jamesz

Who needs government anyway?

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We talk about government intervention all the time, but there are those who believe that governments themselves are unnecessary in modern economies. Peter Leeson says

Anarchy, like all political-economic organizations, is riddled with problems. It is not clear that these problems are any
more numerous or severe than those that plague governments, however. …Where the state does not provide law, order, or the
institutions required to produce these things, private institutions emerge to perform these roles instead.

It may be that many small, everyday transactions, such as those cited by Leeson, would still happen smoothly without government involvement. However, as Rodrik points
out, these sort of things don’t scale well. They tend to rely on repeated transactions between individual agents to maintain co-operation. Once people have to interact on a one-shot basis, as happens in most large economies, this co-operation breaks down without enforcement. If you don’t expect to transact again then there is no incentive to invest in a reputation as an honest trader.

There is also the problem of maintaining a functioning financial system in a large economy. This is very difficult to do without some
regulation, as the online life simulation Second Life is finding out.

Matt Nolan

Should we be pleased to have a tight labour market?

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Over at no right turn, they seem to believe that economists sour reaction to the low unemployment figure is ridiculous. After all, a low unemployment rate implies that people have jobs, and a secure income, which is of course valuable to society.

They seem to believe that if we accept a little more inflation we can keep this low level of unemployment, and society will be better off. However, in this doesn’t hold. As an economist would say, in the long-run there is no trade-off between inflation and unemployment. If we accept higher inflation now, then in the future unemployment will rise to its natural rate, and we will be stuck with a higher rate of inflation.  The unemployment level is a problem now because it is lower than the NAIRU implying that the upward pressure on wages is too strong, and as a result the price level will increase.

Now government policy should be focused on decreasing the natural rate of unemployment. If the government can help improve the function of the market, they can make sure that in the long-run, unemployment will be lower. One of the things the government can do to make sure the market functions better, is keep price growth low, so that firms and buyers are more certain of the price level, and savers (whose money gets invested into firms) have more incentive to say (and so there is more investment). So who knows, maybe there is a long-run relationship between inflation and unemployment, lower inflation leading to less unemployment!

jamesz

Pie-in-the-sky policies

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Here at this blog we talk a lot about corrective regulation but rarely
stop to examine current government policy. In reality, most government
tax policy focuses either on revenue gathering or on discouraging
consumption of demerit goods. Infrequently, a corrective tax is
proposed – such as the ‘fart’ tax – and then discarded when it proves
unpalatable to the interest group generating the externality.

The fact is that corrective taxes are usually targeted at a
particular group and, the more precisely targeted they are, the more
efficient they are. These ‘discriminatory’ taxes are the ones least
likely to be implemented by a government wanting to appear fair and
even-handed: taxing specific groups is a sure way to generate
resentment at your policies.

So, if the taxes we want are equally as unlikely to eventuate as to be
magically fixed by ‘the market’, are we really any less removed from
reality than the blinkered free-marketeers that we scoff at?

jamesz

Rodrik vs GMU

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It’s game on between Dani Rodrik and the GMU crowd at Marginal Revolution and EconLog these days. Rodrik made a very interesting post about the different types of economists, saying that:

I think the best way to understand the source of [economists] disagreements is to recognize that there are two genres of economists. I call them “first-best economists” and “second-best economists.”…The first group’s instinct is always to apply the first-best reasoning to the case, ignoring market imperfections in related markets, while the second group almost always presumes some market imperfections in the system.

I think we at this blog fall squarely in the second camp, as economists who feel that the government has an essential role to play in correcting market imperfections.

Arnold Kling took exception to being placed in the first category, but he often seems to fall into the trap Rodrik describes of leaving the method of achieving first-best outcomes to others. Witness his post on healthcare provision, where he claims that he doesn’t have the answer but is confident that government coverage isn’t it. Can someone who criticises others’ support of government intervention but fails to provide alternatives really claim that their position is more than an ideological one?

Matt Nolan

The regulation of beer

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I realise that a lot of important economic figures were released today, however, I have found an issue more important than any amount of labour market data, the regulation of beer.  Now, according to this article, most binge drinkers drink beer.  So they think we can reduce binge drinking by taxing beer, and reducing availability late at night.

I think that they have ignored that fact that their are substitutes to beer, and that if someone wants to binge drink they will drink them instead.  The reason I drink beer when I go on a bender is to minimise the damage the next day.  If they banned beer from me I would drink Vodka, and that would cause significantly greater negative social externalities, and leave me with a worse hangover.

Having a tax on alcohol is a different story.  If alcohol causes a negative social externality, tax it so that the social cost=the social benefit.   However, taxing beer alone simply gives people the incentive to find other drinks, as those other drinks are more potent regulation is likely to worsen the social externality.   Do you think the same argument holds for taxing cigarettes?  When we tax cigarettes are we really giving people the incentive to move onto harder drugs instead?

Matt Nolan

Porn and manipulation

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I was reading a post on how advertising manipulates preferences, or in other words it gives us mis-information, leading us to make the wrong choices.  At the same time I was thinking about porn, and that lead me to tie the two together and discuss how porn may lead to manipulation.

Now in the advertising case, the manipulation was caused by mis-information, which made us make the wrong choice even when the ‘right’ choice was avaliable.  The manipulation of people in the porn industry is very different.  People who are manipulated into a life of making porn movies may not be mis-informed, they may well be making the best choice of their avaliable options.  However, some of these individuals may be making this choice because all other reasonable alternatives have been closed off to them.

So we have two different types of manipulation.  Type 1 manipulation is where someone has a full choice set, but some other player influences their belief structure in such a way, so that they make a sub-optimal choice.  Type 2 manipulation is where someone is unfairly constraining this persons choice set, and the persons’ choice is is constrained by action.  These two types of manipulation are completely different, the Type 1 manipulation does not seem as serious to me, as with research a person could overcome it.  Type 2 manipulation does concern me, I don’t like to see people choice sets too heavily constrained.

Government policy help solve both these types of market failure.  The government tries to prevent mis-information and provide informationk.  Furthermore, the idea of the welfare state and universal education help expand peoples choice sets, while police try to prevent one person limitting anothers choice set unfairly.  Another awesome score for our hypothetical, normative, and imaginary government.