The former essay is directly on Boyes' posting yesterday and, while it would be nice if the elite read and thoughtfully considered this essay (I wonder if Paul Krugman is aware of this nice overview of the limits to science, knowledge and economics) it is worthwhile to consider several key points surfaced by Hayek.

He wrote:

There seems to be no possible doubt that these two concepts of 'data', on the one hand in the sense of the objective real facts, as the observing economist is supposed to know them, and on the other in the subjective sense, as things known to the persons whose behaviour we try to explain, are really fundamentally different and ought to be kept carefully apart. And, as we shall see, the question why the data in the subjective sense of the term should ever come to correspond to the objective data is one of the main problems we have to answer.

Elites fail repeatedly to acknowledge this key distinction. Models and the apparatus that are devised to approximate reality are just that imperfect approximations. The plans, directions and policies of the planner, elite spokesman or policy maker are doomed to be constructed on faculty foundations due to the key distinction between reality and theory.

Moreover, in Economics and Knowledge, Hayek goes on to remind us of a constraint or limit imposed by knowledge that no planner can overcome. In fact, the elite planning that is based upon a model of rationality has observably in the past lead to perverse and unintended consequences.

It is clear that if the concept is to have any empirical significance it cannot presuppose that everybody knows everything. I have already had to use the undefined term 'relevant knowledge', that is, the knowledge which is relevant to a particular person. But what is this relevant knowledge? It can hardly mean simply the knowledge which actually influenced his actions, because his decisions might have been different not only if, for instance, the knowledge he possessed had been correct instead of incorrect, but also if he had possessed knowledge about altogether different fields.

Clearly there is here a problem of the Division of Knowledge which is quite analogous to, and at least as important as, the problem of the division of labour. But while the latter has been one of the main subjects of investigation ever since the beginning of our science, the former has been as completely neglected, although it seems to me to be the really central problem of economics as a social science.*46 The problem which we pretend solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affaris in which prices correspond to costs, etc., and which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals.

The enigma for me is why this lesson needs constant repeating. The answer is that we are all human I suppose and that our failings and blindness overwhelm the insights of the past (and present).

Moreover, Boyes and I have blogged and discussed at length the hubris of the intellensia and elites in attempting to dictate plans and policy. Both Hayek and Sowell have analyzed this phenonmon at length and the tendancy of elites (on both the right and left) to argue for planning is evident in our society today. Perhaps it is a "marvel" at the success of these elites in convincing the populace that is worth examining.

I return again and again to Samuel Gregg's work in The Commerical Society - it is indeed through mutually beneficial and voluntary exchange that civility emerges and shapes society - both through discourse and through actual interactions. Emergent institutions develop that support and in fact encourage this civil society. Gregg's subtitle captures part of the problem - Foundations and Challenges in a Global Age. These challenges are the ones that have motivated my participation in this blog and the ongoing work to constructively and civilly engage with those who are diametrically opposed to the assumptions and foundations of a liberal order.

I am thinking about our book discussion of Gordon Woods Empire of Liberty and the blogging on that book here. Jefferson, I think, captures both the essential humanity of our society and the often contradictory behavior that agents engage in. I am thinking of the Louisiana Purchase here - an executive action that Jefferson's entire political philosophy opposed. I appreciate the anguish he may have endured but, in this case expediancy trumped believe and principle, as I suppose it always has and always will. Further if we think we live in an age that lacks civility - the vicious level of attack and smearing that Jefferson and his trained dogs Monroe and Madison vomited was on par with the Federalist invective. So, from an historical perspective perhaps Krugman, Limbaugh, Maddow, Hannity, Obermann (nice parachute) and the other quislings on the right and left in the media are mere posers.

Looking to the current debate - and there is plenty of incivility, anger and hatred to go around - I think at least part of the lack of perspective is due to an absence of participation by elites in commercial society. Most have never worked in the private sector - think academe, corporatist media outlets or NGOs. Paul Krugman, for example, earns his wages from Princeton and a media outlet with an agenda an perspective to be advanced.

These elites have, for the most part, been sheltered from the necessity of participation in a commerical society. Their lack of engagement in this important arena allows for the almost pathological distrust for voluntary exchange.

I believe I blogged here that I long and hope for the day that my grandchildren can go into Wal Mart (or the dominant retail outlet of their day) and decide to not buy heroin.

It is this mechanism of volunatary and individual decision making that lies at the heart of a liberal and responsible society. As Dan Klein argues - our responsibility as economists is to make civil and clear arguments to both the populace and the elites who oppose a liberal and responsible society.

For me this is a challenge that at times is almost unbearable. On the left I encounter pleasant colleagues who now hold as an article of faith that elite planning is not only desirable but necessary. This belief is seemingly unshakeable, and while they "tolerate" my consistent plea for liberty, individual responsibility and voluntary exchange I tend to be ignored at best and belittled at worst. To maintain and really value civility in this environment is so difficult.

That said, if we did live in a free and liberal society with mutual respect and civility we would be in utopia.

Saturday, January 29, 2011


What is it economists mean when they say we assume people are rational? Is it that they have complete and perfect information? If so, then any cognitive biases or any errors in judgment can be considered to be irrational. This is illustrated by the old joke about two economists walking down the sidewalk and one sees a $50 bill on the ground. He begins to reach down and pick it up and the other says, don’t waste your effort. If that were really a $50 bill on the ground, it would have been picked up already. This is the strict form of the rational expectations hypothesis. This is the form that Keynesians attacked as their free market straw man during the recent bubble and crash pointing out that if the world was one of REH, then there could be no bubbles. Since there was a bubble the free market does not make function properly.

While perhaps Robert Lucas or Gene Fama support the strict form of REH, I suspect they and most others agree more with the weaker form. If economists accept the weak form of REH, then they say that people do not have perfect and complete information, but will get that information over time. In this case, temporary errors, perhaps such as a bubble, can occur, but these will definitely be temporary. (Fama says bubbles can not develop because when the bubble is occurring no one knows whether it is a bubble or not. So, it is not really a bubble.) In this camp, it is sometimes argued that errors can persist as long as there isn’t a huge profit opportunity to reduce them. For instance, many behavioral economists argue that systematic biases such as Prospect Theory (bad outcomes are disliked more than good outcomes are enjoyed) or Revenge and Reciprocity may determine the equilibrium, or that the economy can reach a stable equilibrium which is second best or inefficient. But this won’t change unless the cost is large enough. Many economists argue that path dependence or network externalities can lead to long term inefficient equilibria. Others point out that the switch from Wordperfect to Word negates such a claim, as does the explanation of VHS over Beta, the existence of the QWERTY keyboard, etc.

The Austrian school is based on praxeology, the study of human action. It does not make assumptions of rationality except to say that individuals are self interested. Humans will act on information they have and information they collect. They are unlikely to have complete information. They have cognitive biases, they are affected by how others view them, they react to the behaviors of others, in short, they are human. The market collects all the information embedded in human action and reflects it in the price. Spontaneous order is the result. Is this second best or first best? This is the wrong question; it makes no sense. The result has to be what individuals perceive to be in their best interest or they wouldn’t behave as they do. Perhaps we could stand above it all and say, oh that is a wrong choice because they didn’t take so and so into account. But this also is wrong – it is the same as saying “I know better what is good for you than you do.” Moreover, the Austrians look on the economy as one of constant motion, not one reaching a static equilibrium. People are always collecting information and responding to stimuli and seeking ways to be more efficient and more profitable.

The reason I bring up this material is that this past week I got into a debate about whether inefficient stable equilibria could exist with a behavioral economist and a Keynesian. The debate went nowhere. It reminded me of Pratt’s frequent posts about civil discourse. It wasn’t. In thinking about the debate, I don’t think we were even talking on the same plane. Their definition of rational was one wherein people can and do make irrational choices all the time. Only those of us who “really know” can say whether their choice is rational or not. It is frustrating because the pseudo intellectual basis of arguments by economists like Paul Krugman and Robert Frank sound reasonable and impressive to numbers of people. Yet, when broken down, their entire argument is “I know better than you do what is good for you.”

Friday, January 28, 2011

The Debt Limit and Stealth Taxes

“The weak economy and fresh tax cuts approved last month will help drive the federal budget deficit to nearly $1.5 trillion this year, the biggest budget gap in history and one of the largest as a share of the economy since World War II, congressional budget analysts said Wednesday.” See here.

This according to a Washington Post article. According to the media, it is not government spending causing the problem, it is the “fresh tax cuts.”

The tax cuts were not cuts, but rather extensions of existing tax rates. To argue that they are the cause of the deficits when spending has increased at historically high rates is ludicrous. But this is the left-wing or media viewpoint.

The big upcoming test of whether the current Congress is willing to bite the bullet and stop spending is raising the debt ceiling. At current rates of spending, the federal government will bump up against its debt limit as early as March. Treasury Secretary Timothy Geithner warns that it will be catastrophic if Congress doesn't increase Uncle Sam's credit limit. Is he correct? Since 1917, Congress has allowed the Treasury the discretion to issue new debt (i.e., borrow money from other agencies or individuals). Congress didn't want to completely give up its Constitutional requirement to control the purse strings, and so it set a cap on how much total debt the Treasury could owe at any given time. Currently the statutory debt ceiling is $14.294 trillion. As of January, the actual debt stood at slightly more than $14 trillion.

Geithner and other spokespeople for the executive branch argue that the world will end if Congress doesn't give them permission to run up more red ink. In particular, they claim that without the ability to borrow from new lenders, the Treasury won't be able to meet its existing obligations, including interest and principal payments on already-existing debt. The government will shut down. This is not true. If the debt ceiling is not increased, the Treasury can prioritize interest and debt payment to avoid a default and essentially put the government on a stringent pay-as-you-go basis.

Repudiating government debt eliminates future tax liabilities. To the extent that people correctly anticipate those future taxes, a reduction in them should increase the value of private assets (including human capital) over the long run by the same amount that the value of government securities falls. Thus, people will gain or lose depending how closely their wealth is associated with the State. If on the other hand, people underestimate their future tax liabilities, they suffer from a fiscal or "bond illusion" in which Treasury securities make them feel wealthier than they actually are. Debt repudiation will bring their expectations into closer alignment with reality, which should increase saving.

Raising the debt ceiling will not staunch default – just change the form of default. Default will occur either explicitly by reneging on payments, or implicitly by massive inflation — at some point anyway in the next decade or two. The increased debt will be monetized and the increased money supply will lead to inflation at some stage. This is the problem of fiat currency and with the Federal Reserve. They are stealth tax collectors. The danger of fiat currency is invisible to the public, professional investors, and political commentators. The collapse of the economy in 2008 permitted the Congress and Bush and then Obama Administrations to authorize an unprecedented quantity of government spending, which has been and will be funded in large part by trillions of freshly minted fiat currency. There can be no question that this is a seizure of wealth roughly equivalent to one year’s collection of income tax, yet there is more outcry over making a trivial increase in the topmost bracket from 35 percent to 39.6 percent.

So rather than allowing the stealth tax increases, I support not raising the debt limit and forcing Congress and the Administration to choose how to cut spending or raise taxes.

Five Books

I love this site - frequently postings of 5 interesting books on a wide variety of topics - I strongly recommend RSS or following.

A representative example is this post by Robert Schiller

Thursday, January 27, 2011

The Bigotry of the Literati - Ludwig von Mises - Mises Daily

Great read that is a superior analysis of what Sowell, Hayek and others have observed about the hubris of elites and, more disquieting, the success that elites have had in "shaping" the message via dominance in many media channels, particularly pop culture. Think here of Hollywood as exemplified by the Daily Show (I do love Jon Daily, but I fear many do not fully internalize that he is a comedian and not a news source).

The Bigotry of the Literati - Ludwig von Mises - Mises Daily

Wednesday, January 26, 2011

Dollar as reserve currency

I received an e mail from a friend asking about the status of the dollar as the world's reserve currency.

My reply is below:

Great to hear from you and you flatter me - we all have opinions and I am not certain mine is worth any more than anyone else's - particularly predications of the future. I suppose the recent Businessweek article might lead to reasonable questions about the future of both the value of the dollar and the status of the dollar internationally.

That said, in the immediate and intermediate term there is little chance that the US dollar will lose its status as the world reserve currency.

1. What is the alternative? The problems in Europe, particularly in the areas you outline in debt and inflation potential are more severe than in the US.

2. Political and economic stability. While the US faces grave threats, the stability of our institutions is far greater than any other country in the word. Douglass North makes a convincing argument for this in Violence and the Social Orders.

In 2009 the FT had a nice piece that observed

A leading Chinese financial official on Monday rejected suggestions the US dollar could be replaced quickly as the global reserve currency, as US Treasury secretary Tim Geithner arrived in China on his first official visit.

“In the short term I don’t think we can find another currency to replace the US dollar,” said Guo Shuqing, chairman of China Construction Bank and former head of the country’s foreign exchange administrator. “The US dollar is the main currency because their economy is number one in terms of competitiveness, in terms of innovation.” Speaking in an interview with the Financial Times, Mr Guo also raised doubts about a proposal from China’s central bank governor, Zhou Xiaochuan, to replace the dollar with a “super-sovereign reserve currency” based on special drawing rights issued by the International Monetary Fund.

3. Ironically, the large levels of US soverign and private debt held by foreign holders - both states and private companies and individuals provides a strong incentive to retain the dollar. Any movement away from reserve status would so devalue the dollar as to reduce the value of these US denominated assets (and in the short run would be a huge windfall for the US government).

Longer term - the dollar will be replaced just like the dollar replaced the pound, the pound replaced gold, and gold evolved over time. The question is when is the long term and no one knows. The pound was the reserve currency for over 100 years, gold for 4 centuries so perhaps the 65 year run of the dollar is nearing a conclusion. But see comment 1 above - there is no replacement and holds of wealth and liquidity are loath to move to a new currency unless there are strong compeling reasons - negative for the dollar and positive for the new currency.

Last year UYS Today (they actually do a nice job of short summary) did a nice piece

For a more detailed overview that I see as objective and with which I tend to agree

I'll turn it around, if you are the leader of Saudi Arabia or the dictator of China - which currency would you hold if not the dollar?

Now, the debt issue to which you refer, this is the major threat to continued US economic growth and the difficulty that our elected officials have had over the past 20 years in formulating a response is of much greater concern to me in the short and intermediate term. I know you are familiar with Pete Peterson and the Peterson Institute and his research agenda and advocacy should be heard and considered by Americans and our elected officials. The failure to do so echoes the late stages of the Roman and Ottoman Empires and inertia will make life very, very challenging for our children.

Tuesday, January 25, 2011

The Nordic Welfare State

Boyes writes of the differences in approach toward economic welfare and policy in Sweden v the United States.

Last week on the 17th I blogged on what appears to be, at least at the level of rhetoric, an awareness on the part of some leaders of the escalating cost of the welfare state here in the United States. President Obama's State of the Union last night repeated some of this rhetoric and there were a number of proposals that, while made under previous administrations of both parties (simplifying the tax code, ending earmarks, reducing military and discretionary spending) that make sense. It remains to be seen whether this change in rhetoric translates into any meaningful change in fiscal behavior. I have my doubts and, as Bob Higgs recently reiterated, this administration, like those before it of both parties, continues to foster regime uncertainty. This regime uncertainty has accelerated in the US and, while I am not the most informed observer of Sweden, it would seem that regime uncertainty in that country has declined at the time that US entrepreneurs and actors face in ever changing rhetoric and unknown future government policy and action.

There has been a clear change in fiscal behavior in Sweden.

Last semester, through a bit of luck, I had a young Swedish hedge fund manager speak to my introductory classes. He graduated with undergraduate and graduate degrees in economics from the University of Stockholm and outlined for my class the formal and informal institutions in Sweden, which he contrasted with those in the United States.

The Nordic countries, and Sweden in particular, have reacted to economic events over the past decade an a much different manner than the United States.

In contrast to the exploding deficits and debt in the US, Sweden has instituted a number of measures to move toward a projected budget surplus in 2011.

"The Swedish economy appears to be stronger than in our previous forecast (in June), in particular in 2010. The recovery in Sweden has been stronger than in the euro area and the United States," said the National Debt Office, which is the government's financial manager.

Sweden is now expected to post a budget deficit of just five billion kronor ($726 million) this year, down from the previous forecast of a 14-billion-kronor deficit, the debt office said in a statement.

"The budget is thus almost balanced. This strong development continues in 2011 and 2012 when the forecast indicates a central government budget surplus of 18 billion kronor and 78 billion kronor respectively," it said.

Click here for the full analysis.

The divergence in approach between the Nordic countries and much of western Europe and the United States is reflected in current and projected economic macro indicators of growth, employment and associated measures of economic welfare.

Click here to view an IMF comparison of reported data between the US and Sweden. For example:


-2005 -2006 -2007 -2008 -2009 -2010 -2011 -2012 Country

7.633 7.042 6.117 6.167 8.300 8.200 8.200 7.700 Sweden

5.083 4.608 4.608 5.817 9.275 9.730 9.589 8.846 USA

The United States leadership has been paralyzed by the approaching fiscal crisis, instead devoting attention to intervention in the market, increased regulation and a general hostility to the business community. This regime uncertainty certainly began in the adminstrations of the 1990s in both parties and accelerated during the Warfare and Welfare expansion of George Bush Jr - think the "conflicts" in Afganistan (our longest lived "war") and Iraq as well as the massive increase in government intervention in the health care market through the Medicare drug fiasco.

This regime uncertainty, unsurprisingly, has continued under the current administration.

On the other hand, it appears that there is considerably less regime uncertainty in Sweden - both the people and leadership seem to reflect a commonality and contentment with government action which as indicated by the macro statistics in the link above (which are reflected in the unemployment figures I pulled out of the report).

More importantly, the fiscal positions of the two countries are moving in opposite directions:

Central government budget close to balance in 2010

The Swedish central government payments resulted in a deficit of less than SEK 1 billion in 2010[1]. The budget is therefore practically in balance. It is a big improvement compared with 2009. This is due to the strong recovery in the Swedish economy, which led to higher tax income, while expenditure growth was moderate.

Note that Sweden's per cent of debt to GDP is in the dark grey = 11-30% while the US is in the light pink (appropriate) 51-70% and growing.

Click on the image below to view the entire world.


So, while Sweden does in fact have a much larger state presence on the fiscal side, why has that country been relatively more successful in managing fiscal accounts? This seems to call into question the notion that economies that are more mixed and less statist respond to economic conditions in a more efficient manner and generate stronger economic performance and resulting welfare measures.

The Swedish speaker last semester suggested a number of key differences between our two countries - Sweden is much smaller and more homoegeous. Further there are a set of informal institutions - beliefs, norms and ethics that privilege egalitarianism and equality.

Taking the first, the smaller geographic area and population of Sweden may allow for a more efficient government - that is there are diseconomies to scale to provision of public goods. I am speculating here based upon my reading of Alesina's The Size of Nations.

A smaller society and state can, perhaps, react more quickly that then large and heterogeous United States. Perhaps this issue of size allows for more rent seeking in the United States which seems tohinder changes in fiscal policies - Sweden, on the other hand, has been much more reactive to the threat of budget deficits and high levels of debt.

The informal institutional framework of the two countries is much different - the norms and beliefs in Sweden seem to be in congruence with an active welfare state that provides a broad safety net. Such a consensus of opinion does not exist in the US, on virtually anything.

That said:

The World Bank ranks Sweden 18th in “ease of doing business” and 43rd in “ease of starting a business” in 2010. Starting a business in Sweden takes 15 days and costs 0.57% of GNI per capita.

The World Bank ranks US 5thin “ease of doing business” and 9th in “ease of starting a business” in 2010. Starting a business in the US takes 6 days and costs 1.4% of GNI per capita.

So, while the US had a clear advantage in ease of starting a business, in an unexpected stat, the US is almost 3 times as expensive in the cost of doing business.

Finally, perhaps due to size and philosophy, Sweden, for whatever this means, has a higher GNI per capital GNI Per Capita (US$) 48,930.00 to GNI Per Capita (US$) 47,240.00 in the US.

Monday, January 24, 2011

Borders and creative destruction

Creative destruction - this article is a nice illustration of Joseph Schumpeter's insight.

Douglass North writes about the importance of adaptive efficiency to the process of economic change. This flexibility or lack thereof is an essential ingredient in the path of economic growth, improving economic welfare and progress. Trial and error and the associated willingness to embrace risk and uncertainty is on of the foundations of an institutional framework that allows for liberty and responsibility.

So, unlike the US auto and financial services industry, we can see in the retail book industry a nice view of the forces of creative desctruction.

The Washington Post observes:

Borders, they know, is struggling to survive. It recently suspended payments to book publishers. Dozens of its stores across the country, including several in the Washington area, have closed. For many in the industry - and for this group of Borders regulars - the question is not whether the chain will go under, but when.

"How many record stores are there these days?" Minor said after the meeting, resigned to the eventual end.

A Borders spokeswoman declined to comment or make

North reminds us that the process of change is ubiquitous and that efforts to slow down, derail, or prevent change lead to very perverse and often unintended outcomes. We are in a positive to view this in the US auto and financial services industries.

However, retail books allows us to see the alternative - creative destruction at play with relative little effort by outside forces - the government, labor unions, NGOs to slow down, derail, or prevent the changes that are sweeping though individual behavior in dealing with information and thought.

Michael Rosenwlad writes:

Borders, which helped a generation of readers learn the pleasure of diving into a book for hours at a stretch, now competes for the attention of readers who dip into a few pages on an iPad, open Facebook, read some more, then tweet random thoughts. Printed books don't need a power outlet or a data plan, yet for some people, their utility seems to be fading.

Here is the essense of emergent and evolutionary orders, at times the speed of evolution accelerates at a dizzying rate. And we see this in retail books, and perhaps a wide swath of retailing in general.

The key is the end of the above quote - utility changes. As time moves on individuals see fulfillment, satisfaction, happiness and information in a variety of new ways. Our lives are infinitely improved due to digitalization and this poses huge benefits to consumers and huge threats to producers.

I see the future of technology as a force that drives middlemen (Borders between the author and the reader) to explore new, creative, alternative, innovative ways to improve individual utility and to make lives better.

Thankfully the government, labor unions or NGOs (among some of the myriad rent seeking, centralized organizations) have overlooked this powerfully positive process.

Rosenwald writes about his process

It started with Amazon. Launched in 1995 by Jeffrey Bezos, the company aimed to be the biggest bookstore on the planet, and it shipped books anywhere at prices so cheap that it lost money on many sales. The jokes came fast: Amazon dot bomb, some people called it. Amazon dot gone, others said.

But it turned out that Amazon knew what it was doing, building an infrastructure that eventually displaced Borders - then known as the more bookish of the chains - as the preferred way to get the right book into the hands of the right customer. Amazon built software that suggested other books to customers, based on their orders. As Amazon got better at such tactics, "Borders lost that patina they had, that special place of a bookstore, and they became just another discount retailer," said Albert Greco, senior researcher at the Institute for Publishing Research.

So, while entreprenuars like Steve Jobs and Jeff Bezos are forward thinking trying to identify the future utility patterns of consumers (a risky, uncertain process that is at the heart of a trial and error society) Borders was slow to react. And, as Bill Gates titled one of his books - Business at the Speed of Light - the rate of change in many if not most areas of live does not allow much forgiveness for organizations that are slow on the uptake. This is also true for workers - in the event an individual fails to anticipate future needs their employment is endangered. For example, book clerks in retail stores might be advised to consider updating their skill sets or examining their talents for alternative types of jobs.

The Swedish Model

Whenever I speak on the relationship between government growth and economic growth, someone throws Sweden up as a counter example. They point out that Sweden is a case where people have chosen a welfare state and yet have experienced rising standards of living, often greater than the U.S. In reality, the Swedish model has failed.

Between 1870 and 1970 Sweden progressed from an underdeveloped country to a country with one of the highest per capita incomes in the world. During that period, only Japan had a higher per capita growth rate.

Sweden also built the most comprehensive cradle-to-grave welfare system in the West. The Swedish system features a steeply progressive income tax and measures aimed at equalization of incomes and opportunity. A broad political consensus supported creation of the system.

Sweden seemed to present an intellectual challenge to those who argued that high tax rates and extensive state intervention would hamper economic growth. Sweden no longer presents such a challenge. Few would now consider the Swedish system worthy of emulation.

Since the late 1960s Sweden's industrial competitiveness has deteriorated sharply. For two decades Sweden has had one of the lowest economic growth rates of countries that are members of the Organization for Economic Cooperation and Development.

Why has Swedish GDP growth fallen? Because 75 percent of its economy—mostly services—is protected. This does not include trucks, software, and banking, which are world class.

In the early 1970s, Sweden enjoyed one of the highest standards of living in Europe. Since then, however, its economic performance has undergone a relative decline.
By 1990, Sweden had been overtaken by Germany, France, and Japan in GDP per capita; three years later, it had also fallen behind Italy and the United Kingdom

Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market.

As of 2005, hours worked per person 20-64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story.

Sweden, like much of Europe is now moving away from the welfare state, attempting to lower taxes, especially on business, and offering fewer cradle to grave services.

There is no doubt that the greater the governemnt the smaller is the growth of the economy.

Sunday, January 23, 2011

Creative Destruction - 2 views

Tucson Aftermath

Having noted that calls for gun control were sure to come out of the Tucson shooting, I looked at a little of the literature on the issue of whether guns lead to violent crime. Here are a few facts from the literature.

England, with the most restrictive gun control in industrial countries is often reputed to be very safe. Its restrictive ban on guns began after March 1996, after a deranged man walked into a school in Dunblane, Scotland and killed sixteen children and one teacher.

British politicians sought to reduce violent crime by enacting an injudicious ban on all handguns. Handgun owners were given a February 1998 deadline to turn in their firearms--and they did. What was the result?

"the incidence of gun crime in England and Wales nearly doubled from 13,874 in 1998 to 24,070 in 2003. And the incidence of firearms murder has risen 65 per cent.During the years 1890-92, only one handgun homicide a year in a population of 30 million. Violent crime has been climbing ever since 1954.
In the two years following the 1997 handgun ban, the use of handguns in crime rose by 40 percent.
From April to November 2001, the number of people robbed at gunpoint in London rose 53 percent.
From 1991 to 1995, crimes against the person in England's inner cities increased 91 percent.
From 1997 to 2001, the rate of violent crime more than doubled.
Chances of being mugged in London are now six times greater than in New York.
England's rates of assault, robbery, and burglary are far higher than America's, and 53 percent of English burglaries occur while occupants are at home, compared with 13 percent in the U.S.
United Nations found that England and Wales led the Western world's crime league, with nearly 55 crimes per 100 people.

Richard Edwards, Telegraph (London), July 2, 2009
Analysis of figures from the European Commission showed a 77 per cent increase in murders, robberies, assaults and sexual offences in the UK since Labour came to power.
The total number of violent offences recorded compared to population is higher than any other country in Europe, as well as America, Canada, Australia and South Africa.
there are over 2,000 crimes recorded per 100,000 population in the UK, making it the most violent place in Europe.
Austria is second, with a rate of 1,677 per 100,000 people, followed by Sweden, Belgium, Finland and Holland.
By comparison, America has an estimated rate of 466 violent crimes per 100,000 population.
France recorded 324,765 violent crimes in 2007—a 67 per cent increase in the past decade—at a rate of 504 per 100,000 population.

Switzerland has a population of six million, but there are estimated to be at least two million publicly-owned firearms, including about 600,000 automatic rifles and 500,000 pistols. This is in a very large part due to Switzerland's unique system of national defense, developed over the centuries. Instead of a standing, full-time army, the country requires every man to undergo some form of military training for a few days or weeks a year throughout most of their lives.In the UK, there are 2,034 offences per 100,000 people, way ahead of second-placed Austria with a rate of 1,677.
The U.S. has a violence rate of 466 crimes per 100,000 residents, Canada 935, Australia 92 and South Africa 1,609.

Friday, January 21, 2011

Mankiw hits it on the head

This excellent blog post hits the nail on the head. In Krugman's disturbing editorial, War on Logic, the nobel winner commits the type of "reasoning" that Mankiw lampoons. Be sure you click over to read.

Monday, January 17, 2011

Pressure on the Welfare State

Today's New York Times presented two interesting pieces that are significant in our understanding of the future of the Welfare State. In the first, Monica Davey writes:

The dismal fiscal situation in many states is forcing governors, despite their party affiliation, toward a consensus on what medicine is needed going forward.

The prescription? Slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if that means tackling the thorny issues of public employees and their pensions.

She goes on to analyze the inaugral addresses of a number of incoming governors with an eye to understanding the rhetoric of the new state leadership. While this rhetoric many well be illusionary, it seems that there is an emerging recognition of the high cost of the welfare state. As the burden has increasingly shifted to the states and municipalities it is informative to see what elected leaders are considering.

For example:

In his speech, Rick Scott, the new Republican governor of Florida, called for eliminating a business tax and reducing property taxes. He dubbed taxation, regulation and litigation “the axis of unemployment.” And he issued a warning: “No job — public or private — should be immune from accountability.”

The recognition of the impact of taxation and regulation on employment and economic growth is extremely important. The next and more important step is one of education, I would guess that the vast majority of participants in society are unaware of this fundamental relationship and the elite are certainly hostile to any effort to apply logical reasoning and analysis to the welfare state in an effort to compare the costs and benefits.

This elite hostility is reflected in the second NY Times piece - Dr. Krugman's editorial.

The elite hostility and hubris is manifest in the preultimate paragraph of his editorial which is revealing titled - War on Logic. Krugman evidently views any disagreement with his presciption for society as war and illogical. Given what we know about the pretense of knowledge I find Krugman's "confidence" alternatively amusing and disturbing. Amusing because his shrill "attack" rhetoric which is so similar to that of others on both the right and left as to be a caricature of the ivory towered professor. Krugman opines:

As I tried to explain in my last column, the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate isn’t a proper concern of government, and alleviating that suffering at taxpayer expense is immoral, never mind how little it costs.

Setting aside Krugman's obvious frustration that his correct view is not prevailing and his failed attempt to associate free and responsible liberalism with the GOP (if Krugman is the Howard Stern of elites, then conservative GOPers are the Jon Stewarts of elite) make for pity - this man won the Nobel?

But in fact, the point he uses to attack freedom and liberty is at the heart of our contemporary dilemna, it is in fact immoral to coerce another in order for some ethermal goal of social justice.

As I ponder the absurdity of Krugman I reflected on a great book - The Forgotten Man. Amity Shales wrote:

The 19th-century academic William Graham Sumner had a famous formulation for the hidden costs of feel-good economic legislation.

Persons A and B, he wrote, usually get together to decide what C will be compelled to do to alleviate problem X. “What I want to do,” Sumner wrote, “is to look up C. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who is never thought of. He works, he votes, generally he prays — but he always pays.”

This is the height of immorality - and yet I fear that the elites have carried the high ground and from their commanding heights continue to convince the populace of the falsehood that somehow coercive activities if approved by the elite are not immoral.

Caldwell on Hayek | EconTalk | Library of Economics and Liberty

I strongly recommend this podcast. Bruce Caldwell is a wonderful scholar and his book Hayek's Challenge was very influencial in shaping my view of Hayek, Keynes and the mid twentieth century in which an epic intellectual struggle was waged in the developing world.

This intellectual struggle continues today and as we make every effort to appreciate emergent and evolutionary orders and the role these play in our liberty and personal responsibility I can think of no better resource than Caldwell, his excellent book on Hayek and this podcast.

Caldwell on Hayek | EconTalk | Library of Economics and Liberty

Wikipedia as an emergent order . . .

Peter Klein, over at Organizations and Markets writes on the 10th anniverary of Wikipedia:

The relationship between the Wikipedia model and Hayek’s concept of dispersed, tacit knowledge, exploited through decentralized decision-making, is perhaps to obvious to note

While the authors of the blog are not yet found on Wikipedia (there is a Greg Pratt listed an actor) it is hard to know what the future holds.

That is the point of emergent and evolutionary orders, I read that Wikipedia is a natural experiment in political science as the system of order and rules emerges in a very public (although not always transparent) forum.

A number of observers decry or denigrate the emergence of wikipedia. This is not surprising in an environment in which elites prize control, particularly control by elites.

So as information collection and presentation becomes increasingly decentralized by the internet, wikipedia will continue to emerge as an increasingly important organization.

So, that said, I clicked over to Friedrich Hayek on wikipedia - While I am far from an expert on Hayek I have more than a passing acquaintance with him and his work. Russ Roberts recently interviewed Bruce Caldwell on Hayek -
Both wikipedia and Caldwell seem to be on the same page.

This is not to say that wikipedia does not contain errors, false or misleading information or outright fraud. In this way, the organization is reflective of the broader society.

Monday, January 10, 2011

Shutting Down the Government

Much discussion has taken place this week about the debt ceiling. Many of the tea partiers are arguing for not raising the ceiling which essentially would shut down government unless spending cuts were instituted. The Obama Administration is screeching that shutting the government down would be a disaster. And on Thursday, Treasury Secretary Timothy Geithner said, "Even a very short-term or limited default would have catastrophic economic consequences that would last for decades… For these reasons, I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent." But this suggests that Congress has never failed to pass a debt ceiling. Congress failed to pass a debt ceiling increase in 1973, 1979, 1983, 1985, 1987, 1995 and 2007. And there was no crisis in the economy nor any default. Instead, the government was forced to temporarily stop borrowing and cut spending to align expenditures with revenues.
Even the two shutdowns when Newt Gingrich was battling Bill Clinton, five days in late November 1995 and then a few weeks in December 1995 and January 1996 -- did not lead to a default. They do not seem to have damaged the economy either as there was no increase in unemployment during either December 1995 or January 1996.
There is no doubt that a shutdown can affect some people. In 1995-1996, some Federal employees had to miss a paycheck or two. This can be a hardship for individuals who did not have any money saved up. But with a debt of $14 trillion and deficits expected to be over $1 trillion and grow to $2 trillion a year in just a few years, something dramatic has to be done.

Sunday, January 9, 2011

Tucson Shooting

Pratt is absolutely correct that our thoughts are with the victims and their families. He is also correct that what makes this type of event so devastating is its rarity. The U.S. is blessed that its culture is not one of constant murders when political differences arise. Each time some similar disaster arises -- shootings by crazed individuals at university campuses government buildings, or gatherings of government officials -- I wonder what would have happened had more people carried weapons. Evidence provided by John Lott here indicates that when there are guns there is less violence. Could someone have taken out the shooter (s) before he killed six and wounded 13?

Saturday, January 8, 2011

Tucson Shooting

Our thoughts and prayers go out to those victims and families of today's shootings in Tucson.

Today's tragedy in Tucson underscores by its rarity a fundamental strength of institutions in the US that support stability and work toward containing violence.

Contemporary to the shooting in Arizona, Africa presents the alternative case of violence centered societies with institutions that have evolved to incentivize violence - both random and predatory.

Darfur, the Ivory Coast and Nigeria present alternative frameworks for use and containment of violence in the political arena. The current stalemate in Ivory Coast is the most recent example and this NPR broadcast makes an all to common and regretable observation:

In Ivory Coast, the man who is widely believed to have won last month's presidential election is under UN guard at a city hotel. The man who is widely believed to have lost the election refuses to step down and retains control of the army. It's a political tinderbox that has sparked violence and reports of death squads.

The gunman that struck Tucson today, in contrast to the Ivory Coast experience of death squads, represents a violence that is individual, unorganized and notable as I argue for its relative unique nature in our society. In contrast to the endemic and organized violence in the natural state orders, our open access order limits the opportunity for this opportunitic and predatory violence.

Today underscores perhaps the most important and positive institution that the state brings to society - security. This security is manifest in both formal and informal institutions and that state by maintaining a monopoly on legitimate use of violence and force enculcates a sense of limitation for the acceptable application of violence.

Imagine what would happen in natural state orders upon the attack on a popular politician and death of a respected judge. We can think of India, Venezuela, Indonesia and the fears for Sudan next week among all to many cases of rioting, competing death squads and overwhelming violence.

Contrast that with the reaction in Tucson today.

Thursday, January 6, 2011

Stability through diversity

This short piece Mbeki by underscores the challenge for what Collier calls the bottom billion and North labels fragile natural states. His analysis of the challenge in Sudan and Africa resonates today as he observes:

As long ago as 1975, Gafaar al-Nimeiry, Sudan’s military head of state, stated with great prescience what Sudan and Africa needed to do to achieve peace and stability. “Unity based on diversity has become the essence and the raison d’être of the political and national entity of many an emerging African country today. We take pride in that the Sudan of the Revolution has become the exemplary essence of this new hope. The Sudan is the biggest country in Africa. It lies in its heart and at its crossroads. Its extensive territory borders (nine) African countries. Common frontiers mean common ethnic origins, common cultures, and shared ways of life and environmental conditions. Trouble in the Sudan would, by necessity, spill over its frontiers, and vice versa. A turbulent and unstable Sudan would not therefore be a catalyst of peace and stability in Africa, and vice versa.”

As a leading developed, open access order the United States has institutionalized a system that at formal and informal levels supports diversity and, more importantly the flow of power from one group to another. It is this latter, open access element of our culture and power process that lends stability to our country. In the face of mounting fiscal, monetary and cultural challenges optimism can be found in this element of our social order, an order that has emerged and evolved over an extended period of time.

The path dependency of social orders, however, provides less optimism for the world as a whole. While the developed or open access societies in the world have evolved along a path that leads to stability the natural order societies have evolved in a manner that seems to have institutionalized a number of forces that move away from stability.

This is why I am looking at the recent presidential elections in Brazil with some interest. My daughter has followed the recent trajectory of Dilma Rousseff's career and her inauguration. In contrast to Sudan, Brazil may well demonstrate cause for optimism.

Wednesday, January 5, 2011

Freedom: A Novel and the Inherent Importance of failure

The current issue of Reason has a nice review of Franzen's newest novel. I am in the midst of this cultural critique and a very, very important element of freedom is repeated throughout the book. The Reason book critique captues this element:

The system is fundamentally based on “the restless growth of capital.” Freedom is the story of a family carried along in a similar current of restless growth. Yet Franzen invests their struggles with enough richness and humanity that their ceaseless effort to break free of their pasts and their communities, to overcome the stereotypes that the world has built for them, is somehow noble anyway. The meaning his characters yearn for is ultimately found only in their restless pursuits. Freedom in America is the freedom to rebel, to fail, and to make mistakes—which, at the very least, are your own.

It is this combination of individualism and freedom to fail that is the operative mechanism of adaptive efficiency. The novel goes to great length to describe characters that express their individuality in both conventional and unconventional ways. I am frequently reminded of the characters in the sitcom Seinfield as I read. Like George, Kramer and Elaine, Walter, Patty and their kids are deeply flawed, often self centered and prone to excess - in short they are human and real.

The actions of the characters in Freedom lead to unexpected consequences (for both the characters and the reader) so the plot is real. These unexpected results are often failure - failures of anticipation, ethics, morality and intent. In this Hayekian world one can begin to see the emergence of order and, more importantly, growth and progress.

Franzen does a wonderful job of capturing the unsettled state of mind that characterizes the market order.

I understand that President Obama made a great deal of his reading of this book. I hope that he takes away from that reading the centrality of the freedom to fail.

Tuesday, January 4, 2011

The impact on civil society of government generated instability

This article describes an example of the negative impact on civil society from moral hazard. Moral hazard is a pernacious, perverse outcome of state intervention in a free society. In this case, the bursting of the government induced housing bubble that is an inevitable result of moral hazard has significantly weakened the bonds that hold a civil society together.

In a particularly stark example of housing tensions found in many places to varying degrees, the International Village homeowners association responded to the banks' slowdown in foreclosures with an aggressive step: It began its own foreclosure process. Florida law permits that under certain circumstances. A nonprofit homeowners association can take temporary title of residential units from people who aren't paying monthly fees they agreed to pay.

Monday, January 3, 2011

Three key points about trade

Three great points made by Patick Thomas!

1. Exports are great for boosting growth… but so are imports. With an understandable emphasis on exporting our way back to economic growth, it’s easy to forget that imports boost growth too. Trade improves economic efficiency, allowing us to buy cheaper stuff and consume more (or if you’re a company, buy cheaper inputs, lower production costs and export more competitively yourself). And global economic growth is not a zero-sum game. As we import more from developing markets, they get richer and can afford more of the stuff we make.

2. Trade deficits can be misleading. Trade analysts spend a lot of time worrying about bilateral trade deficits, though some of these worries may be misplaced. According to a recent WSJ article, for example, the iPhone adds $1.9 billion to the US’s deficit with China because of the way trade stats are calculated. But only about $6.50 worth of value in each iPhone is added there! If the figures were adjusted to show value-added, the United States’ trade deficit with China would be cut in half.

3. Trade is not a job-killer. Freer trade does eliminate jobs (though nowhere near as many as advances in technology), but it creates a lot of jobs too. Matthew Slaughter of the Dartmouth Business School has found that when companies outsource jobs overseas, they tend to increase their hiring and investment in the domestic market as well. A US Chamber study found that US free trade agreements support some 18 million jobs.

Government Stealth

The New Year begins with a reach by government bureaucracy in unprecedented manners. The EPA has claimed the power to regulate all green house gases, especially carbon dioxide. It apparently has pledged to follow Obama the candidate's promise to bankrupt the coal industry. The EPA has also claimed power to determine Texas's premitting process. This is not just the Federal Government encroaching on states rights again, this is a bureaucracy encroaching on states rights . This is highly unconstitutional. But hold on, there is more. The FCC has claimed the right to regulate the internect -- the so called net neutrality issue; homeland security via the TSA has claimed the right to undertake search and seizures as it sees fit; Medicare has instituted an end of life counseling -- so-called death panels; and on and on. The next two years will be the greatest growth of bureacratic power grabbing in the history of the U.S. The Republican Congress must push for Congressional oversight; it must quit making itself irrelevant. The States must join Texas and demand a move back to more states' rights.

As Pratt notes, government stealth is a real danger. Also as Pratt notes, the TSA is incentivizing its employees to become more invasive.

Sunday, January 2, 2011

TSA an army of 67,000 employees

This is a classic, textbook example of incentives. While the government has a clear role in our society - define and enforce property rights, a transparent court system, and national defense.

Beyond that it is clearly worth debating the efficacy of the government beyond these limited functions. So, this article is a nice example of the role that institutions and incentives play.

Every spring, private security officers at San Francisco International Airport compete in a workplace "March Madness"-style tournament for cash prizes, some as high as $1,500.

The games: finding illegal items and explosives in carry-on bags; successfully picking locks on difficult-to-open luggage; and spotting a would-be terrorist (in this case Covenant Aviation Security's president, Gerald L. Berry) on security videos.

"The bonuses are pretty handsome," Berry said. "We have to be good - equal or better than the feds. So we work at it, and we incentivize."

Saturday, January 1, 2011

Government as teacher . . .

Rizzo write (and I agree)

I do not believe it is the job of the federal government to teach us anything. It is simply part of the apparatus of compulsion and coercion whose job it is, at most, to main the basics of social order. When we allow it to become our Teacher we are elevating it to a role for which it has no comparative moral authority. Why should its values be authoritative? Why not my values? Why not your values?