Tuesday, 21 October 2014

What Is Equality of Opportunity?

I have asked before what reasons there are to be worried about economic inequality, highlighting some plausible candidates and rejecting them all. Now Fed Chair Janet Yellen disappoints by lamenting growing inequality while apparently offering no shred of argument for why it would be a deplorable thing. Consider in which society you would rather live if societies consisted of five groups with income levels as follows:
 
Group 1: £1,000 in Society A; £1,000 in Society B;
 
Group 2: £1,100 in Society A; £2,000 in Society B;
 
Group 3: £1,250 in Society A; £3,000 in Society B;
 
Group 4: £1,350 in Society A; £4,500 in Society B;
 
Group 5: £1,400 in Society A; £8,000 in Society B.
 
Purchasing power is the same for every pound across societies. Inequality is palpably greater in society B, but who would not want to live there? I believe this sufficiently proves that inequality is a non-issue to sensible individuals (except to Yellen, Stiglitz, Krugman, Piketty, and other sensible individuals, whose repeated 'warnings' that it is a scourge of our times I cannot fathom). If high incomes were earned by crooks, that would be a problem with crime, not inequality; if low incomes were "too" low, that would be a problem with poverty, not inequality. I am bound to record my impression that a great deal of the concern with inequality is really a begrudging of high incomes going to top talent.

Professor Yellen says:
"It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."
To her credit, Professor Yellen continues by discussing the issue of change at "the top"; the fact that members of, say, the "one per cent"  come and go and are apt not to be the same every year. She is dissatisfied with the rate of change between generations, however, and highlights the now famous 'Great Gatsby Curve', the finding that:
"...among advanced economies, greater income inequality is associated with diminished intergenerational mobility. In such circumstances, society faces difficult questions of how best to fairly and justly promote equal opportunity."
Forget for the moment the fact that "society" cannot "face" any questions, easy or difficult (only individuals can do that), and ask what intergenerational turnover would be compatible with equality of opportunity.

If one in ten (or a hundred, or whatever) children from the bottom percentile of families climbed to the top percentile over the course of a lifetime, would that be evidence in favour of, or against, equality of opportunity? Suppose turnover were complete, so that every child would be in every percentile at some stage of his life. Would that, on the other hand, be evidence in favour of, or against, equality of opportunity?

I submit the proposition that the former scenario is much more in keeping with equality of opportunity than is the latter. Why? Because if one is to live in every percentile no matter what, there appears to be very little one can do with one's life and if this really happens to everyone, it seems likely that one is guided by factors beyond one's control. On the other hand, if people can make their own choices and run their own lives, it makes sense that not everyone should get to see every percentile.

It does not mean that anyone lacked the ("equal") opportunity to reach however high or low he wanted to reach; that is a question of choice sets, not of choices made. It really annoys me that so few people realize the simple truth of the proposition, which I repeat: that one in hundred children from the bottom percentile of families rising to the top one within a lifetime is much better evidence of equality of opportunity than is an alternative scenario in which everyone lives in every percentile for some fraction of his life.

A more arguable point, as far as I can tell, is what fraction of the bottom percentile rising to the top percentile is the lowest one which would still be better evidence of equality of opportunity than would complete turnover. Now my answer is more tentative, but I would suggest that the lowest fraction is any positive fraction, so if those who have it worst are one million families, then it is enough if one child from them manages to rise to the top within a lifetime. Because if they all should get to see the top, that is tantamount to equality of results, not opportunity.

What about points below perfect mobility? If, say, half of the bottom percentile get to rise to the top percentile, would that be evidence of more equality of opportunity than if only one in a million from the bottom percentile rose to the top one? These are trickier questions. One may note that movement is always possible and be content under any non-deterministic scenario, but perhaps movement is too hard if only one in a million manages to climb to the top. Since movement is always possible, however, we are back to the issue of to what extent successful movements reflect choice or the absence of choice. Finding an optimal point in a measure of intergenerational mobility is not something I would like to attempt. At any rate, I believe it would not be much better, if it existed, than would other points, potentially quite far away.

Alan B. Krueger, who coined the term 'the Great Gatsby Curve', said in a concomitant talk that "equality of opportunity should be a nonpartisan issue", but if one gets to define equality of opportunity as rising with intergenerational mobility, one has made a very partisan definition, indeed. There is probably too much focus on intergenerational mobility. Perhaps it would be better if one simply noted that the progress at the top has not come at the expense of those at the bottom and contented oneself with the justice of a procedure that violates nobody's rights.


PS. This was my 100th blog post. As Groucho Marx Said, "Time flies like an arrow. Fruit flies like a banana".

Sunday, 19 October 2014

What to Do if Enemies Are Mapping out a Country for Conquest?

Recent activities in the Stockholm archipelago, coupled with prior infringements of Finnish air space and of course the unruliness in the Ukraine, have sent people wondering what the best response is if Russia might be aggressive towards its neighbours. The best response for leaders may well be to spruce up their countries' militaries, because if they are taken over these people will lose their positions of power.

I am not saying there is any risk of a Russian invasion of any parts of Scandinavia. These activities were observed during the Cold War as well and of course no invasion took place then. Rather, entering the waters and air spaces of other countries might serve to extract benefits by bullying other countries into concessions. Still, the political leadership in Scandinavia may well benefit from increased military preparedness, so as not to appear too weak while making such concessions.

For the citizens, however, the best response depends, as I have said before, on the likely changes in policy which come from a more aggressive Russia, and in the limit on the likely policy changes which come from Moscow Rule. It is not obvious to me that these changes are big enough to justify increased outlays on weapons and on training people to commit murder. It might be that the bulk of the citizenry actually favour more of this kind, but the bulk of the citizenry lack incentives to make informed judgements, so that would not be strong evidence in any direction.

Case in point: Finland used to be a part of Russia from its war with Sweden of 1808-1809 until 1917. For over a century, it would seem to me that Finland was not very "russified". Finland held autonomous status as a Grand Duchy during all of this time and as far as I know, most of, if not the only Russian spoken in Finland today is by the numerous Russian tourists coming in to see Helsinki or other pleasant places. I also believe that Finland could set its own rules regarding a great deal of foreign trade as well as taxation and many regulations, but I am no expert so don't quote me here. At least culturally, Finland today is Scandinavian and apart from the beautiful Uspenski Cathedral and some other buildings not Russian in the slightest, so the status as a Grand Duchy must have meant something substantial.

The situation with a more aggressive Russia is very unfortunate, but my impression is that it would be far less unfortunate if the outside world responded as one does when stumbling upon an angry wasp: Do not move, especially not suddenly. Alas, this is not what has happened with sanctions and condemnations taking up much space in the newspapers. Neither Finland nor Sweden is a member of NATO, but it would not surprise me if this were to change given how things are going.

I don't know, but I reckon it would be a lot harder for anyone to kill another person knowing he was committed to non-resistance. It seems to me that nonviolence has its appeal from the fact that it is rare indeed for it to lead to the death of its practitioners by slaughter of their adversaries, so maybe there would be less death and destruction if countries gave this strategy a try?

Wednesday, 15 October 2014

National Defence as a Public Bad

In textbook treatments of price theory and of public economics, one invariably sees national defence cited as an example of a public good. But how useful national defence is surely depends upon the expected change in policy if a foreign power took over. If this change is for the better, then clearly national defence is only an impediment to amelioration; if the change is for the worse, the utility of national defence would depend upon how much worse and compare that magnitude to the costs. If the change is neutral, national defence is again a public bad.

One could argue that citizens want a national defence and so their preference for it makes it a public good. But why should citizens qua citizens know what is good for them? Facing virtually no chance of their opinion being pivotal to any national decision, they can indulge in whatever idiocy they want. I do not normally like the distinction behavioural economists make between decision utility and experienced utility, but it seems serviceable in this case. If citizens want national defence, that is just their decision utility talking, but in actual fact it could be that they are throwing money away. Maybe it is a purely normative issue, but it seems to me to be just as normative to refer to something with such ambiguous effects as a public good.

If one goes along and takes the right name to depend upon whether national defence safeguards against changes for the worse or just keep things bad, it would seem to me that national defence is to be referred to as a public bad in the countries which pursue the most horrendous policies (certainly it would seem a normative point to give a name like "public good" to racist polcies such as the nuking of areas containing people of a certain skin colour, wanted by racists). I have made the case before that policy may not actually improve from outsiders invading such countries, but of course if policy is about the same the war was wasteful and so national defence was a bad idea.

With no spending on the military in the countries pursuing the worst policies, the countries pursuing the second-worst policies face no threat of invasion from countries with worse policies anymore. Again, maybe invasions by countries with better policies would not actually result in improvements, but if things do not change appreciably it would seem that these countries also waste resources now by spending them on national defence.

In this way, we regress to a situation in which no country spends anything on national defence. This is an equilibrium because no country now has any incentive to spend money on protection, though the people in the countries pursuing the most horrendous policy arguably still have an incentive to change things somehow - just not by getting invaded. The operative assumption here is that countries which are invaded suffer only if policy is changed for the worse (otherwise why resist?) and that the risk that this happens goes away if the invading country is one pursuing better policy.

In equilibrium, national defence is a public bad. Outwith equilibrium there may be a point to it in countries with good policies at risk of invasion by countries with bad policies (though there are problems with this view, too), but still many countries today do not face any serious risk of that happening (e.g. Switzerland, New Zealand, Canada). If the language of economics textbooks took steps to approach value neutrality by calling national defence, say, a "public-bad-or-good(-but-probably-bad)", my guess is there would be no less national defence anywhere. It would be better language, though, and reflect better thinking. That's something.

Tuesday, 14 October 2014

Charles Tiebout at 90

It escaped my notice that the man behind the Tiebout Model (short for "feet voting"), Charles M. Tiebout, would have turned 90 on Sunday last week had he had as long a life as his insights deserved. Alas, he died suddenly, in his 40's, in 1968, but I belatedly celebrate his memory with a blog post on the Tiebout Model, his most famous brain-child.






The Tiebout model says that perfect competition between local political jurisdictions ensures an efficient supply of public goods. Perfect competition here means that there are no costs of migration, so that if Town A has better street lights but a higher sales tax than Town B, those who do not mind paying more for their purchases while having more ample light on the streets move to Town A and the rest move to Town B.






Obviously perfect competition is unlikely to hold, but the essence of the Tiebout Model is hard to escape when looking around oneself. If a local community decides to tax high-income earners at a higher rate than low-income earners, it will quickly lose most of the former. This is not necessarily so if this is done at the country level where movement costs are greater (compare moving abroad to moving to the neighbouring municipality). This implication of the Tiebout Model is evident in the fact that the world looks pretty much like what Tiebout predicted. Local governments have little to offer high-income persons by way of services, so cannot really tax them as much as can nations.


Chances are that most readers of this blog post, if they have ever moved house, have based some part of their decision on the tax-services bundles available in their destinations under consideration. If so, they act according to the Tiebout Model, works in several other ways, too, including if local governments engage in the production of private goods, such as schooling: In a celebrated paper (gated) from the year 2000, Stanford Economist Caroline Hoxby shows that competition among public schools benefit school quality as judged by available measures and Professor Hoxby's ingenuity. This adds a great deal of relevance to the Tiebout Model since pure public goods are few and far between.




There are ways of attacking the Tiebout Model, of course. For instance, one could belabour its assumption of perfect mobility, which does not hold for land and buildings. However, this critique is only partially successful, because the value of such stationary objects depends on the quality of human genius that tries to make something out of it. If land is taxed a lot by one local government, it is apt not to be as well developed as the land in the neighbouring jurisdiction in which it is lightly taxed.




EconLog blogger and GMU Economics Professor Bryan Caplan, whose judgement I respect immensely, has challenged the Tiebout Model on the grounds that it really deals with non-profit competition, which fails to provide the necessary incentives for the Tiebout Model to hold:
"If a business owner figures out how to produce the same good at a lower cost, he pockets all of the savings.  If the CEO of a publicly-held corporation figures out how to produce the same good at a lower cost, he pockets a lot of the savings.  But if the mayor of a city figures out how to deliver the same government services for lower taxes, he pockets none of the savings.  That's how non-profits "work.""
I find his critique unconvincing. Armen Alchian pointed out in his classic paper 'Uncertainty, Evolution, and Economic Theory', that whatever an actor does will result in an enhancement or a reduction in his capacity to survive. Thus, if firms choose strategies randomly, those that come closest to maximizing profits survive and the others are successively eliminated, so that it looks like firms maximize profits in the end. Similarly, local governments may behave randomly and those who offer "good" tax-services packages will gain population at the expense of others.




There would have to be different incentives to behave "badly" for Tiebout competition not to work, but I don't see them. Probably failing local governments would attempt to learn from thriving ones. I am also unsure whether non-profit competition really is applicable to this case since politicians could be crooked (and probably frequently are) and thereby extract some tax theft from the population, which seems to give them an incentive to increase the tax base.




So to me, the Tiebout Model looks like it is holding up very well. Tiebout thought of it as a graduate student and had it published in 1956, so his brain-child would be 58 years old this year. Every parent should live to see his children, including brain-children, reach that age. It is a tragedy that Tiebout did not. I hope it gave him great satisfaction to imagine how economists and otherwise interested individuals might continue to experience many hours of deep spiritual joy from his work long after his demise which proved so untimely. I know he would not have been wrong.

Sunday, 12 October 2014

Another Nobel Post

If the Peace Prize has gone rather awry, my impression is that the other prizes hold up pretty well to the standards which say that excellence in their respective fields should be rewarded. There are, of course, a number of economists to whom I would not have given the Prize, and others who have died without winning what would have been a well-deserved one (e.g. Armen Alchian and Albert O. Hirschman), but no winner as far as I can recall has a really bad case and certainly no-one has caused the field to regress in the way some winners of the Peace Prize have.


Tomorrow the Economics Prize is awarded. I have never made an accurate prediction, but if I keep making them maybe some day I'll be lucky. In years in which so-called "microeconomics" may be rewarded, I usually stick to a team of maybe five economists and pick one or a few of them. Prominent members of this team have been the aforementioned Alchian and Hirschman, and otherwise Gordon Tullock, Richard Posner, Anne Krueger and Sam Peltzman. Consequently, for my prediction to be accurate, the prize this year must reward applications of economic science to Political Economy and rent-seeking. The prize cannot, I believe, be shared by more than three people, so my guess would be that either Tullock, alone or with Peltzman, will be the winner(s), or that Tullock shares it with both Posner and Krueger.


Tullock, of course, ought to have won the prize already in the 1980's with James Buchanan but that was not to be. I am not sure of this is accurate or not, but several people have told me that Tullock vomited when finding out about his exclusion from the prize. And why not? A great deal of Buchanan's best work was joint with Tullock. Anyway, now my prediction is official. If accurate, my foresight will be remarked upon. If inaccurate, everyone will forget the prediction very quickly.


There are of course many other deserving candidates. Tomorrow we'll whom the Riksbank pick.

Friday, 10 October 2014

Good Intentions Are Overrated

There is a lot of talk about this year's joint winner of the Nobel Peace Prize, Ms. Malala Yousafzai, but amidst all of it, I cannot find any information about what she has actually done. My ignorance is as deep and vast as the ocean, so maybe she actually has real accomplishments, but what appears to be normally mentioned as her main feats are talks and writings which advocate more education for girls in Pakistan and elsewhere. Now there is nothing wrong with any of this (maybe education is overrated and so she proposes bad policy, but she has the right to do that as far as I'm concerned), but I do not see why it should be worth £860,000 or $1.4 million (then again, the error-prone gentlemen in Oslo have, as far as I know, not violated anyone's rights by awarding the Prize to a great many feeble choices, so I guess that would make it OK).

Yet, awards like this devalue peace. Ms. Yousafzai wants to be a politician. If my impression is correct that she has never actually accomplished anything, never achieved any of the change she frequently talks about (which is OK for a seventeen-year-old), then her career choice means she will continue doing that forever. Remarkable statement? Not at all! If politicians were all about changing the world (for the better or for the worse), we would see a lot of policy changes whenever a new party comes into power. We quite palpably see extremely little of that sort (gated example here), meaning that politicians probably do what popular opinion, or some function of it, tells them to do, rather than influence it. That is why Ronald Reagan said that politicians have a great deal in common with workers in the world's oldest profession.

Ms. Yousafzai has spoken in favour of education for girls which is about as platitudinous as it gets unless one gets into the messy details about the ethics of craving positive rights, or about the economics of third-world education for girls, which I believe, suggests that it reduces domestic violence, but fails to impact policy views or voting intentions (some evidence here). But the yokelry and even most of the gelehrten do not go this deep and tend to think in simplified terms such as "education-good". Not that they are mentally defective; they very likely only lack incentives to think more deeply. So Ms. Yousafzai's campaign for girls' education hardly needs to influence anyone. Things are different in Pakistan, of course, and her very brave outspoken style would not always be platitudinous there, but she is rewarded and seems to be best liked where her words offend no-one and are met with disagreement by rather few (though possibly by many who are well-versed on the issues, I don't know). Would she have received the peace prize if she had campaigned against, say, agricultural subsidies or the minimum wage? Their abolition would surely benefit the world while avoiding the issues of positive rights and difficult cost-benefit analyses, but unlike education they do not enjoy widespread support.

Consequently, if Mr. Jagland and the other members of the Peace Prize Committee are really serious about peace, they should award the price to people or organizations who are likely to bring about more of it in this world. They have got some choices right, like Norman Borlaug and possibly the one to Muhammad Yunus (the evidence on the impact of microcredit is mixed, though I believe theoretically their case is a good one), but this one, the one to the EU (for preserving peace in Western Europe since the end of WWII - have they ever heard of the post hoc, ergo propter hoc fallacy?), the one to POTUS, to Jimmy Carter, Mikhail Gorbachev and a vast array of others, can do absolutely nothing for peace. Professor David R Henderson of EconLog has remarked that some of these prizes could actually promote war, since for a politician to be a peace dove it helps if he has first got himself into a violent conflict.

Again, I don't mean to say that Ms. Yousafzai has not accomplished anything and she is clearly a brave young woman for being outspoken in the face of threats; I merely say that I have not heard of anything she has done. I have looked, but I could have missed it. What seems to be a much more defensible proposition than that she has accomplished great things is that she means well. But given their beliefs, everybody means well. The real trick is to actually do something good. Certainly my own accomplishments are very few, but if my impression of Ms. Yousafzai is correct, maybe mine are more numerous than are hers. If the prize money is taxed, I'm hoping to receive a quiet ceremony next year so that it will be easier to hide the income from the tax authorities.

Tuesday, 7 October 2014

The Poverty Trap

Some people argue that poor countries stay poor because they are in a poverty trap of health and nutrition. According to this idea, labour capacity increases more than proportionately in income at the absolute bottom where one dies if not fed, then less than proportionately during a stage of living just above the minimum, and then more than proportionately again as "good health" is reached. In the graph below, nutritional intake is captured by the red line. If income (the "S-shaped" curve) is below point B, corresponding capacity to work leads to a nutritional intake which lowers capacity to work (and income) the next day (or whichever period one considers), eventually leading the individual to Point A ("the bad equilibrium", or poverty trap). This is because the point on the red line which corresponds to the capacity to work for an income below point B is associated with a reduced income (one may draw lines on the graph to see this). Above point B, capacity to work is increased by more income, leading to a stable point at C ("the good equilibrium").
However, this relationship suggests that most of the truly poor around the world spend the vast majority of their income on victuals. However, this is false; many studies show that the highest fraction spent on food by the very poor typically does not exceed 70 per cent, and that they could get a great deal more nutrition out of the money spent by rearranging their food outlays, akin to how richer people would eat more on the same money if they buy chicken and vegetables rather than caviar and smoked salmon. Why the world's poor do not consume more food is still up for debate. It may be that they would benefit, in which case the above curve could be very useful, but it may also be that they are spending their money rationally and that something else is preventing them from getting rich.




That something else may not be a poverty trap and it could not be one based on nutrition, but it may be one based on something other than victuals. Here is one example: When Westerners go to very poor countries like Ha├»ti or India, they may be surrounded by indigents asking for alms. Maybe natives living amidst these people - including potentially every indigent individual - correctly deduce that they would face a similar situation if they did something to improve their productive capacity and thereby raise their income. Unlike Westerners, natives have ties to other indigents and may find it prohibitively expensive to refuse to help them.




If they know how to increase production, there would be no problem, because everyone could just do it and even if the destitute neighbours "tax" away all the surplus with cries for help, learning from the successful ones means that this "tax" will shrink over time. However, if the poor do not know precisely how to be more productive, they will face a choice between the status quo or experimentation. Experimentation could result in great success or abject failure, but any success will be greeted by clamour for donations by the hapless neighbours who experimented differently or not at all, while failure may mean death.




Maybe the deep poverty that still persists is simply a result of this sort of coordination failure?