Wise as Serpents

Progressives and Race

2011-11-14T09:59:00.003-05:00

I've written on this topic several times, and here, in NRO, comes someone more expert than I to discuss the connections between the Progressive movement and racial segregation in the in 19th and 20th century Sadly, two of the most prominent Progressives in this article were leading lights in the emerging Economics profession. However, the prize for most outlandish proposal goes to the sociologist who promoted forced labor camps for blacks. Yes, let's have more national discussions on race, and establish once and for all who established Jim Crow laws, disfranchisement, and educational segregation.

What is Poor?

2011-11-12T10:20:00.004-05:00

Co-author Brad Hansen sent this link to the blog Pyromaniacs, which combines the statistics of a BBC video hosted by Hans Rosling, the blogger's own analysis of the U.S. data in terms of the complaints of the Occupy Wall Street Movement, and Chrisitian theology.

Brad asked if I had any further thoughts, and the blog suggests several. One thing that I think we ought to consider at the start is that the terms "income" and "wealth" are often used interchangeably, and they are not. (Part of the problem is that "poor" is popularly used as the opposite of both "wealthy" and "high income.") I believe that I recall reading recent data that income in the U.S. has become less equal but wealth has not. How could that be? There are several factors, including greater life-cycle disparities in income that don't translate into wealth disparities, problems with valuation of assets (wealth, such as home values or even wealth intangibles like the social wealth of living in a safe neighborhood), increasing differential returns from education, income statistics that don't capture all aspects of government income redistribution etc.. I'll try to check this out further, and maybe post some other thoughts.

David Brooks on Inequality

2011-11-11T11:06:00.004-05:00

I have mixed reactions to David Brooks, but his article today on "inequality" was thought-provoking. Even here, we can see the cultural divides between Manhattan/Chevy Chase and "flyover country". Brooks asserts that's it's not acceptable to wear clothing with religious messages. I think if Brooks walked around Tennessee or Texas or Iowa more he might see that a lot of people have t-shirts with explicitly religious or, more neutrally, "I love First Church" type messages. Nevertheless, although the article is humorous, I think it raises interesting questions for Christians. It would make a good single-meeting Bible study resource. (Thanks to hotair.com for the tip on the article).

Rent

2011-10-20T10:25:00.002-04:00

In a discussion in our Theory of Moral Sentiments Readings Group, we delved into Prof. Gordon Tullock's pathbreaking article in which he introduced the idea of rent seeking (although the name came later from Anne Krueger). One of the questions Gordon raised was how one would measure rent seeking. For the United States, I have long promoted a metric such as "Count the number of Nordstrom and Neiman-Marcus stores in the Washington DC metropolitan area and multiply by the a normalized difference of the excess increase in housing prices in the D.C. area compared to the rest of the United States." Just kidding. But consider the news yesterday that the Washington, D.C. metropolitan area which historically has manufactured virtually nothing, long ago quit growing (gasp) tobacco, and has no known natural resources other than mosquitoes, is now officially the wealthiest (actually, highest income) part of the United States. This Versailles-on-the-Potomac produces one thing: government. I think that it's interesting to consider there were many things that the U.S. government, some of them relatively well, with Washington remaining a relatively sleepy Southern town. The big changes in D.C. came with the ramp up of the New Deal, then The Great Society, and then the social regulatory programs of one of America's most economically liberal Presidents, Richard Nixon (sorry Republicans, but do the math: OSHA, EPA, wage and price controls, AMTRAK, Title IX, and so forth). The current administration has successfully pushed the Washington team over the goal-line. (As long as I am ranting, can you imagine any other part of the country as hypocritical as Washington D.C. having a professional football team named the "Redskins" in the midst of all of the political correctness that it imposes on the rest of the country? To think that Florida State had to fight to retain the name "Seminoles" which is an actual (both historical and living) proper name and not an ethnic slur like "Redskins", well ... I guess it's time to stop ranting.)

Indeed

2011-10-10T20:50:00.002-04:00

From the New York Sun, a quote from the just-announced winner of the 2011 Nobel Prize in Economics, Thomas Sargent:

“Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.”

Could Not Have Said It Better

2011-10-05T11:38:00.003-04:00

Brad Hansen, our co-author on Wise As Serpents, brought this video to our attention. It is part of the launch of a new initiative called povertycure.org which is designed to bring entrepreneurial solutions to issues of economic development, particularly in Africa. In the video, the narrator says that is it easy to have a heart for helping the poor, but harder to have the mind to do so. This is very much the motivation behind the FSU course on the Economics of Compassion. Best wishes to them in their efforts.

Name That President

2011-10-03T14:27:00.006-04:00

A future President once said "Facts are Stubborn Things." So let's describe the facts about another President, because it's important in understanding macroeconomic policies.

This President did not believe in anything like what we would call the free market or spontaneous in order in things like wages and prices. In fact, he used the bully-pulpit of the White House to intervene to keep workers' wages high. Coming into office, Americans recognized him as one of the smartest men ever to hold the office, and he certainly believed in the appropriateness of an activist government managed by the elites of educated society. He approximately doubled the size of the federal government under his tenure, and ran unprecedented peacetime budget deficits, deficits so large that his successor campaigned vigorously against them. He raised taxes, with an especially big hit on what we would probably now call the millionaires and billionaires. He used federal funds in ways that most Americans had never anticipated were the province of the federal government: promoting home ownership, massive public works projects, and bailouts for failing banks. He was not generally a supporter of free trade, and under his watch he helped enact massive new barriers to the free flow of goods and services. Who was this President? Click here to find out.

Gee Officer Kurpke, Krup You

2011-09-28T15:08:00.005-04:00

Urban renewal was one of the pinnacle dreams of the Progressive/Social Gospel/New Deal streams of American economics and politics. Government "experts" decided which neighborhoods were "blighted", used the police power of government in the guise of eminent domain to take the property from it's rightful owners, and replaced the existing "slums" with (typically butt-ugly) housing "projects" that were often either government operated or handed out by government to political cronies. (In some cases the land was turned over to private corporate development).

We find ourselves in a position today of trying to figure out how to "fix" unsustainable programs of government provision of health care (Medicare and Medicaid). Other Americans receive government provided food (at school) , and we were in the 1950s well on our way to having government being a dominant direct provider of housing. (Instead, we had two government created frankenfirms, Fannie Mae and Freddie Mac, subsidizing home mortgages through smoke and mirrors).

This Reason TV program highlights the damage to the lives of the poor through one government directed "urban renewal program." I know I sound like a broken record, but no oppression of the poor is more condemned in the Bible than oppression of the poor that operates out of the domination of the government by the rich and powerful. Indeed, if you want to see what replaced the living spaces of the West 99th Street families, read the full story of what is now called "Olmstead House on Central Park West." Maybe for New York City a one bedroom apartment for $3,300 per month is a steal.

Boogity, Boogity, Boogity, Amen

2011-09-25T14:20:00.003-04:00

Are we too uptight and proud and concerned about our image to pray sincerely for the things that have been blessings to us or that are in our concerns?

The Aliens Among You

2011-09-24T23:08:00.006-04:00

It would be hard to make a list of all of the exhaustive themes in Deuteronomy, but one of them certainly is that the Israelites were to treat fairly and with dignity the sojourners (aliens) among them because they too had been sojourners in another land. Now, like with almost anything in the Bible, we need to be very, very careful in transition to specific policy prescriptions, especially in the heat of partisan politics. But my personal opinion is that there has to be some kind of moderation between the Obama administration executive decisions that come close to granting amnesty in direct contravention of what our elected representatives have decided (one the one hand) and (on the other) the out right meanness exhibited by almost all of the Republican candidates (except Rick Perry) to the sojourners in our land who were brought here, through no fault of their own, by their parents. I found the attached op-ed to do a good job of expressing my own thoughts policy after that debate:

http://www.redstate.com/thesophist/2011/09/23/perry-illegals-and-in-state-tuition/

What this article doesn't add is the Deuteronomic exhortation that we Christians, in particular, ought to take seriously.

Calling Prof. Hayek: A Central Planner Dropped Some Knowledge and Wants You to Return It

2011-09-15T11:43:00.007-04:00

Embedded in today's New York Times article on the Solyndra solar manufacturing bankruptcy is the following amazing statement from the deputy director of the Office of Management and Budget:

"While taxpayers could lose the $528 million the company borrowed from the Treasury, Jeffrey D. Zients, deputy director of the Office of Management and Budget, said that the system for evaluating such loans was sound. He said it was inevitable that some cutting-edge firms would fail but that over all, the investments would prove worthwhile. He did allow, 'The lesson learned here is that marketplaces can change even more rapidly than one would have anticipated.'"

The lesson learned here is that marketplaces can change even more rapidly than one would have anticipated, indeed.

Epstein and Pope Benedict: Cont'd

2011-09-15T10:47:00.002-04:00

Doug and my co-author (and my former pastor) Brad Hansen has an outstanding discussion about the issues of the O.T. Law and economic life in his "comment" on the previous Epstein and Pope Benedict post. If you can take the time, please go read it.

The Rain in Spain Blocks the Sun and Causes Pain, Part 3,545

2011-09-15T09:58:00.009-04:00

Why the fancy numbering on the continuing saga of the Green Jobs Bubble? Because that's what the Washington Post this morning reported is the actual number of jobs (3,545) created by the government's 38.6 billion dollar green jobs loan guarantee program, or a cost of over 10 million dollars in loan guarantees per job. Government reports that the number is closer to 60,000 jobs apparently include accounting that claims that about half of the Ford Motor Company workforce has been converted into green jobs and therefore "created". Even at 60,000 jobs, that would be a cost of over $600,000 in loan guarantees per job. Apparently as the fund has been only half allocated, one might argue that you could cut those numbers in half, so that the cost per "green job" drops to somewhere between $300,000 and $5,000,000 in loan guarantees per green job. But, as the famous Spanish report (see posts below) pointed out, this doesn't allow for any jobs lost due to the financing of the program.

Now one could argue that as these are loan guarantees, eventually the government will get its money back. But as the Solyndra bankruptcy shows, that is not guaranteed.

(H/T to Hot Air for the track to the WaPo article).

(After the first publish, I edited the text to make clear that this program is a loan guarantee program as distinguished from a direct grant program).

Epstein and Pope Benedict, Cont'd

2011-09-04T17:55:00.007-04:00

I'm afraid that this is going to come off disjointed. The starting point is that I've been reading Deuteronomy (which means the second telling of the Law). From the very beginning Christians have been debating what role the Old Testament Law Code should have in the life of a Christian. Almost no Christians believe that every Mosaic law is binding upon Christians. Some Christians go to the opposite extreme of antinomianism, which says that the law has no role in our lives. I suspect that the vast majority of Protestant Christians come somewhere along the lines of the reformers, who believe that the sacramental laws are no longer binding, but that there are certain of the laws that are moral laws that serve functions separate from any kind of works righteousness: they can be moral guideposts for what is expected of a sanctified life, for example.

One problem is where is the dividing line between the sacramental and the moral law? I think that most Christians wouldn't have any trouble putting the prohibition against weaving together two types of cloth or clean and unclean foods in the former category. But what about the prohibition against tattoos? According to my study Bible, tattoos were a sign of cultic paganism. But what about today, when that connection has been lost? Maybe we should see this law, given its ancient cultural context, as essentially sacramental. But if we are going to make cultural drift a part of the distinction between sacramental and moral laws, where do we stop? Does that lead us to surrender ALL of our moral values to our culture?

I think that most Christians would argue that the 10 Commandments form the core of an unambiguous moral law. But if we stop with the Decalog, what do we have to guide the kind of moral context for economic life that I mentioned in the last post? One: "Thou shall not steal" is pretty good. And bearing false witness could include all kinds of deceit and fraud. But much of what forms our debate on economic policy is found in the extra-decalog Mosaic rules: the restrictions on usury, the jubilee and tort codes, and so forth. So are the rules against usury like the rules against theft or like the rules against tattoos?

Another approach is to note that the 10th Commandment is unique in that it prohibits a particular way of thinking: coveting your neighbor's stuff. And that's where this all loops around back to Deuteronomy. It is in Deuteronomy that Jesus pegs "the Greatest Commandment", and it is another rule about our thinking and not our actions: "Hear O Israel: The Lord our God, the Lord is one. And you shall love the Lord your God with all your heart and with all your soul and with all your mind and with all your strength" (Mark 12:29, quoting Deut 6:4-5).

But how, you may be asking, does this get us back to economics. Well, just 2 chapters later is an amazing command from God that is also a "right thought" command and it certainly goes to the heart of our economic life. From Deuteronomy 8:

"Take good care lest you forget your God by not keeping his rules and his statutes, which I command you today, lest when you have eaten and are full and have built good houses and live in them, and when your flocks multiply and your silver and gold is multiplied and all that you have is multiplied, then your heart be lifted up and you forget the Lord your God....Beware lest you say in your heart, 'My power and the might of my hand have gotten me this wealth.' You shall remember the Lord your God for it is he who gives you the power to get wealth, that he may confirm his covenant that he swore to your fathers, as it is this day."

Epstein Part II: Pope Benedict

2011-09-03T20:32:00.005-04:00

In the post below, I linked to Richard Epstein's discussion about Warren Buffett. But I mentioned that the first part of Prof. Epstein's article was a critical discussion about Pope Benedict's statements in Spain on economics.

Prof. Epstein says that the Pope is attacking markets. But his quotes (and those in the embedded link) don't obviously follow in that direction. I agree with Prof. Epstein that "putting people before profits" and "the common good" are two of those vacuous phrases that shows a lack of serious thinking about ethics and economics. On the other hand, the Pope warned against consumerism and hedonism which, to me, is a legitimate social criticism that has little to do with criticizing markets per se. On the other (third?) hand, his argument that a people or a society need an ethical framework seems to have morphed into a statement that an economic system as as system needs an ethical framework. I'm not ready to go there.

I remember when the Pope's encyclical on economics was released. I read through it, and I thought that it read as though it was written by a committee, full of "on the one hand but on the other" type of discussion of economic theory and what we know about the functioning of markets. Some of the sections were quite perceptive and economically literate, others were on the level of the "people before profits" slogans mentioned above.

At the end of the day, while I may literally come down on the side of Prof. Epstein in his critique of Pope Benedict's summary statements, at least Pope Benedict has attempted to articulate a theology of ethics and the marketplace that combines a positive analysis of how economies operate with a Christian ethical theology. This is something much more than many if not most mainline Protestant leaders have accomplished, even if I don't find it consistent or completely satisfying.

A New Category on Today's "Jeopardy!", for A Half-A Billion Dollars, Alex

2011-09-02T10:15:00.007-04:00

We've presented numerous posts in the category "unintended consequences". It looks as though we need a new, continuing category:

"The Guys in Spain Warned Us About The Unsustainability of A Centrally Planned Green Jobs Bubble"

Here's a Washington Post/Tulsa World report on the failure of Solyndra, a solar energy company with a a half-a-billion dollars in federal loan guarantees.

Meditation 3: Language

2011-09-02T09:11:00.001-04:00

Yesterday was my 27th birthday. Today, maybe, I feel marginally wiser so that's good news. But, what struck me yesterday reading facebook wall posts and talking to people was the power of language and words. The love and encouragement from others was palpable. And, with that sentiment, combined with conversations earlier in the week, my meditation is simple: Words have the power of life or death, and, we should remember that when we speak.

Also, the manner with which we speak is like a litmus test for the heart. As Jesus said,

"The good man brings good things out of the good stored up in his heart, and the evil man brings evil things out of the evil stored up in his heart. For out of the overflow of his heart his mouth speaks." (Luke 6:45)

Awesome.

2011-09-01T09:55:00.004-04:00

Did I say that this story is awesome. This is about America. This is about why there is a difference between free markets and "greed is good." This is about the flyover country that DC and New York and Boston and Berkeley love to sneer at. This is about your neighbors helping each other in hard times. This is about entrepreneurship as opposed to a sterile static model of "perfect competition." This is about waffles.

(Hat tip to awesome Jonah Goldberg at NRO for the link).

And God Said: "Let Me Entertain You"

2011-08-31T09:59:00.005-04:00

One model for the reinvigoration of the independent sector in the provision of compassionate activities is the so-called public/non-profit partnership. (If you are asking how a non-profit can receive taxpayer funds and still be independent, then you've got an idea of where I am going). This report from the Washington Times out of (where else) Washington, D.C. shows why this half fish/half fowl program model can be a very bad idea.

Just For Fun

2011-08-25T13:44:00.002-04:00

Which NFL team should I root for? I've seen this on several sites, but this one on NRO has the best resolution. The listed author is "Interpretation By Design" and it is very, very funny. I am slammed. Right out of the gate: Do People Already Hate You? Yes. Then you're a Cowboys fan. To get to Doug's favorite Chicago Bears you have to go through about 20 nodes.

Steve Jobs the Entrepreneur

2011-08-25T13:30:00.002-04:00

What a great article by Nick Schulz in NRO on Steve Jobs and the role of an entrepreneur. Schumpeter could not have written this any better himself.

Warren Buffett, Math Genius

2011-08-23T10:27:00.017-04:00

Let's hear it for Lawyer Richard Epstein who unlocks the secret of algebra for Billionaire Warren Buffett, who believes that, having reached the deck of the luxury liner, it's time to pull up the ladder for everyone else trying to get there by making them pay higher taxes. (Buffett himself could always write a check to the U.S. Treasury to sooth his own social conscience).

Here is Buffett's argument:

"In 1992, the top 400 [tax filers] had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent."

Here's the algebra:

1992 ) .292 * 16.9 billion = 4.93 billion paid in taxes

2008 ) .215 * 90.9 billion = 19.54 billion paid in taxes

What Epstein didn't do is to adjust for inflation, which my quick calculation of the CPI shows that, even in inflation adjusted terms, the 400 top filers paid 12.53 billion in "real 1992" taxes in 2008 compared to 4.93 billion in taxes in 1992. So, while lowering the tax rates we more than doubled the tax collections from wealthy Americans. Buffett's argument, both explicitly and implicitly, is that these two things have nothing to do with one another. In other words, Warren Buffett believes that there is zero response in anyone's behavior due to after-tax returns.

And, to repeat, if Warren Buffett believes that he is underpaying for the services and/or satisfaction he receives from the federal government at the current tax rates, by all means let him write a check to the U.S. Treasury. The instructions on how to do so are here. Now, Doug and I have research which shows that people look upon taxes as a group commitment device. But, as one of America's wealthiest men, does Buffett really need to know that all of the little people of the world are falling into line before he steps forward and takes the lead on helping to do whatever it is that his increasing the federal general Treasury receipts will do? (Of course, Epstein's argument is essentially that following Buffett's prescription about raising tax rates may actually lower tax receipts anyway).

Can someone be as successful as Warren Buffett and NOT understand this basic math? It should not go without comment that Buffett's Berkshire-Hathaway's business lines are likely to increase in profits if there are expansions in things like life insurance, tax-deferred annuities, and municipal bonds, time-tested ways by which wealthy people avoid paying more taxes from higher (estate tax and marginal income tax) rates. The link in the previous sentence shows that B-H explicitly markets their products with an eye to helping customers legally reduce the taxes they pay to Uncle Sam. Maybe Buffett is a math genius after all.

Notice also that the first part of Epstein's article is a critique of Pope Benedict's economic comments. I plan to talk more about that in a later post.

Hat Tip to Andrew Stuttaford at NRO for the tip on Epstein's article.

I Thod I Saw a Puddy Cat! Sufferin Succotash. No One Here But Us Federal Bureaucratttsh.

2011-08-21T15:30:00.008-04:00

This story has been bouncing around the internet for several days on many other blogs. I wanted to post a link also, but it was so outrageous that I assumed it would be exposed an an Onion myth or something. Alas, as CBS, the heirs to Walter Cronkite (if not also Dan Rather) have confirmed the story, I guess there must be some truth. So, in case you have not already heard it, here is the story of the young environmentalist schoolgirl who was mugged by the reality of "a woman" from the U.S. Fish and Wildlife Service. Why is this stopping with a vague apology of a "clerical error" of "processing" by the USFWS? It would never have been "processed" if the federal agent hadn't reported the little girl in the first place. It seems to me that bowing, scraping, and groveling in person by the unnamed agent is a more appropriate closure.

Hat tip to: numerous bloggers who have been on top of this story, especially Mark Steyn.

Wise as Serpents: The Movie

2011-08-19T11:46:00.002-04:00

Not really. But Wise as Serpents, the book, by Brad Hansen, Mark Isaac, and Doug Norton is now available on Kindle for only $1.99. We think it can be a great resources for highschool and/or college study groups wishing to establish both a Christian foundation for an analysis of economic questions, and an economics foundation to inform discussion of policy based upon Biblical justice.

Friday Posts: Spanish Jobs Program Bombs, so Does American*

2011-08-19T11:22:00.003-04:00

Doug and I were at one of the first conferences in which an academic report (Calzada et al.) on the bursting of the Spanish "Green Jobs Bubble" was presented, and we've been using the results in our Economics of Sustainability class. I don't know what effect that evidence has had on American students with an initial inclination to follow the Spanish model. (Full disclosure: I recently bought a set of solar garden lights, and so far I am very happy with them).

But, the transferability to the U.S. of the problems with promoting "green" technology as fundamentally a "jobs" program is now evident, as these three media articles from this week demonstrate: my previous post from Seattle on their cash for caulkers program, this from the Boston Herald on the bankruptcy of a "star" Massachusetts solar firm, and even this from the New York Times . Venture capital firms constantly make guesses about which firms are making new products or offering new services that are going to have profitable markets. Many, many times those start-up firms fail to pan-out. That's the nature of the business, but the risks are absorbed for the small chance of investing in the next Apple or Facebook. Survival for a VC firm will include having staff with a good nose for good investments and, as Alchian so famously pointed out in the 1950's, good or bad luck. We need to fundamentally rethink the models, popular with both "liberal" and "conservative" politicians, of the government acting like a venture capital firm: what works, what are the costs and distortions, and what is the ultimate goal? ("Number of jobs" is not necessarily a good indicator of long term success,as the Spanish bubble demonstrated).

*Hat tip to Hotair on the New York Times article. And, yes, the title is a musical reference.

Ah, That Stimulating Cup of Seattle Juice, Leaking Out of the Bucket All Over The Pavement.

2011-08-16T15:01:00.005-04:00

According to KOMO News in Seattle, on Earth Day "last year" (so I'm assuming that's April 22, 2010) Seattle received a $20 federal million weatherization("cash for caulkers") grant that was supposed to retrofit 2,000 homes and create 2,000 "green jobs." Sixteen months later, a grand total of 3 homes have been retrofitted and 14 (mostly administrative, not construction) jobs have been "created" --- I put that in quotes because it assumes no job loss from the taxes and borrowing that funded the $20 million. Now that's a "leaky bucket."

As President Obama says, he was shocked to discover that there is no longer any such thing as a "shovel ready" project. This is a serious macroeconomic problem, because it calls into question a most basic, practical level the usefulness of macroeconomic counter-cyclical (Keynesian) stimulus programs. In other words, even if Keynes was correct in his underlying formal theory, if the environmental impact statements and labor and wage studies and so forth make it impossible to time counter-cyclical stimulus correctly, then it doesn't matter how correct Keynes' theory is/was, it's not going to work in practice. That's why I was in favor of the idea that if the Administration was going to try a Keynesian stimulus, it should have addressed this problem head on, by a decree of an economic emergency that would have suspended many barriers to shovel-readiness.

Hap Tip to Drudge.

Friday Link: Taking it in the Shorts

2011-08-12T10:10:00.003-04:00

My link for Friday is this Bloomberg discussion about several European countries banning short selling in their stock markets. "Unintended consequences" is only the beginning of a discussion of why this is a bad idea (and note that the topic of "unintended consequences" is discussed explicitly in the article). How about: "May have the exact opposite effect as intended." Or, as I read yesterday, (and I apologize for not writing down the author of the quote), "This is like unhooking your heart monitor because you don't want to hear bad news."

BPD, West Virginia

2011-08-06T21:27:00.003-04:00

There is one area in which I am in partial sympathy with the late Senator Robert Byrd. I believe that the federal government is too concentrated in Washington, D.C. For example, I find the idea that the National Museum of the American Indian is in Washington, DC not only an example of more wealth transfer to an area simply because it exercises political power, but also bordering on the insulting given the atrocities inflicted on Native Americans from Washington, D.C.. I actually find it refreshing when some important functions, such as the Centers for Disease Control, are located elsewhere (CDC is in Atlanta).

On the other hand, the late Senator Robert Byrd's lifetime challenge seems to have been to move as much of the federal government as he could get away with to West Virginia. (In this he simply followed in the great tradition of Lyndon Johnson who tried to move as much of the federal government to Texas as he could get away with.)

I remember a complicated legal question I had for the IRS a few years ago, and I was told "Oh, you need to talk to our office in West Virginia." Well, you remember all the brouhaha we've been having recently over our public debt. What I didn't know until I read an article by Mark Steyn and double checked it in an archived article in TIME, is that the U S Bureau of the Public Debt is located in...West Virginia. So if the US ever defaults on our public debt, does that mean that all of those Chinese and European creditors will have to stand in a line waiting for payment....in West Virginia? That will have to be good for their hotel, motel, and restaurant business. Somewhere, Robert Byrd is smiling (something he actually didn't do very much when he was alive).

Friday Links

2011-08-05T09:49:00.002-04:00

Here are my two choices for the week:

Selling Lemonade Is Not A Crime. I agree wholeheartedly, but let's admit that there are lines to be drawn. Many homeowners agree to property covenants that they will not operate a business out of their residence. If Junior is 24 and operating a lunch wagon on the front yard, then there's probably an enforcement issue.

Tax Holidays Are A Bad Idea: Unintended consequences, unintended consequences, unintend.....

As Belgium Waffles....

2011-08-04T16:26:00.005-04:00

As I am writing this at the closing bell, the Dow Jones Industrial average has dropped over 500 points (over 4 % of value) today. The talk is not a lot about what is going on in the U.S. (although the July Unemployment numbers come out tomorrow) but rather what is going on in Europe. Why should our markets be so nervous? Why should we care that the Wall Street Journal reported today U.K. regulators' interest in Belgian debt, in addition to the known problems of Greece, Ireland, Spain, and Italy. I ask you, when was the last time you had a thought about Belgium one way or another (and I don't count Belgian waffles)?

This is why you should care.

Good. Food.

2011-08-02T23:18:00.003-04:00

Doug and I have been involved in a lot of recent discussions about the Lord's Supper (Communion, the Eucharist). For those of you who would like to read a very well written discussion of the Reformed view of Communion (which, as the author points out, turned out to be in many ways similar to the Orthodox view), I invite you to read this fine article.

Johnny, We Hardly Knew Ye?

2011-08-02T09:58:00.002-04:00

There are several media reports (I got mine from Rich Lowry) that Sen. Richard Durbin (D- IL) is saying that with the passage of the compromise agreement on the debt ceiling, we are witnessing "the final internment of John Maynard Keynes." As an economist, I wonder if that's true? If so, why? And, to what effect?

Are we witnessing the death of Keynes own formidable intellectual legacy? I don't think so. The death of naive post-war Keynesianism? That died during the simultaneous inflation/recessions of the 1970s. Perhaps we are witnessing the death of the facility with which those who politically favor more and more government central planning of the economy can merge Keynesian-like economic arguments with their own political agendas. But if that died, it died several weeks and months ago, as it became clear that the massive ratcheting up of the trajectory of federal spending (and with it the federal debt) has failed to solve the nation's current economic problems.

Don't take this that I am an enemy of Keynes. I'm not a macroeconomist by research field, by I teach it in principles courses and I have to keep a straight face when I discuss other economic theories that try to explain-away the disaster and misery that were the Great Depression of the 1930s. Keynes at least recognized that something was amiss.

I also think that the first Keynes versus Hayek "rap" video was fun, but I kind of wish that the creators would put it to rest. Economics shouldn't be about (although it sometimes is) some kind of zero-sum smackdown in the schoolyard at recess. It seems to me, as an outsider with no skin in the macroeconomics theory game, that there are more similarities between Keynes and Hayek that might be realized. I hear both Keynesians and Austrians talking about asset bubbles, for example. Keynes famously referred to "animal spirits". Schumpeter highlighted the crucial role of entrepreneurs. Neither Keynesians nor Austrians are fans of the static, soul-less, microeconomics of equilibrium price theory. I am sure there are others. The point is, Keynesianism may indeed be dying, but I wouldn't count out that dead scribbler John Maynard Keynes, at least not yet.

TBD

2011-08-01T10:55:00.000-04:00

When the Collective Bargaining Agreement (CBA) for the NFL was completed the pulse of Sports Talk radio spiked and excited fans like me tuned in to hear all the latest news. Now, I am ready for the season to start and I'm tired of hearing whether people are satisfied/dissatisfied with their team's brief off-season acquisitions and cuts. But, perhaps what I was most dissatisfied about were the numerous comparisons between the NFL and Players Association and the debt ceiling negotiations. The latter is about the future landscape of the United States in almost all imaginable ways, while the former is about a sport (albeit a beloved one) and how to divide a pie.

This morning when I pocketed my iPhone, the news alert box reported a debt ceiling agreement (still needs to be passed). The bill was not beloved amongst everyone. Democratic House Member Emanuel Cleaver called the deal a "sugar-coated Satan sandwich", and, while Republican House Members have not provided quotes quite as memorable many of them are also dissatisfied. But, the Wall Street Journal reported this morning that this was perhaps the greatest victory for conservatives since the 1996 Welfare Reform. This was a compromise that does not solve all the problems instead it kicks the ball in the conservative direction to be determined later. The bill still leaves open a number of political strategies for both parties to exhaust in the upcoming 2012 elections. Meanwhile, those elections will determine whether the American people have more appetite for conservative reforms.

As mentioned earlier, these are more than standard negotiations. The United States is at a turning point in history where it will decide whether to adopt large government that wields panels of experts slated to solve all our problems or a smaller government that allows people to select into and exit from specific governance communities based on how well those people solve problems. Like Charles Krauthammer wrote in a recent National Review article,

We’re only at the midpoint. Obama won a great victory in 2008 that he took as a mandate to transform America toward European-style social democracy. The subsequent counterrevolution delivered to that project a staggering rebuke in November 2010. Under our incremental system, however, a rebuke delivered is not a mandate conferred. That awaits definitive resolution, the rubber match of November 2012.

Like the sports radio soon I will be tired of reading and listening to these discussions. For now, I read about them, knowing that next November will go a long way to determining the future of our country.

Revised and Resubmitted

2011-07-29T08:16:00.001-04:00

What happened to the plans, plans to dive into deep mathematics and understand the mystery of Mas-Colell? Simple. There were those revise-and-resubmits on pending manuscripts, building up other research projects, and a teaspoon of dread/laziness. Allow me to share a brief overview of the projects:

Endogenous Institutions and the Possibility of Reverse Crowding Out -Since the implementation of New Deal programs in the 1930s voluntary charity (e.g. churches and non-profits) has receded and become dominated by government provision of charitable goods/services. Is this reversible? There are two conditions that must be met for what we call "reverse crowding out" to occur. First, taxes must go down. Second, total provision of the charitable goods and services must at least remain the same. We design an economics experiment that is intentionally staged (to mimic the historical evolution of charity in the U.S.). We allow in later stages for participants to vote on their own tax levels, where the tax is 80% efficient (the selection of tax levels is the endogenous institutions part). One of our central findings is that what we called "reverse crowding out" was rarely obtained. However, one interesting result that emerged regarded TRUST. If groups had a high level of provision in Stage 1 they often did not vote for high taxes later in the experiment. To me, this finding is of serious interest because it indicates that for a slew of things people view taxes as a COMMITMENT DEVICES to secure charitable goods they deem valuable. This causes me to consider a quote from Adam Smith,

"What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these."

Experts with Conflicts of Interest: A Source of Ambiguity? - With specialization comes expertise, people who have deep knowledge about a small sliver of material. We call on these people to guide our actions and provide us with good advice. Yet, many professions whether they are doctors, lawyers, financial advisors, computer specialists, mechanics, etc. have conflicts of interest which could lead to distortion of such advice. Some folks have advocated that conflicts of interest be subject to full disclosure. We model an experimental environment in which an "expert" knows information with certainty but has a financial incentive to distort the truth. Yet, we are more interested in how the "clients" perceive this advice. The paper has two goals. First, from the point of view of the economics literature this bridges research on ambiguity (which you can think of as situations where known-to-be-relevant information is not known) and "credence goods" (which studies how "experts" decide to treat customers). Moreover, this ambiguity flowing from a conflicted expert is far more naturally occurring than standard balls-and-urns or compound lotteries. The second goal is to show when clients accept advice from the conflicted expert. Clients with low outside options (alternatives) were more likely to take the advice. In our experiment this worked out well; however, if experts lied this may not have been so benign. To me, this suggests that those without greater alternatives are more likely to be hoodwinked in situations where there are conflicts of interest.

Intermission: "On Missing the Boat"

2011-07-27T10:14:00.003-04:00

My last post was about the essence of globalization, this post, however, shares a lesson about the outcomes of globalization and what it might do. Collier's intermission chapter, "On Missing Boat", is descriptive of this point. Collier recognizes the outcomes of globalization have been superlative over the last 30 years, yet, the prospects of bottom billion countries breaking into the world market are not great at this point because they have fallen into the "traps". In short, the bottom billion countries have a lot of catching up to do.

First, let's present some of the outcomes of globalization from 1980 onward. Most globalization did not begin until the 1970s with improvements in technology that lowered barriers to transportation and communication. Below are the $2 poverty rates. On the y-axis is the percent of the population living on less than $2.16 per day (which is adjusted across time by inflation and across countries for purchasing power parity).

We can see that since the 1980s there has been a large drop in this kind of poverty in countries such as China and India (which have posted massive growth numbers). Other declines have been more modest but those are also good signs. But, notice that the Sub-Saharan African countries are a flat line. There rate of poverty has not improved over nearly 30 years. Have they missed the boat to prosperity?

As mentioned earlier, this question is Collier's chief concern. What he is worried about is an idea called "Economies of Agglomeration" (EOA) (this idea was popularized by Paul Krugman, and, is the reason he won the Nobel Prize). When companies decide to make investments in other countries either to outsource or break into a new market many costs are borne on the first-mover. A company must ask whether the area they are considering as a workforce with the requisite skills, necessary transportation networks in-and-out of the country, legal systems that do not make conducting business too cumbersome, and is the necessary infrastructure such as electric and sewer in place? These are just a sample of the questions that companies must ask prior to a decision to move into an area. Once one company moves in and builds some of the infrastructure up, trains workers, and builds a trusting relationship with the government/law it reduces the cost for subsequent movers.

This notion of EOA is important because investment in the bottom billion countries does not seem attractive at the moment. Why invest in countries that have little infrastructure, little legal stability, and untrained workers? There are safer investments to be had. And, indeed, American and European investors are not the only ones of this mindset. Collier reports that there are massive amounts of "capital flight" in these countries. People within the country are "voting with their dollars" by investing money in countries not their own! Also, people who are educated and highly skilled are seeking opportunities by migrating outside of their home country. Those facts are far from a vote of confidence.

When you see how many jobs have been created and how people have lifted themselves out of poverty this makes people champions of globalization. There are some critics of globalization on different fronts (cultural, environmental, ease of operating illicit industries, etc.). These concerns have some merit but there is also tremendous hope in globalization. As Nicholas Kristof writes in "Where Sweatshops are a Dream", "The best way to help people in the poorest countries isn’t to campaign against sweatshops but to promote manufacturing there." Unfortunately, Collier's discussion of EOA, capital flight, and migration point to the fact that some countries are not likely to be successful overnight. He writes, "This all adds up to a depressing picture of what globalization is doing for the bottom billion. To get a chance to play in the global economy, you need to break free of the traps . . . Even once free of the trap, countries are liable to be stuck in a kind of limbo ---no longer falling apart, but not able to replicate the rapid growth of Asia . . ." There are some policies rich countries can enact that could help hasten this. We will talk about those in the next post on The Bottom Billion.

You've Got Creative Destruction

2011-07-22T09:29:00.004-04:00

It was a wonder: both the Tallahassee Democrat and the Wall Street Journal writing similar articles on the same day: people getting teary-eyed over the closing of Borders. Wait, I thought, wasn't it just a few years ago that most of America cheered plucky Meg Ryan as she fought to stop the collapse of American (e.g. Upper West Side Manhattan) civilization as she knew it by fighting the arrival of a chain bookstore?* I had visions of finally fulfilling my ambition of combining my work as an economist with my long abandoned dream of becoming a comedy writer by writing a sequel in which a now much older (sorry Meg, but aren't we all) Meg Ryan can't understand as her plucky daughter (who is appropriately plucky today?) tries to stop the collapse of American (e.g. Upper West Side Manhattan) civilization by fighting to preserve a Borders from the encroachment of e-books, embodied by a young techie played by Colin Hanks. The economist in me would feature history's only second sexy lead economist character (this was the first) explaining that this is all a lesson in Joseph Schumpeter's idea of creative destruction: the essence of the competitive market is not static competition among existing firms with static product lines. Instead, it is the ability of entrepreneurs to create value by innovations in products, services, delivery systems, etc.

Alas, my Hollywood visions were once again crushed under the heartless weight of the City of A Thousand Broken Dreams as Rich Lowry today published essentially the same article.

* Disclosure: at the time of You've Got Mail my favorite bookstore was "The Haunted Bookshop" in Tucson.

Globalization (A Primer for Collier's Intermission)

2011-07-21T10:10:00.000-04:00

Globalization is a hot topic and will, no doubt, remain a hot topic for a long time. But, the phenomenon is not new. Let me borrow from Nobel Prize Economist Amartya Sen,

[Globalization is], in fact, neither new nor necessarily Western. And it is not a curse. Over thousands of years, globalization has contributed to the progress of the world through travel, trade, migration, spread of cultural influences and dissemination of knowledge and understanding (including that of science and technology) . . . The high technology in the world of 1000 A.D. included paper, the printing press, the crossbow, gunpowder, the iron-chain suspension bridge, the kite, the magnetic compass, the wheelbarrow and the rotary fan. A millennium ago, these items were used extensively in China — and were practically unknown elsewhere. Globalization spread them across the world, including Europe.-Amartya Sen, "Does Globalization Equal Westernization?", The Globalist 2002

There are a couple important points here. First, globalization is multi-faceted. The acronym I like to use with my class to explain the essence of globalization is PIPI (which I pronounce pee-pee in hopes that it will stick in their memories): Products, Investments, People, and Ideas. Yes, we all know about Products made in other countries from the "Made in China" or "Made in Korea" stickers to the tags of the very shirts on our backs.

Some of us have also heard about Investment. We know that many other countries are buying United States debt. We also know that U.S. companies are Investing in a variety of locales throughout the world (contrary to what you might be thinking most of the investments do not go to the really poor countries ---that is the topic for the next post). The next two portions of globalization are not well known: People and Ideas. But, these are quite powerful components of globalization. When people and ideas are free to flow across borders there are many cultural exchanges -new outlooks, new perspectives, etc. but these People and the Ideas they share can also have economic consequences.

Here is a story to the affect of the Ideas facet of globalization. These ideas happened to be transmitted not by people directly but by products.

The Indian automobile industry was protectionist with plenty of price controls and sales and distribution regulations. At the same time, this was untrue of the industry for small scooters. In terms of innovation the scooter industry thrived while the automobile industry took a dive (in terms of innovation). The question is why? Consider that when we purchase a product we do not just purchase the function of the product but we purchase the ability to learn from the product. The smart and industrious people of India did not merely buy scooters ---they bought the engineering of scooters. Ideas are replicable. Before long India became the arguably the "scooter capital of the world".

In the next blog post on globalization we will broach Amartya Sen's statement that, "[Globalization] is not a curse." We will look at this through the lens of Collier's intermission in the Bottom Billion to discuss globalization.

Who Would've Thought? (Maybe an Economist?)

2011-07-20T14:07:00.006-04:00

'[“There is no clear evidence that playground safety measures have lowered the average risk on playgrounds,” said David Ball, a professor of risk management at Middlesex University in London. He noted that the risk of some injuries, like long fractures of the arm, actually increased after the introduction of softer surfaces on playgrounds in Britain and Australia.

[“This sounds counterintuitive, but it shouldn’t, because it is a common phenomenon,” Dr. Ball said. “If children and parents believe they are in an environment which is safer than it actually is, they will take more risks. An argument against softer surfacing is that children think it is safe, but because they don’t understand its properties, they overrate its performance.”

[Reducing the height of playground equipment may help toddlers, but it can produce unintended consequences among bigger children. “Older children are discouraged from taking healthy exercise on playgrounds because they have been designed with the safety of the very young in mind,” Dr. Ball said. “Therefore, they may play in more dangerous places, or not at all.”]'

See the full Today article in which these paragraphs appear here. Thanks to hotair.com for the tip for the link.

That Thing We Do

2011-07-18T15:42:00.002-04:00

If you've ever wondered how seemingly complicated academic exercises such as economic theory (specifically mathematical auction theory) and experimental economics can play an important role in public policy towards the disadvantaged in society, you might be interested in this video by Prof. Peter Cramton of the University of Maryland on some appalling policy decisions by the people who run Medicare. Disclosure: I am one of the economists who signed the petitions mentioned in the video.

The Bottom Billion: A Book Review (The Traps)

2011-07-18T08:55:00.000-04:00

Well, it has been too long since my last blog post, so I'll get back in the saddle with a book review that could have been written long ago. For three years now I've utilized chapters in The Bottom Billion for the Economics of Compassion course. The author, Paul Collier, writes in excellent prose some fairly advanced concepts, but, another reason I like the book is because it represents an in-between view of the politicized foreign aid debate between Sachs and Easterly. The book has an intuitive structure where Collier diagnoses the so-called "Traps", holds intermission with a discussion on globalization, and continues by offering his "Prescriptions". Overall there is a strong admonition not to fall victim to the "headless heart". In fact, like Saint Ignatius said, "God assumes intelligence" and we are also to love God with all of our hearts, soul, strength, and mind. Thus, long time readers of the blog should not be shocked, I am an advocate of using the mind.

The so-called "traps" are conflict, natural resources, landlocked with bad neighbors, and bad governance in small countries. What does Collier mean by "traps"? These are not black holes of failure from which countries shall never return, rather, these four traps (conflict, natural resources, landlocked with bad neighbors and bad governance) are difficult to escape from and can potentially lead to cycles of poverty. In an effort to help my class remember the key content from those chapters I came up with the following mnemonic: DUMP SID NOT CARL. To our single female readers: you are welcome for the free advice.

The Conflict Trap (DUMP - Destruction, Uncertainty, Misery, and Poverty)

This trap begins with destruction. Conflict destroys physical infrastructure such as buildings and transportation materials as well as disrupts present production. Additionally, conflict also severs social bonds and disrupts children emotionally and hinders their ability to acquire knowledge. Perhaps the most vile fact about conflict is the legacy it leaves: uncertainty. Because there is such a high reversion into conflict after recently emerging from a civil war (Collier cites 50% chance) companies are reluctant to invest in such an unstable nation. Meanwhile there are no opportunities, prospects, or hope for the future. What is there? Misery. The most likely candidates for recruitment into rebel forces to start a new conflict are young males with low education and no dependents. Also, no job equals low opportunity cost for joining the ranks. Now, restart the conflict. This both creates poverty and a situation in which poverty can persist.

The Natural Resource Trap (SID - Survival of the Fattest, Institutions, and Dutch Disease)

This seems like an oddity. Why on earth would natural resources such as oil, gas, diamonds, metals, etc. be a trap? It seems like natural resources ought to be a blessing. And, they are, now here is the the big BUT, without good institutions they will become the profits for power. (Remember, institutions are the social and legal rules governing human interaction. Such rules would include property rights, transparency over where government funds are allocated, the checks and balances of democracy, etc.) Good institutions can help the natural resources to be prosperity enhancing, without them, natural resources basically promote poverty because the potential profits to be made attract certain kinds people to power.

*Notice in the last sentence I said "can help". Why didn't I use the stronger statement "will help"? Dutch Disease. There is this idea in economics that large natural resource endowments can actually harm an economy. For example, imagine that a country is a big exporter of motor scooters when suddenly some in-land farmers are shooting dinner and that good ol' black gold bubbles up. Now the country exports oil and motor scooters, but, their scooter market is in shambles because the value of the currency has gotten so high. Why is the currency high? When you buy a country's goods like oil you buy their currency. As more people are demanding the country's currency (to buy the oil) the value of the currency increases. What does this have to do with scooters? Where an importer of scooters would only need to pay $50 per scooter before they will now have to buy the country's more valuable currency in order to import the same scooter. Now it might cost them $70 for the same scooter. Maybe they will buy elsewhere. What can combat Dutch Disease? We'll get to that in the next post.

The profits to power from controlling a natural resource leads into a core idea Collier has called Survival of the Fattest. Normally in electoral competition the politician who promotes the best mix of policies wins the election. This would be Survival of the Fittest. In countries with large natural resource endowments however this kind of electoral competition does not take place as easily due to corruption. Instead, politicians in these crooked regimes can use the profits from the natural resource to buy votes. Moreover, their corrupt practices keep potentially good politicians from entering the political process because they can see everything is rigged. Such a rigged process and the wealth it creates for the select few in higher ranks of government also attracts more power hungry. Over time the integrity of the government disintegrates.

Landlocked with Bad Neighbors (NOT - Neighbors, Opportunities, Transaction Costs)

Close your eyes and imagine your most unreliable friend. What would happen if you had to bet your future on them coming through for you? That is the situation of the people in landlocked countries with bad neighbors. It is all about the neighbors. Switizerland for example is landloced; yet, Switzerland is successful in part because France and Germany are both well-functioning economies. When landlocked countries have bad neighbors they lack opportunities. As Collier writes, "When you're coastal you serve the world. When you're landloced you serve your neighbors." Bad neighbors make fore weak opportunities. What further harms opportunities are the high transaction costs. Transaction costs are obstacles to trade. They can be anything from poor roads, bad ports, no airfield, extortion that occurs on the road or from customs officials. All of these things increase the cost of trade. Being landlocked is not so bad, but, being landlocked with bad neighbors hurts.

Bad Governance in Small Countries (CARL - Corruption, A?, Reform, Largeness)

This underpins most of the traps already discussed. The role of corruption is simple: It corrodes political checks and balances and hinders growth (we can talk about this in greater depth on a future blog post if you like). But, the reason Collier writes that bad governance is such a hindrance to "small countries" is based on an empirical finding. In order to reform a country Collier argues that countries need a large educated population and a large general population. This helps with building a critical mass of people for reform within a country. Also, Collier argues that recent emergence from civil war helps to turnaround a country's prospects. Think about that on an individual level. When are you most likely to change? Perhaps when you have hit rock-bottom. Things are more fluid in those situations and we are more accepting of change than we otherwise would be. But, reform is more than population size and level of secondary education it also requires courage and a special person to stick their neck out. There is no doubt a human element. Becoming free and staying free however are two different things.

What keeps a country free from falling back into all these traps? Stay tuned.

Take the Money and Run

2011-07-15T09:38:00.006-04:00

The Rockefeller family were never wallflowers when it came to building churches. On the left is the interior of Riverside Church in Manhattan, funded by John D. Rockefeller, Jr. and built for modernist Baptist preacher Harry Emerson Fosdick. You can easily see how this church reflects the simplicity typical of the Baptist roots of Rockefeller and Fosdick. (Yes, that was sarcasm). To the above right is a picture of the "Rockefeller Chapel" funded by equally Baptist John D. Rockefeller, Sr, who also founded the University of Chicago on which the "chapel" resides.

The Economic Science Association recently had its world meetings at the University of Chicago School of Business, directly across the street from Rockefeller Chapel. One day during a break I decided to wander over and see the chapel. I guess I shouldn't have been surprised. The stone carvings above the door had the IHS indicating the chapel's Christian origins. Inside, there was no communion table in sight. The pews were stripped of any Bibles or hymnals. I found it impossible to tell by anything not relating to the original structure that this was in any sense a Christian, must less sacred, space.

Upon moving to the lobby, I noticed a large marble dedicatory building stone, with the following carving:

"The founder of the University of Chicago, John D. Rockefeller, on December 13, 1910, made provision for the erection of this chapel and thus defined its purpose: As the spirit of religion should penetrate and control the university, so that building which represents religion ought to be the central and dominant feature of the university group. Thus it will be proclaimed that the university is dominated by the spirit of religion. All it's departments are inspired by religious feeling, and all its work is directed to the highest ends."

A docent was sitting right next to the tablet, and I asked her: "Do you think this is true?"

She said, "Is what true?"

I said, "What it says on this tablet about the spirit of religion permeating and controlling the University of Chicago."

She said, "Well, that probably true for the divinity school."

I said, "But that's not what it says. It says 'all its departments.' Do you think that if I walked into the Political Science department that they would say that the spirit of religion was permeating and controlling their teaching and research?"

She said, "That's a really good question. No one has ever asked me that before."

It took much less than 101 years for the University of Chicago to be stripped of its Christian moorings. That's a sliver of time that it took for Princeton and others. The process of secularization marches faster and faster. The question is, when will donors such as John D. Rockefeller recognize the corrosive effects of time and modernism and change the way they are stewards of their resources, even when they have the best intentions with respect to making those resources available to the work of the Gospel.

On a Roll, With Government Protected Butter

2011-07-13T11:19:00.004-04:00

Wow. AEI is on a roll with it's analyses of U.S. farm policies. Here's another link to a summary paper about how United States agricultural policies harm the world's poor people.

How Many Times....When Will They Ever Learn?

2011-07-13T11:12:00.004-04:00

Can this be for real? Do we really have the federal government once again pressuring banks to make mortgages to people who can't afford to make the payments? Please. Make it stop. Or tell me that this is an Onion parody. Or that this is really April 1.

Indeed.

2011-07-12T11:35:00.002-04:00

I realize that the attached document, by Goodwin et al. is relatively lengthy for a blog-post, but it is one of the best attempts I have seen to lay out the intricate parts of our expensive agricultural subsidy programs and to debate which ones could and should be cut.

Meditation 2: The Great Separator

2011-07-06T16:43:00.000-04:00

There is a scene in L.A. Confidential where Dudley Smith (James Cromwell) is hammering Sid Hudgins (Danny Devito) with his fists. Then, Dudley Smith drops this pearl, "Reciprocity Boyo! It's the key to human relationships." Indeed! Reciprocity seems like the natural fuel for human relations. If we keep careful record of rights-and-wrongs then we each have incentives to keep doing right. Reciprocity also seems symmetric. But, in such an environment we must ask, "Where is love? Where is grace? Where is forgiveness?"

But reciprocity is not the only ingredient in human relationships. Empathy has also been an important fuel for human relationships. Consider the fact that many cultures have had something akin to the Golden Rule, "Do to others as you would have them do to you." (Luke 6:31). In fact, Wikipedia cites numerous examples throughout history which seem to consider the welfare of others.

The meditation, or what we shall call "The Great Separator", is about what separates Christian thought from the reciprocity and empathy that has been practiced by other cultures. Jesus teaches us an important and radical lesson in the Sermon on the Mount:

“If you love those who love you, what credit is that to you? Even sinners love those who love them. ³³ And if you do good to those who are good to you, what credit is that to you? Even sinners do that. ³⁴ And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full. ³⁵ But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be children of the Most High, because he is kind to the ungrateful and wicked. ³⁶ Be merciful, just as your Father is merciful.

Tell Me What You Really Believe

2011-07-05T22:38:00.002-04:00

One of my academic mentors, the late Ed Zajac, told me of being schooled at old Bell Labs on how to conduct yourself when being interviewed by the press. At that time, the idea of staying on topic was just becoming conventional wisdom. However, Ed Miliband, the Opposition (Labour) Leader in the U.K. has given "staying on topic" an entirely new dimensionality, if not singularity, in this now almost viral interview. (Thanks to HotAir for the original tip for the link).

Bonhoeffer Part 3: The Second Myth

2011-07-01T21:06:00.008-04:00

I'm continuing with my discussion about how Eric Metaxas' book Bonhoeffer: Pastor, Martyr, Prophet, Spy upended some of my views about Dietrich Bonhoeffer. In this blog, I assert that there is a second Bonhoeffer myth in many religious circles, namely that Dietrich Bonheoffer was a committed pacifist, who underwent some kind of wrenching spiritual reorientation to join in the plots against Adolf Hitler.

To argue that this is a myth, please note carefully my modifier "committed" on the noun "pacifist." It is clear in Metaxas as in every other Bonhoeffer biography I have ever read that Dietrich Bonhoeffer was not a militarist nor a scholastic "just war" advocate. He passionately believed in the Sermon on the Mount and its directions of peacemaking. He fervently hoped that Europe would not enter into another World War and correctly saw that it could only lurch the continent from disaster to disaster. But that doesn't make him what I would call a committed pacifist. This is my own personal, subjective judgment: I am convinced that, even early in his career, if Dietrich Bonhoeffer were standing on the street and saw SS thugs kicking Jewish prisoners to death, and that if he had an ax or a baseball bat in his hand, he would resort to violence against the storm troopers to attempt to save the lives of the prisoners. In this regard, I have come to believe, from the documents in Metaxas' book, that Bonhoeffer's transition into the anti-Hitler conspiracy was not a wrenching reorientaion, but a painful natural progression that Bonhoeffer saw far in advance.

There are, in Bonhoeffer:P,M,P,S three key pieces of documentation for me.

First, there is a letter to Anglican Bishop George Bell, a close confidant,upon the news that Bonhoeffer's birth year was likely to be called up for military service (p. 322-323 in Metaxas).

Bonhoeffer states clearly it would be "conscientiously impossible to join a war under the current circumstances." (Emphasis mine.) A full-blown pacifist would never add the qualifier "under the current circumstances." Then he says that "Perhaps the worst thing of all is the military oath which I should have to swear." Again, to a committed pacifist the worst thing about being in military service would not be the swearing-in oath, it would be the violence expected of a soldier. Bonhoeffer continues: "So I am rather puzzled on this situation, and perhaps even more because I feel it is really only on Christian grounds that I find it difficult to do military service under the present conditions, and yet there are only a few friends who would approve of my attitude. In spite of much reading and thinking concerning this matter, I have not yet made up my mind what I would do under different circumstances. But actually, as things are I should have to do violence to my Christian convictions, if I would take up arms 'here and now'". (Again, emphasis added by me). Metaxas also provides ample documentation that Bonhoeffer did not pressure his students to refuse to serve in the armed forces.

Secondly, there is the testimony of Eberhard Bethge. Bonhoeffer was Bethge's mentor, and Bethge was very likely Bonhoeffer's best friend through most of his adult life. Bethge reports (Metaxas pp 360-361) that Bonhoeffer, as early as 1935, was leading his students to understand that "Mere confession, no matter how courageous, inescapably meant complicity with the murderers....Thus we were approaching the borderline between confession and resistance; and if we did not cross this border, our confession was going to be no better than cooperation with the criminals."

Finally, one problem for all of Bonhoeffer's biographers is that there is no single letter or diary entry at which point Bonhoeffer wrote, "Today I decided to help kill Adolf Hitler." If you believe in the "gut-wrenching reorientation" model, then what we are looking for is a missing piece of the puzzle. But, if instead, you believe that Bonhoeffer's joining the Abwehr conspiracies was instead the naturall progression of a man who believed that we must obey God in everything, and who also saw, long before so many of his fellow Germans, the horrific evil of the Nazi regime, then doesn't the absence of such a "Road to Damascus" letter make perfect sense?

What we do know is that the Bonhoeffer family and circle were collecting evidence of Nazi atrocities and run-ups to the final solution perhaps as early as the invasion of Poland. Bonhoeffer would have most certainly been aware of this information. Metaxas provides, to me for the first time, a startling point at which we can be sure that Bonhoeffer had crossed into active participation in the conspiracies (pp. 361-362). In early 1940, Bonhoeffer and Bethge are visiting a small German village pub when news comes over the radio that France had surrendered to Germany. There was, apparently much cheering, and singing, and giving the Nazi salute:

"Bethge was flabbergasted: along with everyone else, his friend [Bonhoeffer] stood up and threw out his arm in the 'Heil, Hitler' salute. As Bethge stood there gawking, Bonhoeffer whispered to him: 'Are you crazy? Raise your arm! We'll have to run risks for many different things, but this silly salute is not one of them.' ... It was then, Bethge realized, that Bonhoeffer crossed a line. He was behaving conspiratorially."

As Metaxas documents on page 369, in July 1940, Dietrich Bonhoeffer went to work for the Abwehr, the German military intelligence. He became a spy, and joined the conspiracy to topple, and most likely to kill, Adolf Hitler.

Go Noles!

2011-06-27T16:13:00.003-04:00

It's always good news when a major national blog (Instapundit) highlights research from a fellow FSU faculty member. And, by the way, were you aware that tropical storm/hurricane activity has been at recent historically low levels in the past few years? (Just as a word of warning, go back to the mid 1980s and observe that it was also in a period of low hurricane activity. It was in that "low" period that Tallahassee last got slammed by a major hurricane.) So if you standing at Spot X on the Gulf or Atlantic coast, the "average" level of activity may not be much comfort to you if the one storm that hits the U.S. that year is heading in your direction! (For that matter, my wife and I survived the 1983 tropical storm that came up the Gulf of California and rained destruction on Tucson, Arizona). In economics it's called not confusing ex ante expectations with ex post realizations.

Bonhoeffer Part 2: The First Myth

2011-06-25T13:53:00.010-04:00

MYTH: Because Dietrich Bonhoeffer's two visits to the United States were in conjunction with the liberal Union Seminary, we can view Bonhoeffer as a typical, early 20th century modernist liberal in the Union Seminary mold. (By the way, I am using the term "liberal" to describe a theological, not political viewpoint.)

I’m not sure of the protocol on blogging when you want to make a point by referencing a lot of material in another source. Metaxas’ depth of research on Bonhoeffer’s letters about the modernist theology that he saw in the United States at Riverside Church (Harry Emerson Fosdick) and at Union Theological Seminary is extraordinary. So I’ll err on the side of intellectual property rights and say “read the book” while quoting just these two summary passages regarding Bonhoeffer’s second visit to the United States.

On his earlier visit, Bonhoeffer had been warned that the Broadway Presbyterian Church, just down the road from Union Seminary, was a hotbed of “fundamentalism.” But Bonhoeffer was dissatisfied by the theology of worship at Riverside (p. 333), and he wrote about a sermon was centered around not the Bible but rather the philosophy of William James:

“The whole thing was a respectable, self-indulgent, self-satisfied religious celebration. This sort of idolatrous religion stirs up the flesh which is accustomed to being in check by the Word of God….The tasks for a real theologian over here are immeasurable. But only an American himself can shift all this rubbish, and up till now there do not seem to be any about.”

So Bonhoeffer ventured forth into forbidden territory. He’s what Mextaxas reports that he wrote when he attended Broadway Presbyterian Church:

“Now the day had a good ending. I went to church again. As long as there are lonely Christians there will always be [church] services. It is a great help after a couple of quite lonely days to go into church and pray together, sing together, listen together. The sermon was astonishing (Broadway Presbyterian Church, Dr. McComb) on our ‘likeness with Christ.’ A completely biblical sermon --- the sections on ‘we are blameless like Christ,’ ‘we are tempted like Christ,’ were particularly good.” In perhaps a second part of that letter or another letter, he said of Broadway Presbyterian Church “This will one day be a center of resistance when Riverside Church has long since become a temple of Baal. I was very glad about the sermon.”

The key part, I think, in this puzzle (at least for those who have been taught to see Bonhoeffer as a “modernist”) is the phrase “Word of God.” Bonhoeffer was out of step not only in the Upper West Side of Manhattan but also in Germany, where he was a rebellious “academic grandson” of Friedrich Schleiermacher. According to Metaxas (p. 136-137) Bonhoeffer wrote to his more typically 20^th century German liberal brother-in-law:

“First of all, I will confess quite simply --- I believe that the Bible alone is the answer to all our questions, and that we need only to ask repeatedly and a little humbly, in order to receive this answer. One can’t simply read the Bible, like other books. One must be prepared really to enquire of it, only thus will it reveal itself. Only if we expect from it the ultimate answer, shall we receive it. That is because in the Bible God speaks to us. And one cannot simply think about God in one’s own strength, one has to enquire of him. Only if we seek him, will he answer us….

“If it is I who determine where God is to be found, then I shall always find a God who corresponds to me in some way, who is obliging, who is connected with my own nature. But if God determines where he is to be found, then it will be in a place which is not immediately pleasing to my nature and which is not at all congenial to me. This place is Cross of Christ. And whoever would find him must go to the foot of the cross, as the sermon on the mount commands.”

Here are three closing thoughts. First, many of those who read this passage will find it beautiful, even powerful, but may not understand how much of an outsider these views made Bonhoeffer in the world of "establishment" German and American Christianity in the early part of the 20^th century.

Secondly, it was mind-boggling humbling to read Mextaxas’ historical narration, knowing how it would all end, and to follow day after day the Dietrich Bonhoeffer who never ceased studying the Bible and praying: in life, in prison, and on the doorstep of death.

Finally, does it bother you to read the thoughts of a passionate Christian such as Bonhoeffer describing sermons and theology of Christians (Christians who are probably in most of our hymnbooks) as "idolatrous" and “rubbish” and comparing a famous Christian church to a “Temple of Baal”? I know it did me. In our culture there are strong constraints against being judgmental, and those cultural constraints have become a part of our religious identity. We don’t want to be seem as being judgmental of other Christians. Was Bonhoeffer out of place, or is it our reluctance to call out bad theology that is the outlier?

Mark's Friday Links

2011-06-24T12:09:00.004-04:00

1 ) It surprises me the number of people today who want to march under the banner "progressive" when the actual time in America in which self-proclaimed "Progressives" were in power included such abuses as Jim Crow segregation and eugenics. Probably the height (or depth) of the Progressive Era support for eugenics was in forced sterilization laws. Here is an article on attempts to provide compensation for some of the still-living victims of that program. (Hat Tip to Instapunidt).

2 ) Not exactly a link, but here is a headline from this morning's Wall Street Journal: "Airbus Caps Week With Record Order." It seems that while one of America's biggest and most successful employers and exporters, Boeing, is having to spend energy, time and resources fighting our own government over Boeing's right to optimize their production model by building things in that strange foreign country known as South Carolina, Boeing's biggest rival (Airbus) is spending its energy, time, and resources, you know, building and selling airplanes.

UPDATE: Here are some from Doug

This is a really interesting non-economic perspective on immigration by President of Asbury Theological Seminary Timothy C. Tennent. The video is a short 5 minute talk and well worth the time.

I've started reading this really good book on hospitality called Making Room. The book begins with this fantastic quote from Henri Nouwen, "If there is any concept worth restoring to its original depth and evocative potential, it is the concept of hospitality."

Here is a fantastic new podcast on "benevolent autocrats" by William Easterly. Normally I am not a fan of sarcasm; however, I find Easterly's sarcastic bent to be funny. It's definitely worth listening to if you're curious about the growth miracles in China, South Korea, Singapore, etc.

Meditation 1: Freedom

2011-06-23T16:13:00.000-04:00

Truth can become stale but meditations can bring fresh revelation. In that spirit I'm looking forward to bringing my attention to important truths about Christianity that we ought to keep fresh. Freedom. Last I considered freedom in this blog post about the Passover Feast. The Jewish people remember the Lord who led them out of Egypt. We remember Jesus who led us out of spiritual slavery. But, there is a difference between being free and staying free. That is the subject of this meditation. We cannot obtain freedom on our lonesome. When we try on our own we feel confined and get depressed at how much bondage we may still experience. This verse from Romans 8 (The Message) spoke to my heart:

"Those who think they can do it on their own end up obsessed with measuring their own moral muscle but never get around to exercising it in real life. Those who trust God's action in them find that God's Spirit is in them ---living and breathing God! Obsession with self in these matters is a dead end; attention to God leads us out into the open, into a spacious, free life."

To live a free life we need correct focus. In some ways this is a question of magnification. Consider the heroic stories of faith from Hebrews 11. These people did great things because they magnified a magnificent God. That is, they paid less attention to themselves and more attention to God. My meditation is simple: We remain free when we magnify God more than ourselves and our problems.

Bonhoeffer Part 1: No. It's. Not.

2011-06-21T21:11:00.005-04:00

I wanted to structure my reviews of Eric Metaxas' Bonhoeffer: Pastor, Martyr, Prophet, Spy around several ways in which this book upended what I had previously been taught about Dietrich Bonhoeffer. But first, I thought I really needed to write this introductory post.

As long as I've followed the life of Dietrich Bonhoeffer, and thought of him as one of my heroes, I've noticed that there is a tendency, by many people, including me, to read Bonhoeffer's story into our own situation. Liberals opposed to the Vietnam War and Evangelical Christians upset over denominational positions on gay pastors have all veered towards the : "This is what Bonhoeffer was going through" narrative. If you want a particularly distorted example of this type of thinking, read this. But as I said, I have not been immune myself. Here's an example: on more than one occasion I've been asked my opinion of putting an American flag in the front of a church. I'm against that, and sometimes openly, and sometimes to myself, like the antiwar protestor and the PCUSA Confessing Church activist, I think of Dietrich Bonhoeffer and his struggles leading up to the Barmen Declaration.

Folks, It's Not the Same. No. It's. Not.

Here is what would be the same thing. Let's say our next President, because he may not be "O," let's call him or her "X," convinces Congress to essentially disband and grant him emergency dictatorial powers, and his "government" in rapid succession, does the following:

1 ) Forces the merger of all American Protestant denominations into a single denomination called the American Evangelical Church, to be headed by a bishop chosen either by the President or by his lackeys.

2 ) Issues a proclamation that any protestant pastor in the new American Church who can be shown to be "-------" where "-------" could be Republican, Democrat, of a certain percentage of Jewish, Armenian, or Scots Irish blood, is hereby excommunicated.

3 ) The new Bishop lays out plans to remove certain books from the Bible and to retranslate others more to the liking of the President, making it illegal to publish any other versions of the Bible. He proposes for pastors to make oaths in the church directly to the President; to remove all crosses from churches and replace them with the flags of the President's political party, to decide who can teach in seminaries, and who can hold meetings in any church in the country, and so on and so forth.

This is what Dietrich Bonhoeffer was facing, and this was only in the first year or so, before things got really bad. I really think that we in America have drunk the Kool-Aid of Arendt's idea of the "Banality of Evil." Maybe I'm wrong, but I don't think Bonhoeffer believed in the banality of evil. I think that Bonhoeffer saw early on that Germany was suddenly being ruled by people who were Nucking Futs and that things were going to get very bad very fast. Lest we forget, within a decade these same people were holding dancing contests on the corpses of people they had just murdered and making hand bags out of human skin.

I think that it is incumbent upon us to remember when we think that we can't see the screen door close on George Bush or Barack Obama fast enough, that even on their very worst, most terrible day, living under the American political party not of our choice is not even in the same universe of mental derangement that was recognized by Dietrich Bonhoeffer. And that lays out the foundation for the three myths of Dietrich Bonhoeffer that I want to explore:

Myth # 1) Because Dietrich Bonhoeffer's exposure to religion in the U.S. was largely through Union Seminary and its modernist, liberal Protestant worldview, Bonhoeffer was also a typical modernist, liberal, protestant.

Myth # 2) Dietrich Bonhoeffer was a committed theological pacifist who struggled mightily against the temptation to join the plot against Hitler, and at a relatively late date had some kind of spiritual moment in which he fell gasping into the reality of the situation.

Myth # 3 ) Dietrich Bonhoeffer was a saintly person who would never lie, cheat, or steal, nor countenance anyone who would.

Before concluding, let me take away right now one of the most often repeated and horribly wrong narratives about Dietrich Bonhoeffer: "Dietrich Bonhoeffer was killed because he spoke out against the policies of Adolf Hitler." "Wrong" on several counts. Initially, Bonhoeffer and the group responsible for the Barmen Declaration were focused on one and one thing alone: the so-called "Aryan Paragraph" (see my analogy above) in which the new German Church moved to defrock pastors who had "Jewish Blood." It was about this narrow issue, not about the invasion of the Ruhr or the persecution of Jewish lawyers and dentists. Bonhoeffer's unceasing criticism of the "German Church" caused him all kinds of inconveniences, but the Nazis never thought they could get away with throwing him in jail. When Bonhoeffer was arrested, it was largely because of his connections with the Abwehr (military intelligence). The Gestapo hated the Abwehr (the feeling was mutual) and the Gestapo sniffed out some money laundering that Bonhoeffer had done to help Jews escape to Switzerland. However, he was not held nor charged on any capital offense. Bonhoeffer's imprisonment as a capital criminal and his execution was because the failed bomb plot (Valkyrie) against Hitler exposed Bonhoeffer's deep connections with that and other plots to kill Hitler and/or stage a coup. In summary, Bonhoeffer wasn't executed because he stood in the city square and yelled "Hitler is a pig", he was executed because Hitler figured out that Bonhoeffer was part of the Abwehr assassination conspiracies.

William Parker and the LAPD, Part 2

2011-06-18T12:51:00.003-04:00

So what did William Parker do to clean-up the LAPD? Doug and I argue that he operated on two separate but interconnected levels: 1 ) he changed the incentives inside the LAPD to encourage honest behavior and discourage dishonest behavior; 2 ) he personally epitomized and repeatedly promoted personal values of honesty and integrity, both in his police officers themselves and in terms of the community’s view of his police officers.

We can’t go through the whole list of incentive changes here, but some examples are: 1 ) raising the salaries of LAPD officers so that he could be more selective in hiring and so that being fired was more costly; 2 ) rotating officers among different parts of the city so that they would not be attracted into local networks of corruption; 3 ) innovating internal controls regarding spotting and punishing dishonest cops.

In terms of values, Doug and I argue that Parker appealed directly to the long history of religious values of the average Los Angeles resident. He spoke of these values constantly, and he used his association with the TV show “Dragnet” to broadcast the values of the honest LA cop. “This is the city. My name is Friday. I carry a badge.” became the new face of the LAPD.

But what we believe is important to emphasize is that incentives and values are not two disconnected planes of human activity. Parker succeeded because he wove incentives and values together to promote a rapid change from the previous equilibrium. In just a handful of years, he demolished the previous stereotype in which LA cops were the corrupt, lazy louts as depicted by Raymond Chandler and created a new face of the LAPD: the honest, hard-working, value infused Joe Friday (as depicted by Jack Webb). To give just one example, consider the costs of being fired from the L.A. police force for corruption. As depicted in Buntin's book L A Noir , in the 1930s and early 1940s such an officer would have had little trouble finding roughly equivalent new employment. But what did Parker do? He raised both LAPD salaries and the officers social stature. He attracted young men that would be raising families and coaching Little League and going to PTA meetings. Being fired now meant a bigger monetary hit plus the shame associated with being identified as a dirty cop. In an early “Dragnet” Joe Friday rants about the scum of the earth that would be a corrupt policeman (but note carefully, that in this episode, the corrupt cop was an impostor.)

Friday Link II: If You Are in the Center of the Road, You Are Likely to Get Run Over

2011-06-17T20:04:00.004-04:00

When I worked in the United States Senate, I developed what I've found to be an unusual dislike for self-proclaimed "moderates". I observed that the senators with an ideology, whether "conservative" or "liberal" were most likely to be acting to further that ideology. In other words, their constituents got what was advertised in the election. For example, at one point in a fit of historical amazement, New Yorkers elected Jim Buckley (William F. Buckley's brother) as a senator. He voted exactly as he had campaigned, and was one of the most principled senators I had the privilege to observe. Sen. Buckley was defeated after one term as New Yorkers returned to their more liberal traditions. I suspect Jim Buckley wouldn't have it any other way. Senator Birch Bayh was a similar example on the opposite side of the political spectrum. In my estimation, it was the "moderates," the "centrists," the "liberal Republicans" and "Conservative Democrats" that you had to watch with suspicion. I realize that this is a broad generalization (obviously it was not the case that no liberal Republican or conservative Democrat had principles) , but because this picture is contrary to what many people suspect, I wanted to put it out here for discussion.

Sometimes I have viewed columnist David Brooks as an embodiment of everything I distrusted in this fashion. His columns seem to have the "if only we could get all the smart, reasonable people together" mentality that I thought brought disaster upon disaster to the US in the 1970s. So imagine how stunned I was to see his column today in which he takes to task exactly this "establishment" class for the scandal that was Fannie Mae.

(Thanks to Hot Air for the tip to the link.)

It's Friday: Here is One Link

2011-06-17T18:11:00.007-04:00

One thing that we've noticed in Doug's Theory of Moral Sentiments Readings Group is that Adam Smith endorses the day to day functioning of commerce more than he ever idolizes "Big Business." In that light, this commentary by University of Chicago economist Luigi Zingales on the current American political situation is interesting. A "median" voter position right now might be enthusiasm for markets but distrust of "big business." (It should be noted that Zingales is the co-author of a book titled Saving Capitalism From the Capitalists).

I have a couple of reactions to this sentiment. Many of the respondents may frame their worries in terms of business abuses in the market. I am more worried about firms that are able to manipulate the government in order to protect their position in the market: what is currently known as "crony capitalism." Secondly, this distrust of "business" leaves open the question of the entrepreneur. I have a feeling that most Americans like the idea of somebody who creates wealth from an innovative product or service. When that entrepreneur is an outsider, then two streams mentioned by Zingales would seem to mesh. But what happens in those cases where the innovator is an established entrepreneur...someone already "big"? Then I think we see the kind of love/hate relationships that Americans currently express towards Microsoft, Nike, Apple, Google, and Facebook. We buy a lot of iPhones (Steve jobs wasn't working out of his parents garage when it was introduced) , but we are always keeping a wary eye on the "bigness" of these companies.

Finally, this kind of discussion perpetuates the idea that "the opposite of the government is 'the market'." As I'm know people get tired of hearing me say: the opposite of "the government" is voluntary activity. Sometimes this is the market, sometimes it could non-profit collective organization. In either case, firms and non-profits struggle to find the boundaries of the market and their own, preferred hierarchical or cooperative organizational boundaries. This is one of the hallmarks of the new institutional economics studied by people such as Williamson, Coase, Buchanan, Davis, North, and Alchian. Firms (and even non-profits) compete in the market, but within the firm or non-profit there are institutions and institutions help to shape behavior.

(Note: thanks to NRO for the original link to the Zingales article)

Bonhoeffer Part 0

2011-06-16T10:06:00.004-04:00

OK, I said I wasn't going to write on Bonhoeffer until I had finished, but I couldn't resist this one tidbit. To the Presbyterian Church (USA) The Barmen Declaration (Theological Declaration of Barmen) by the German Confessing Church against the Nazi-dominated "German Christian" heresy is one of the most important statements in our tradition. It has been elevated to the status of an official "Confession" in our Book of Confessions. The author of the Barmen Declaration was theologian Karl Barth, who was also an opponent of the rationalist theological liberalism that had dominated Protestantism at the turn of the 19th/20th centuries.

On a seemingly separate topic, the PCUSA continues with its Social Gospel, Prohibitionist strains by "requesting" that the independent Presbyterian Foundation refrain from investing in certain types of stocks. You may have heard the fracas that erupted a few years ago when we came close to disinvesting in some companies that did certain types of business in Israel (that would have been a truly shameful blot on our denomination, in my humble opinion---never mind the irony that a denomination that honors the Barmen Declaration wanted to punish Israel, but that's another story). One of the categories of stocks that has successfully been placed on the boycott list is that of tobacco companies.

Well I guess that I shouldn't be surprised that Barth, that "neo-orthodox" opponent of empty liberalism had this to say about how the Barmen Declaration came to be written:

According to Metaxas: "The principal author of the Barmen Declaration was Karl Barth, who claimed to have produced the final version 'fortified by strong coffee and one or two Brazilian cigars'." Bonhoeffer also shared Barth's appreciation for a good cigar.

Barth and Bonhoeffer: Neo-orthodox, anti-Nazi, pro-cigar. What's more do you need to call them modern prophets of the Church?

Pastor, Martyr, Prophet, Spy

2011-06-14T11:37:00.002-04:00

I thought I might post something now about Bonhoeffer, the 2010 biography of Dietrich Bonhoeffer by Eric Metaxas, but I don't know where the start, and I'm only a third of the way through. This book will upend so much of what you thought you knew about Bonhoeffer. I will try to revisit this after I've soaked it in more.

TOTAL DEPRAVITY, OR ALWAYS LOOK ON THE BRIGHT SIDE OF LIFE

2011-06-05T15:14:00.004-04:00

My pastor, Bill Bess, always says that every Presbyterian elder ought to have at least one good sermon in his/her head. He followed up on that by asking me to preach on Biblical models of economics today. For better or worse, here is my potentially one (good or bad) sermon.

A Sermon Prepared for the First Presbyterian Church, Havana, Florida, June 4, 2011, by Mark Isaac, Ruling Elder, substituting for Bill Bess, Teaching Elder.

I was born in a home for unwed mothers. Before you crank-up your sympathy, my parents were married. Like many of the GI Bill generation, they bought a house in the suburbs of Oklahoma City, and my Mom’s doctor believed that the best obstetrics facilities in the area were at the Home of Redeeming Love, a home for unwed mothers run by the women of the Free Methodist Church. The facility was already in transition (my birth certificate reads Deaconess Hospital) but the history of the Home of Redeeming Love, stretching back decades, is fascinating. The women of the Free Methodist Church founded and ran the facility for young women who had no access to good natal care because the shotgun didn’t fire and they were abandoned by their families. Initially out in the country, the women of the Church plowed the fields to raise crops both for the Home and for sale for cash.

The story of the Home of Redeeming Love is illustrative of part of the so-called Social Gospel movement in American Protestantism. Although we toss around terms such as “old time religion” we often forget that by 1900 the mainline Protestant churches, including the Presbyterian Church, were heavily influenced by a century of German theological rationalism and materialism. Biblical concepts such as the bodily resurrection of Jesus Christ were viewed as campfire fables invented by church leaders who were decades removed from Jesus of Nazareth. Now if your theology strips out all of the supernatural components of the New Testament, what is left of Christianity? Well one thing that is left is the body of teachings of Jesus as a guide as to how we ought to conduct our daily life both personally and in our communities. The latter focus became a dominant theme of the American and British Social Gospel throughout the late 19^th and early 20^th century. Among the good results of the Social Gospel were institutions such as the Home of Redeeming Love, the Salvation Army, the YMCA and YWCA, and countless hospitals. (By the way, the American Economics Association was founded as part of the social gospel movement).

But the Social Gospel broke into two strands. One stressed what Christians could do directly to lift the burden of off those who were suffering (the Home of Redeeming Love) and the other stressed what Christians could do to get the federal government to accomplish similar ends. The best example is the famous Methodist Board of Temperance and Prohibition. Temperance was a program of the community helping individuals make good choices; Prohibition was the drive to use the federal government to make those choices by force. In many American Protestant churches, the Prohibition branch eventually won out. (Our own Presbyterian denomination purged our seminaries of traditionalists. Interestingly, these traditionalists, branded with the nickname “Fundamentalists” not only disagreed with the modernists with regards to the bodily resurrection of Jesus, they also believed that it was none of the church’s business to enlist the government to tell a man or woman that they could not settle down with a pleasant single-malt Scotch before bedtime.)

By the 20^th century, although alcohol Prohibition was eventually deemed a failure, many of the major Protestant denominations bought into the idea that the government is the primary agency for caring for the poor. This has been codified by our own General Assembly, and no year goes by without some agency of the PCUSA weighing in on minimum wages, health care, smoking, and so on and so forth. Our stated clerk even recently took sides in the partisan fight over collective bargaining in the State of Wisconsin.

If we are going to talk about what economics means in terms of Heaven on Earth, we need to go back and find out more about what the Old and New Covenants were teaching before, during, and after Jesus’ ministry.

First, there is no question that in the Old Testament there is a dual recognition of the right to private property and the responsibility of the owners of that property to act justly and to care for the poor. In the former category are the prohibitions against stealing, against moving boundary markers, and the parts of the law code dealing with damages done to the property of others. In the latter category are the tithing requirements, the various debt forgiveness passages, the commands for honest weights and measures ,and numerous restrictions against unjust lending practices, especially to the poor.

Leviticus 23:22: And when you reap the harvest of your land, you shall not reap your field right up to its edge, nor shall you gather the gleanings of your harvest. You shall leave them for the poor and the sojourner. I am the Lord Your God.

When we get to the Acts passages, there are some interpreters I have heard, and you probably have too, that suggest that the early church moved in a different direction, abolishing private property. This is clearly not the case. In the the Ananias and Sapphira story, Peter makes clear that the land was theirs to sell or not. This story is about the sin of lying to the community. What is suggested is that the Jerusalem church was a diverse collection of both wealthy individuals and people whom we might consider refugees, living in a world of violent oppression, in which the order of day to day life was clearly in peril. In this world, the wealthy people sold their property to provide funds to care for the poor. “They gave to anyone as he had need.” However, note that, as we will see in a minute that this does not mean some kind of Stalinist/Maoist collectivization of all among all: it becomes clear that “the poor” refers to groups such as widows, and, I suspect, orphans.

I wonder where they got this idea of caring for the poor?

Mark 10: 17-22. And as he was setting out on his journey, a man ran up and knelt before him. “Good teacher, what must I do to inherit eternal life?” And Jesus said to him, “Why do you call me good? No one is good-except God alone. You know the commandments: Do not murder, do not commit adultery, do not steal, do not bear false testimony, do not defraud, honor your father and mother.” “Teacher, all these I have kept from my youth.” Jesus, looking at him, loved him, and said to him, “You lack one thing. Go, sell all that you have and give to the poor, and you will have treasure in Heaven; and come, follow me.” Disheartened by the saying, he went away sorrowful, for he had great possessions.

It is at this point that I wish to turn to a Presbyterian Pastor who gets remarkably little attention in these days: John Calvin. We Presbyterians don’t like to talk much about Calvin. Look around any large city and you’ll see Presbyterian Churches happy to advertise their aerobics classes and high school pancake breakfasts. Putting a lot of John Calvin on the church marquee probably wouldn’t be good for attendance. But we must, at this point, confront a key part of our Reformed Faith: which has been tagged with the horrible phrase “The Total Depravity of Mankind.” The doctrine of the Total Depravity of Mankind most certainly does not mean that we are all sociopaths, incapable of doing good, even sacrificial things. It means something completely different. What it means is that there is no part of our lives that we can put in an imaginary box and say “I do not sin in this part of my life.” It means that even when we are doing what we think of as “good” we remain subject to sin.

I John 1: 8-10 : “If we say we have no sin, we deceive ourselves and the truth is not in us. If we confess ours sins, he is faithful and just to forgive us our sins and to cleanse us from all unrighteousness. If we claim we have not sinned, we make him a liar, and his word is not in us.”

So let us see the operation of sin in the economics of the early church:

Acts 6: 1 – 7: “Now in these days when disciples were increasing in number, a complaint by the Hellenists arose against the Hebrews because their widows were being neglected in the daily distribution. And the Twelve summoned the full number of the disciples and said: “it is not right that we should give up preaching the word to serve tables. Therefore Brothers, pick out from among you seven men of good repute, full of the Spirit and of Wisdom, whom we will appoint to this duty. But we will devote ourselves to prayer and the ministry of the word.” And what they said pleased the whole gathering, and they chose Stephen, a man full of faith and the Holy Spirit; and Philip, and Procurus, and Nicanor, and Timon, and Parmenas, and Nicolaus a proselyte from Antioch. These they set before the Apostles, who prayed and laid their hands upon them.”

As Calvinists, we can see the operation of sin even in this most noble of institutions: the distribution to the poor. Either the Hebraic Jews really are discriminating against the Greek-speaking Jews, or the Greek-speaking Jews are bearing false witness against the Hebraic Jews. It doesn’t matter, because in midst of this sin God works His will and the church office of Deacon is born, ordained with specific responsibility to care for the poor.

Now it would be nice to continue on with the evolution of economic institutions in the early church in Jerusalem. But we simply don’t know more, because the Christian Church in Jerusalem was decimated with Jerusalem’s destruction by Rome.

Instead, we turn to a different early Christian tradition: the churches begun by Paul and the other church-planting apostles around the Mediterranean. And we see here something new:

Acts 16: 13- 15 And on the Sabbath day we went outside the gate to the riverside, where we supposed there was a place of prayer, and spoke to the women who had come together. One who heard us was a woman named Lydia, from the city of Thyatria, a seller of purple goods, who was a worshipper of God.

When we read the popular history of the Roman Empire, we see very little of merchants, traders, and manufacturers, what we would call the “Middle Class.” Rome was ruled by landed oligarchs and a major source of its “wealth” was plunder from military campaigns. In the midst of this were people who did the ordinary: making goods, trading, etc.. It is important to note that these people were not the respected merchants of Geneva or Amsterdam. Even though trade and manufacturing could provide what was probably a good standard of living, only a few of these folks would be candidates for the Roman Senate: they were equally likely to be slaves, freed slaves, women, illegitimate children of the agricultural or military class, or people living in or emigrating the flyover provinces: The Oklahomas and Nebraskas of the empire. Recent scholarship, which might embarrass some Christians inclined towards liberation theology, suggests that outside of Jerusalem, Christianity became a religion that spread primarily through this proto-middle class of merchants, traders, and artisans. What we continue to see are short but repeated references in Pauls’s letters to his congregations raising money for the poor ---perhaps the poor in the local community but also perhaps the relatively more oppressed Christians in Jerusalem. This suggests that the economic system in Jerusalem, described in the earlier Acts passages, was probably some kind of survival system that was sustainable only with subsidies from the Mediterranean churches, and thus not exported elsewhere in the early church. There’s little reference to this kind of survival communalism in the churches of the epistles.

I hate to say it, but in terms of the Bible, that’s pretty much where we stop. The problem for us is that there’s simply no transition theology to a capitalist world in which the church has ceded to the government the office of primary care for the poor. I suspect that most of you in the congregation today are like most of my students: you cannot conceive of a world in which the Presbyterian Church renounces the government as the primary office of care for the poor. You can’t imagine lines forming to plow fields for unwed mothers. We are like the Jews after the time of the Judges, who, against God’s warning, have merged the identity of God’s people with the coercive power of a centralized government. I suspect that the Home of Redeeming Love, now Deaconess Hospital, is well entwined with Medicare, Medicaid, and so forth. In this, I believe we have before us a very good model for the decline of the Presbyterian Church , the UCC, the Episcopal Church and so forth. If your theology has rejected the supernatural and simply focused on the government as the agent of the material, once that social agenda has been accomplished in the New Deal and the Great Society, what need is there to be a Presbyterian on Sunday morning? The answer from the collapse in our membership from 4.25 million to 2 million in my adult lifetime says that the answer is “not much.”

At the risk of being repetitive, our scripture from Acts demonstrates a fundamental paradox of our Reformed faith: we are called to do good, to bring the Kingdom “on Earth as it is in Heaven.” But we must bathe ourselves in the humility that, acting with the best of intentions, we might “miss the mark,” what the Bible calls sin. Therefore, in a world in which our government educational system does a good job for the well-off but a horrible job for the poor, in which the government has been completely ineffective in preventing a dramatic rise in children born out of wedlock (what the Bible would certainly consider fatherless children or “orphans”) I cannot imagine that the Old Testament prophets wouldn’t be screaming that we are differentially hurting the poor and most vulnerable of our society, that we as a society will suffer the consequences of this sin, and that we ought to be thinking about doing something different. I personally believe that the model for this “something different” can be found in the earliest Calvinist communities in Switzerland, but that is a story for another sermon.

More Unintended Consequences

2011-06-02T16:14:00.004-04:00

Mayor Bloomberg of New York, hardly known as a conservative or libertarian firebrand, has ignited a controversy by claiming that some people voluntarily enter homeless shelters simply to receive rent subsidy vouchers that are only available to shelter residents. The New York Times takes a look, and finds some evidence that this is true. This is an important unintended consequence not simply because people may be gaming the system, but also because, assuming that shelter resources are scarce, like anything else in our economic world, then these resources are being diverted away from people who may much more in need.

Would You Like Staples With Your Copies?

2011-06-01T20:56:00.002-04:00

Extending Doug's discussion on the EITC and the minimum wage, in the comments on my May 12th post on the minimum wage, I was in a good discussion with Brandon V., and I mentioned that I couldn't figure out why it was legal for middle class and upper class "kids" (actually young men and women who years before would have been in the workforce, but that's another blogpost entirely) can work for free in "internships" but it's illegal for a young man or woman from the inner city who wants to build up a skill set to work for a training wage of $5.00/hour. Interestingly, over the past three weeks or so that same idea has cropped up on several different websites.

I recall that in Oklahoma, state Prohibition lasted longer than federal Prohibition, and one of the reasons it was finally repealed was the state actually started enforcing the law. Maybe the only way to get a training wage is for the Obama Administration to start shutting down internships for the well-to-do.... to enforce the minimum wage law across the board.

Minimum Wages and the Earned Income Tax Credit (a first cut)

2011-06-01T11:59:00.000-04:00

Mark has written a number of recent blog posts on the minimum wage and living wage laws. The positive and negative consequences minimum wages are well-known to economists: 1) Minimum wages increase wages for those currently employed at minimum wage and 2) Minimum wages have a host of negative unintended consequences. Here is a list of various unintended consequences that have been researched by economists:

Negative Employment Effects (This is well reviewed here) - Because firms compete against each other in the market place they must keep prices low and quality high. When minimum wages increase there are increases in the cost of doing business. Thus, in order to keep prices low in the face of competition certain strategies such as outsourcing, loading more responsibilities onto less people, or substituting technology for labor become desirable. In any case this means that less low-skilled labor will be hired. Luminary and economic Nobel Prize winner Paul Samuelson once wrote in 1973,

"What good does it do a black youth to know that an employer must pay him $2.00 per hour if the fact that he must be paid that amount is what keeps him from getting a job?"

To this point, former colleague and excellent labor economist Dave MacPhearson has a working paper showing that much of the unemployment amongst African Americans can be attributed to the recent increases in the minimum wage. This has especially impacted African American teenagers at 40% (versus 25% for other teens).

One proposal to help improve the employment of low skilled teenagers is a sub-minimum wage "training period". This would allow firms to benefit from the labor of teenagers, screen those teens who show the most promise, and then retain those teenagers at a higher wage after the training period. From the standpoint of teenage benefit they have the opportunity to obtain skills and develop a good track record. In light of the next unintended consequence a "training period" at a lower wage may not be a bad idea.

Altered Opportunity Cost - Because there is greater reward for those working in low-skilled jobs under a higher minimum wage this has been shown to increase the opportunity cost of staying in school. Neumark and Wascher (1995) show increased minimum wages cause more high school drop outs. Some suggest that this unintended consequence only underscores the need for compulsory education laws. I'm not against compulsory education; however, I would ask the question of what kind of education (I believe we overlook the importance of vocational education in the U.S. ---this is a topic for another post).

Overall, no economics research (known to me) show the minimum wage has reduced poverty.

The studies are more numerous than these and are well summarized in this massive literature review (here and also in book form here). Nevertheless, the minimum wage continues to appear desirable because well intentioned people continue to desire a wage that secures a basic level of welfare for all workers. This desire is not unfounded. But, what policy could obtain the goal of helping the poor without all the nasty unintended consequences? The Earned Income Tax Credit.

The EITC is a cousin of the Negative Income Tax (NIT). There is a good summary of the negative income tax on Econ Library. The basic idea is that people receive a "wage subsidy" to supplement their income. The size of that wage subsidy is determined by two components: the initial threshold and the rate of the tax subsidy. The initial threshold determines what someone would earn if they worked zero hours. The downward slope determines the size of the wage subsidy at each unit of income (i.e. the subsidy gets smaller as income gets larger, but, at what rate does the subsidy decrease?). Where the NIT is a strictly decreasing slope the EITC increases, decreases, and is flat over different ranges of income (see below from Tax Policy Center)

Because the EITC targets independents and people earning less than a certain amount of money there are fewer problems with helping the poor. While the minimum wage disproportionately benefits teenagers, teenagers who file taxes as dependent would not qualify for the EITC. Also, while a higher minimum wage (or living wage) might induce a stay at home Mom or Dad into the labor force the EITC may not. This is because if their spouse earns a certain level of income they would not qualify to receive the EITC.

At this point you may be saying, "The EITC sounds like a better policy than an increase in the minimum wage, but, how would you fund such a thing?" That's a really good question, especially with the national debt rising to great heights. But, funding is not problematic when you view the EITC expansion as a replacement of, rather than an addition to, other programs. I came to this idea independently, but, it turns out it is not original. In Greg Mankiw's best-selling economic textbook he reports that 79% of economists agree that the government should restructure the welfare system along the lines of a negative income tax.

The rationale for restructuring the welfare program along these lines stems from at least a few observations. First, there would be lower administrative costs to distributing money via the EITC. Second, the EITC provides an incentive for employment that welfare does not. Third, unlike the so-called backward hustle (talked about in the documentary Waging a Living and written about at the Mises Blog) the EITC does not punish people for promotions.

Hiding in My Room, Safe Within My Womb, I Touch No One and No One Touches Me*

2011-06-01T11:00:00.009-04:00

I have long admired the writings of Jonathan Adler of Case Western University, an expert on environmental regulatory law. In this article, he dissects the so-called "precautionary principle." I am sure that this will be required reading in the Economics of Sustainability class. A surprise to me is that Cass Sunstein, currently serving as a top-level advisor to President Obama on regulatory issues, is such a harsh critic of the precautionary principle. He calls it "deeply incoherent". Both Adler and Sunstein are lawyers but they are making the fundamental economic argument that there is no such thing as cost-free doing nothing. "Doing nothing" incorporates the opportunity costs of not doing something else, so doing nothing can not, in any meaningful sense, be equated with "doing no harm." If I stay in my home every day to avoid all the risks of the outside world, I might, for example, die in my house during a fire, tornado, hurricane, or airplane crash. Deciding whether to leave my house necessarily involves imputing some kind of probabilities to these events (which are certainly non-zero) and probability assessment is antithetical to (at least the most extreme versions of) the precautionary principle.

*For post-baby boomers: Lyrics from "I Am A Rock" by Paul Simon.

Influence: The Psychology of Persuasion

2011-05-30T12:03:00.000-04:00

This nifty best seller called Influence was penned by Arizona State psychologist Robert Cialdini. When I purchased the book from Amazon my intention was to learn more about rhetoric and why people are persuaded by some arguments but not others (my interest in rhetoric started last year when reading this). In reading the book this question was somewhat answered ---indeed, language is important---yet, there were large amounts written about how people are persuaded by actions or social cues rather than words. Overall the book was fascinating and I learned a lot.

The book begins by pointing out that thinking is tough work. Because we don't like to strain our brain we often use "rules of thumb" or make decisions in an almost automatic fashion. There are several tactics that can be employed to take advantage of our mental shortcuts. And, while these tactics do not twist our arms into compliance the author's research points out that they are extremely persuasive. These tactics form the basis of the chapters in the book and Cialdini provides numerous examples of these tactics in several contexts. Note, he does not investigate how economic incentives persuade people to action, but, that's mainly because that fruit hangs too low on the tree.

Cialdini first presents the reciprocity principle. This principle is extremely powerful and pervasive. Upon reading the chapter I began to see many examples of this principle at work. Essentially, Person A would like Person B to do some action. In order to induce Person B to do that action Person A provides a gift to Person B. Then, person B will feel obligated to do that action. Real world examples exist in politics (think log rolling and campaign finance), business (free samples or week trials), and with charitable giving (St. Judes Hospital for example provided my wife and I with address labels). Specifically, with charitable giving Cialdini spoke of his observation of the Hare Krishna society and their approach of handing out flowers to a passerby and then asking for money. My own personal observations included an environmental sustainability group on campus that provided free cookies but also sought signatures for a petition. Also, I recalled in both Atlanta and Chicago that homeless people would offer directions to different destinations. Upon finishing directions they would ask for money. There are some subtleties to this reciprocity principle but Cialdini notes it is very powerful because we can sense the asymmetry and want to act to make the interaction more symmetric.

The second persuasive technique presented is called commitment. When people are on the fence they do not feel a strong affinity for one product/person/idea, etc. more than another. However, once people take sides there is a strong connection to the choice which shapes our perception of the choice as "good" or "bad". In other words, we become more certain of something immediately after we choose it. To be uncertain means we chose wrongly. This chapter is chalk full of examples of commitment from POW camps and communist indoctrination to romantic relationships, charitable donations, and promises of toys to our children. In a myriad of contexts the simple statement of "Yes," is meaningful and seems to commit us to a particular course of action. For example, I utilized the commitment technique a couple weeks ago at the laundry mat. Cialdini cites a study showing that people are far more vigilant in guarding other people's possessions when someone asks, "Will you watch my stuff?" whereas when this simple question is not asked people are highly unlikely to intervene if somebody tried to steal another person's possessions. The simple response, "Yes,", even to a small commitment opens up the door to larger commitments. This chapter was very interesting and I couldn't possibly discuss it all here in this summary.

The third persuasive technique is "social proof". Initially I thought, "What is social proof?"; however, it is pretty straightforward. Social proof simply says that we are likely to "see an action as more appropriate when others are doing it". This principle is especially true in uncertain or ambiguous situations. Should we laugh at that joke? What kind of clothing should we wear to that event? Basically, what is appropriate? This technique can be more severe. Cialdini utilizes social proof to explain the Jonestown deaths and the well publicized death of Katherine Genovese. When Jim Jones, leader of the People's Temple Cult, was certain to be under investigation for the murders of four people he called all of the believers to a mission of self-destruction: drink the strawberry poison. Cialdini reports, "The survivors claim that the great majority of the 910 people who died did so in an orderly, willful fashion." Why? Cialdini believes "social proof" helps clear up this mystery. Living in the strange country of Guyana (the cult had recently moved there from San Francisco) there was high uncertainty. Combine that uncertainty with some ultra compliant cult members and others followed suit. The Katherine Genovese story is one example in which many people witnessed a murder taking place but did not help. The common explanation was apathy amongst the citizenry (which I think could be quite valid). On the other hand, Cialdini notes that because nobody did anything everyone was uncertain about what to do. In uncertain situations we act based on the actions of those around us. I think more probable is that each person thought, "Someone else will call the police."

The fourth technique is immediately obvious: liking. We are persuaded to compliance by people we like. Moreover, we tend to like people who are attractive, people who flatter us, and people we view as being similar to ourselves. Cialdini discusses ways in which "liking" can be produced which include positive association. We have all heard the aphorism, "We are known by the company we keep" which was usually from our parents telling us about negative association. Cialdini writes, "As for positive associations, it is the compliance professionals that teach that lesson." Advertisers frequently use pretty girls or certain words that have nothing to do with their product but create a positive association. Anything to induce "liking".

Authority is the fifth technique which states that we are influenced by authority. The famous Milgram experiments are up close and personal in this regard (you can see a video about the Milgram experiments here). The Milgram experiments are one huge reason we have a Human Subjects Committee to protect people from research that can be psychologically harmful. But, they reveal something important: People respond to authority. We learn obedience to authority at an early age with parents, teachers, pastors, doctors, etc. guiding us or providing advice. Since they have been correct in the past we confer authority to the position. We should respect these types of people and Cialdini claims that we often carry out their requests in an unthinking fashion. Besides providing a plethora of examples Cialdini also notes that: Titles, Clothes, and Trappings all act as signals to people about how to value someone else even in situations where they would seem to have no special expertise. For example, Cialdini reported a psychological study that showed people were 3.5 times more likely to jay walk when a man with a suit crossed than when the same man crossed in ordinary dress. Another example, researchers in San Francisco found that people are far less likely to honk at luxury cars than economy cars when they are slow to pull away from a green light.

The final so-called "weapon of influence" is scarcity. Cialdini begins this chapter with a quote from G.K. Chesterton, "The way to love anything is to realize that it might be lost." When we are told we cannot have something (parental restriction, legal ban, etc.), or told "limited time only", or told to disregard certain information (jurors in a trial for example) our freedoms are being restricted. For example, star crossed lovers Romeo and Juliet may have had such heightened love because of the forbidden-ness of their courtship. Or, we want those things which seem scarce because we feel they must be of higher quality. If people generate a feeling of scarcity or restrict our choice set we are inclined to believe the thing we cannot have is a better choice. This has all kinds of implications for how we parent or what kinds of laws we make. To be honest, this is a difficult chapter that I am still digesting.

Now, I will close this review and reveal my nerdiness. These weapons of influence remind me of an exchange from Star Wars. Before Obi Wan and Luke leave Tatooine and team up with Han Solo they must bypass Storm Troopers searching for the lost droids.

Stormtrooper: Let me see your identification.
Obi-Wan: [with a small wave of his hand] You don't need to see his identification.
Stormtrooper: We don't need to see his identification.
Obi-Wan: These aren't the droids you're looking for.
Stormtrooper: These aren't the droids we're looking for.
Obi-Wan: He can go about his business.
Stormtrooper: You can go about your business.
Obi-Wan: Move along.
Stormtrooper: Move along... move along.

The weapons of influence are designed to elicit a "yes" response and work best when we are not paying attention. Cialdini closes each chapter with a section entitled "How to Say No". The key to saying "no" in most of these contexts is to understand why you feel compelled to say "yes". For example, the reciprocity principle illustrates that when we are given a gift we feel compelled to reciprocate. Yet, we must think about the purpose of the gift. Then, we may realize that it wasn't a "gift" at all. Or, in the case of authority we must ask whether they are a relevant authority or not. Also, we must ask whether they are acting out of their personal benefit. But, mainly the advice of these sections is simple: pay attention. Because people often function on a "click-whir" level we can be bypassed or conned like Storm Troopers. Our awareness is important.

There is no problem in studying compliance. However, this information can obviously be abused and utilized to manipulate people. In fact, because much of the discourse were studies motivated by real world examples these weapons of influence are already being used. When is it ethical to use such influencers (for example I think my use of the commitment principle was fine at the laundry mat)?

Sunday Thought

2011-05-29T22:08:00.001-04:00

A very good sermon from Rev. Bill Bess today. His central point was the following:

When Jesus says, in John 14:15

"If you love me, you will keep my commandments."

It is not a directive, it is a promise.

William Parker and the LAPD, Part I

2011-05-28T10:43:00.006-04:00

So how corrupt was the LAPD in the 20s, 30s, and 40s? Let's look at some popular culture references.

In the movie Changeling, one [in fact, two] courageous pastors use a religious radio broadcasts to expose the LAPD incarcerating in a mental hospital an "inconvenient" woman who was making charges against the department. Numerous accounts that Doug and I accessed confirm that the basic underlying story is TRUE.

In the novels of Raymond Chandler, the LAPD of the late '30s and early 40's is depicted as a mixture of some good cops and some that are lazy, incompetent, and on the take from various corrupt activities. In fact, more than one of the historical accounts claim that the LAPD of the period was, if anything, worse than Chandler depicted (certainly worse than the version depicted in the movies made from his novels). In the late 1930's, a crusading group of civic reformers, again with strong ties to local religious leaders, gained power on the county grand jury and began exposing civic corruption. The local news media, especially the vibrant competition between the Times and the Examiner, kept the story before the public. Representatives of the reform group were subject to violent attacks. Eventually, Mayor Shaw was recalled and his brother indicted over a scheme to sell police and fire commissions. (The, um, checkered history of the LA County District Attorney is another movie waiting to be made. ) The recall of Shaw installed reform-minded Fletcher Bowron.

The movie L A Confidential (based on the novel by James Ellroy) shifts in time some important events that occurred in the 1940s while Bowron was mayor. The police, under new leadership, put intense pressure on leaders of organized crime to leave Los Angeles. Many left for Las Vegas. Mickey Cohen was indeed the face of the mob to most citizens of Los Angeles. But, in 1949, the news broke that a prostitution ring was being run with assistance from inside the LAPD. As far as we could tell, LAC's depiction of the plastic surgery to create prostitutes who resembled famous movie stars is fiction, but the Brenda Allen prostitution scandal and other concurrently revealed events were the reason that the LAPD needed a new police chief, and with a one vote majority on the Police Commission, that chief was William Parker.

Finally, here are the answers to our previous questions about famous fictional photos. Parker helped to make the honest, tough, hard working officer Joe Friday of "Dragnet" the face of the LAPD. At some point, Parker needed some help writing speeches, and the job went to an officer with writing talents named Gene Roddenberry. Two of our sources state that Roddenberry modeled the character Spock after his former boss, William Parker. And while the movie L A Confidential has a new, reform minded chief in the script, many of the personal characteristics of Ed Exley suggest the younger William Parker (right down to the glasses).

One of our best sources for the paper is the history L A Noir by John Buntin. And if you want to see how Joe Friday became a cultural icon, this clip is not to be missed.

Friday Links 5/27

2011-05-27T13:38:00.001-04:00

Like the Florida ground my blogging activities have run into a dry spell; however, like the Florida weather, the forecast is looking much better. In the next couple of weeks I should have a blog post regarding minimum wage v. the earned income tax credit as well as a few book reviews and some other misc. material. For now, the Friday Links should suffice.

On May 19th one of my favorite blogs, Aid Watch, penned its swan song. The posts were frequently insightful, sometimes sarcastic, but most of all, they were never dull. The blog achieved its objective of bringing more attention to the economics of development and whether our various attempts to help those in less developed countries really worked. For interested people, the search function on the blog will allow you to cull the archives for some very thoughtful material.

An article about an economist, Tyler Cowen, who writes for another one of my favorite blogs Marginal Revolution. He's very interesting, just read it.

This article appeared in the Boston Globe some time ago; however, I just discovered it. This article makes me proud that economists can help solve such problems as matching medical residents to residencies, children to particular schools, or kidneys to in-need medical patients. However, the crown of "society's mechanics" is not one we should bear without a nod to humility and our own limitations. (Also, the article mentions FSU professor David Cooper)

The Reform of Corruption: The Case of the LAPD

2011-05-20T14:09:00.013-04:00

In the 1930, Los Angeles was an extraordinarily corrupt city. A columnist in TIME referred to the city as the slobbering civic idiot of American municipalities. Police and fire commissions were being sold. Author Raymond Chandler artfully depicted a police force riddled with sloth and bribery, only slightly less bad than the hideous "Bay City" police in his Philip Marlowe novels. A serious reform movement in the late 1930s seemed to bring things under control, then just as TIME appeared to revise its view of LA in 1949, a scandal involving a prostitution ring operating inside of the LAPD threatened to revive the image of the LAPD of Raymond Chandler. (The picture above is a depiction of an LAPD interrogation in the movie Murder My Sweet appearing on the website piddleville.com)

In this sordid environment, the Los Angeles Police Commission appointed William H. Parker as it's Chief. And something remarkable happened. Within a handful of years, Parker had cleaned up the LAPD, so that by the mid 1950s it was being looked to as a model of police professionalism. The picture above right is Parker, as taken from the official LAPD website.

How did this happen? How was Parker able to steward such a remarkable and rapid turnaround? What are the implications for the elimination of corruption in the developing world. Doug and I have a new paper: "Just the Facts Ma'Am: A case Study of the Reversal of Corruption in the Los Angeles Police Department," looking at these questions.

Background reading is tedious, but background watching can be fun. So the question is: what do these fictional characters have in common? (Sgt. Friday is from the official LAPD website, Mr. Spock is from Wikipedia, Ed Exley is from this review of L.A. Confidential in Slate.com.)

Friday Links May 20, 2011

2011-05-20T13:50:00.008-04:00

Social norms: voluntary or enforced. Do private norms drive the de jure rules, or do we need the de jure rules to support private norms? (NRO)

For no particular reason: original names of famous bands. (Debby Witt on NRO).

A book I must read this summer: Bonhoeffer: Pastor, Martyr, Prophet, Spy by Eric Metaxas.

While I'm at it: Bonhoeffer and Tobacco.

Randomized Controlled Trials Part II: The Scientific Method

2011-05-19T11:29:00.000-04:00

Remember the science projects of your childhood? Thinking about wielding the bi-fold boards onto the kitchen table, cutting colored paper, and pasting the various hypotheses, data, and results make me nostalgic. This trip down memory lane occurs whenever I consider the scientific method because these memories are familiar. My science fair projects were never anything special; however, even now they seem illustrative. For example, do plants grow better in the presence of classical music, rock music, or no music? So, my dependent variable was plant growth. The plants were identical in every respect. Same bag of seeds. Same soil. Same sunlight. Same watering. The only difference was the exposure to different music. My control group was "no music". My treatment groups were "rock music" and "classical music". Perhaps the question was juvenile and the sample size small, but, when you think about it, this is the scientific method at its best.

For a moment, consider a question that personally interests you. Will school uniforms improve educational outcomes? Does religious proscription improve generosity? Does merit-based teacher pay improve student educational outcomes? What will the impact of a different tax structure do to labor supply? What is the impact of job training programs on ex-convicts? Does marriage make people happier? And, the list could go on, and on, and on.

The scientific gold standard is a "randomized controlled trial" with a large sample size. The term "randomized controlled trial" is borrowed from the medical and clinical fields and is quite descriptive. Randomization matters because it reduces self-selection bias.

For example, imagine that we were studying the impact of a government sponsored job training programs for ex-convicts. The before-and-after study may show tremendous success in transitioning ex-convicts into the workforce; however, substantial information would be missing. If the job training program is voluntary there could be differences in motivation, education, etc. amongst some of the ex-convicts compared to their counterparts that did not sign up. Therefore, the question would be, "How much is the job training helping, or, would these people have found work regardless of the program simply because they are highly motivated to turn their life around?"

Randomization can help overcome the selection bias. Randomization would assign people into job training programs and thus weed out any underlying differences between the two sets of populations (those who would sign up and those who would not sign up).

Controlled implies that the only difference on average between people in the sample will be whether or not they received job training. Like my flowers example where the only difference was exposure to different music, the only difference, on average, among those being released from jail was whether they received job training or not. Certainly there will still be differences between people released who receive job training and those who do not; however, those differences will be balanced.

Obviously there are some questions that cannot be answered by randomized controlled trials. For example, the Human Subjects Committee wouldn't allow me to randomly assign people to religions in order to observe how certain religious teachings alter generosity. Also, they would likely disallow random assignment of people into marriages to figure out whether marriage causes them to become happier. These are good things! But, there are a number of really interesting questions that can be answered with randomized controlled trials. In my next post I will discuss some of the interesting "field experiments" (equivalent term for RCT) that have been conducted in the past and more recently.

By the way, the plants grew better under classical music. Though this is far from an iron-clad empirical reality.

A Modest Proposal

2011-05-19T10:18:00.003-04:00

In this article, legal superstar Richard Epstein walks the reader through the logic of the National Football League Players' Association decertification and the so-called "Tom Brady" lawsuit. Through much of the analysis, Epstein appears to be making recommendations that favor the owners rather than the players. But then, near the end of his analysis, he drops the following idea into the mix. I can't believe that it will ever happen, but I believe that it would be a great public policy compromise (and, yes, the public is involved because we have written the labor negotiation and antitrust laws that are constraining and driving the current unhappy state of affairs):

"Nor is there, I might add, any chance of forcing a split up of the NFL’s two conferences, the AFC and the NFC , which would lead to the best of all worlds: measures to assure parity within leagues, and competition between leagues. The players give up their unions in favor of a choice between teams in two leagues. The management gives up its solid front in favor of labor peace. The rest of us can still watch a Super Bowl at the end of the season, with a special antitrust exemption. It may be too much to ask in the current milieu, which prefers the use of what the late John Kenneth Galbraith used to call countervailing powers."

A radical idea? Obviously. But often we need people like Epstein to toss a few crazy ideas over the castle wall to see that institutions can be changed. Which leads, oddly enough, to a topic for some new posts: the radical and crazy idea of one man, William H. Parker, that in 1949 corruption could be driven from the Los Angeles Police Department. Within a few years, the LAPD had become the model of "police professionalism." Who was William H. Parker, and how did he pull off this model of reform? More to come.

Thanks to NRO for the tip to the Epstein article.

What's 10 Years Give or Take in The Grand Scheme of Things?

2011-05-18T12:00:00.004-04:00

These are amazing photographs, but for history buffs out there, what's with the headline?

What do we know about Heaven?

2011-05-16T10:12:00.000-04:00

People looked to Heaven for their sustenance (manna), cried out towards Heaven in times of pain, and celebrated towards Heaven in times of joy. We are called to first seek the Kingdom of God and are told by Jesus that the Kingdom of Heaven is near. One of my favorite lines in all of scripture is,"Thy Kingdom Come, Thy Will be Done, On Earth as it is in Heaven". But, honesty compels me to admit, I do not know much about heaven (other than various verses in Revelation).

A long time has passed since I asked a question of the readers of our blog: How much do we know about Heaven? And, what is the source of our knowledge? Do we need to know what Heaven looks like, or, do we need to better understand Jesus (because he is the visible image of the invisible God)?

Quite a Leaky Bucket; In Fact My Feet are Soaking Wet

2011-05-15T17:22:00.004-04:00

In one of our research projects, Doug and I created an environment in which individuals could endogenously choose not only personal decisions leading to voluntarily provided public goods, but they also had the power to vote to tax their group for the same purpose. In the enforced taxation option, we wanted to capture what Arthur Okun had famously called "the leaky bucket," namely, the idea that government transfer programs designed to help the poor suffer a loss of efficiency. We chose a parameter of 20 percent loss of efficiency largely for reasons specifically relating to the experiment, not because we thought that 20 percent (as opposed to 10 percent or 30 percent) was the actual level of the leaky bucket.

Nevertheless, we've had a fair number of people conjecture about this extrapolation: was 20 percent "too big," or "about right" when one is talking about actual governments. This article in the Washington Post is a great illustration of the problem of the leaky bucket, and why we were justified in wanting to incorporate it at some level in our experiments.

Thanks to Instapundit for the tip to the link.

Presbyterians for Spiking the Football?

2011-05-12T11:48:00.000-04:00

Here is an interesting figure and I really don’t know what to think about it. I often conceive of the remnant in America of what used to be called “Mainline Protestantism” (Disciples of Christ, Episcopalians, Mainline Lutherans, United Methodists, Presbyterians (USA), United Church of Christ) as more liberal than so-called Evangelical Christians. Most of these denominations’ institutional faces support very liberal economic policies, several of these denominations allow for practicing gay clergy and even gay marriage, and most of the anti-war sentiment has been focused within these denominations (at least while Republicans are President, but that’s an issue I’ve addressed in other posts). But this report from the Public Religion Research Institute really surprised me. It asks a simple question:

***Does the Scripture Passage “Do Not Rejoice When Your Enemies Fall” apply to Bin Laden?***

The full NIV citation is:

Proverbs 24: 17 – 18

“Do not gloat when your enemy falls;

When he stumbles, do not let your heart rejoice

Or the Lord will see and disapprove

And turn his wrath away from him.”

Among all the groups surveyed (Minority/Christian, White Evangelical Protestant, Catholic, Unaffiliated, and Mainline Protestant) it was the Mainline Protestants who were the least supportive of this Biblical wisdom. White Evangelicals accepted the scripture as applicable by 66-24; mainline Protestants by only 53-32. What’s up with this?

(Thanks to hotair.com for the tip to the link).

What Will It Take to Make Christians Finally Pay Attention?

2011-05-12T11:15:00.000-04:00

Once again, our remarkable former colleague (FSU's loss was very much Trinity's gain) David Macpherson looks at the critical issue of who gains and who loses from increases in the minimum wage in this new report co-authored with William Even of Miami University. Using careful econometric techniques, they conclude (again) that the job-loss effects of the minimum wage fall disproportionately on young black Americans. What is new here is their finding that increases in the minimum wage raised unemployment for African Americans by a stunning 40 percent more than would have occurred merely from the Great Recession. Christians interested in social issues: is anyone listening? Does anyone care about what's actually going on out there?

(Thanks to NCPA for the tip about the study).

Randomized Controlled Trials: Part 1

2011-05-11T09:03:00.000-04:00

For social scientists the whole world is a laboratory. Also, the materials/substances we analyze (humans in our case) hold a complex array of motivations. This lack of control makes causality messy business. But, we are frequently called to pin-point solutions about what will work for, say, global poverty. One promising method for determining what kinds of interventions have significant impact on reducing poverty are called "randomized controlled trials" (long ago these were simply known as "field experiments"). Below is John Bates Clark Medal winner Esther Duflo talking about randomized controlled trials.

The Speenhamland System

2011-05-07T14:01:00.007-04:00

The Speenhamland System was one of a number of Poor Laws in England in the late 18th and early 19th century. The background is complex. Here is a short description.

It appears that real wages for farm laborers were falling, especially in the South and East of England, but migration opportunities to London were growing. There were several types of poor laws, but the Speenhamland System was interesting in that it appears that local governments and churches (it's not exactly clear to me where the lines of authority were drawn in the "parish") agreed upon what we might call a “living wage,” with the parishes paying for the gap between actual wages and the living wage. Several great economists including Mark Blaug and D. McCloskey have reconsidered the 19th century view that lax administration made the system a failure. Most of what I’m writing from here is based upon George R. Boyer, “The Old Poor Law and the Agricultural Labor Market in Southern England: An Empirical Analysis,” Journal of Economic History 46:113-135 (1986).

Apparently, that a rapid rise in relief payments burdened the parishes is taken as a given by just about everyone, even among economists on opposite sides of other issues regarding the laws. One of the intense debates over the past several decades is whether it was the Speenhamland System that caused this increase either through an increase in voluntary unemployment and/or a reduction in wages. McCloskey argued that economic theory would support the former conclusion but not the latter. Boyer quotes McCloskey (Explorations in Economic History [1973]) as saying that the system “was generally administered as an income subsidy ‘with a 100 percent marginal tax rate on earned income below the minimum’.” Boyer appears to argue a public choice view of the system. In areas with concentrated political power for landowners the Speenhamland system shifted the expense of paying wages that were high enough to keep laborers from moving to London from the farmers to everyone else in the parish.

What do Boyer’s numbers tell us? There is strong support for his public choice argument about the powerful landowners. But, the results on the issue as the whether the Speenhamland System created voluntary unemployment are irritatingly mixed. Per capita relief expenditures had a small but statistically significant negative effect on laborers’ income. On the other hand, the Speenhamland system of wage supplements was indeed measured to increase unemployment, but the result was not statistically significantly different from zero. (British analysts contemporary to the period believed that the system did lead to voluntary unemployment.)

What is most interesting to me in Boyer’s analysis is his reaction to the somewhat muddy results of the relationship between the Speenhamland System and the idea of voluntary unemployment. Boyer says that the results “provide tentative support for the revisionist hypothesis that rural parishes were selective in their granting of relief to able-bodied laborers.” (My emphasis.) The idea that decentralized religious institutions in the 19th century could minimize unhelpful effects of compassionate relief by being selective and discerning in their application has been a central argument of Marvin Olasky for years.

Faculty Union

2011-05-06T11:31:00.000-04:00

The internet is wall papered with rallying cries from pro-union faculty and union employees. In particular one article employs over-the-top and urgent rhetoric "Organize or Die". Before writing this post my goal was to find one unbiased and well-written piece explaining the United Faculty of Florida (UFF hereafter) saga. No luck. Thus, this abbreviated posting will try to present another side (hopefully in a measured manner). In the past couple weeks FSU faculty have received a flurry of letters, emails, office visits and telephone calls promoting UFF. The reason? House Bill 1023. If UFF does not reach 50% membership among the FSU faculty by July 1, 2011 the UFF-FSU chapter will dissolve.

The lobbying and promotion have been non-stop ---though the man tonight on the phone indicated UFF would have no problem reaching 50%. The most recent percent membership of UFF-FSU is uncertain although I've heard the numbers are somewhere around 35%. The hustle of the union employees signals a cause for concern. For example, why did the man call me if membership was already certain to exceed 50%. Moreover, why did he insist on debating my reasons for not joining the union? Another signal for concern is that UFF offered to waive all dues for joining faculty (and even made a point to tell people they could retroactively withdraw after July 1, 2011 with no monetary obligation). The hustle and the special offer smack of desperation. But, the union purports to offer a good product:

[We are working] to improve state funding for increased faculty salaries and benefits, working to improve the faculty's role in decision-making on campus, assisting in negotiation of collective bargaining contracts for over 18,000 professionals, protecting academic freedom and tenure, defending faculty rights, influencing the formulation of policy by the governing boards, working for legislation to improve the quality of education in our colleges and universities, and advancing academic excellence. Class load, equipment, salaries, professional advancement, instructional resources---ultimately every decision that affects higher education faculty is either a bargaining issue or a political decision and involves UFF.

With such self-evident benefits people should be lavishing UFF with gratitude. Yet, this union seems to have difficulty achieving membership for half the faculty at left-leaning Florida State University. Odd.

Before delving into the details of UFF-FSU it will be useful to take a step back and ask about the role of unions in general. The intuition of labor unions is simple: Because no single employee wields significant bargaining power all the decentralized employees become one centralized bargaining agent. Then, that agent essentially acts as a monopoly on the labor supplied in an industry. As mentioned in the block quote, unions usually bargain for pay increases and benefits for their employees (historically in the unions bargained for improved safety regulations ---though not all improvements in safety came at the hands of the union).

The UFF-FSU lobbied contract has several benefits (which the union happily celebrates) but the contract also has costs (which the union is conspicuously silent on). And, I should mention that like most bureaucracies that attempt to convince people of their necessity they sometimes exaggerate their benefits and really diminish their harmfulness. One example of an exaggerated benefit is the UFF claim to "protect tenure". In fact, the UFF-FSU chapter did fight on behalf of some faculty positions that were cut at FSU during the last round of budget cuts. But, this is the exception. In general the protection of tenure does not require a union ---it is the free market and the legal system that protect tenure. Imagine for a moment that FSU decided that it would not honor the hard-earned tenure of many of its faculty. This could seem plausible in a tumultuous budgetary climate; however, FSU will have difficulty attracting and maintaining good professors in the future if tenure is not honored. Also, if a professor is wrongfully terminated they can appeal their case before a judge.

Another exaggerated claim is that funding would disappear without the union. But, with alumni seated in the State House and Senate it is legitimate to ask the question of how much benefit UFF curries FSU with respect to appropriations. But, these kinds of arguments weaken the case for UFF. Thus, they do not appear on their website.

The benefits of the union largely consist in its ability to establish a centralized agent for bargaining and protect faculty members without a valuable outside option. We have already discussed the idea that a centralized agent wields more bargaining power, but, the second part of that statement answers the question, "for whom"? The faculty that most need a centralized bargaining agent are those faculty that do not have many well-paying prospects in the private sector. Economists, for example, have many well-paying prospects consulting for firms or working as an in-house analyst. But, generally speaking, any professor from the Humanities does not have a high-paying outside option. The reason this outside option is important is because it gives the individual more bargaining power. Anytime someone can come to the bargaining table and say, "You need me more than I need you", they are in better position to obtain benefits.

The costs of UFF are concentrated on our best and brightest faculty. The economics department will be losing two of our faculty in the fall to other universities. Also, the business school will lose five faculty. One negotiated "work rule" is instrumental here. FSU is unable to give a faculty member a higher salary (beyond standard pay increases to keep up with inflation or for promotion) unless they have an offer letter from another school. In many cases it would be beneficial to provide a preemptive pay increase. Once people have toured another college/school, talked to their spouse, and imagined themselves in another locale they are half way out the door. We have less flexibility to retain our good faculty because of such a work rule. Another cost to our best and brightest faculty occur when the union attempts to inject different "fairness" criteria into processes (previous post about this here).

Other costs associated with UFF are ideology and inefficiency. Because UFF is affiliated with national union organizations that contribute money to the Democratic party that imbues them with an ideological flavor. While the union cannot (by law) directly support candidates with dues the fact that money is fungible means they can legally donate money to causes that are largely democratic (this article talks about how the NEA is in the pocket of the democratic party. Incidentally, you can see in the next link that the NEA and AFT receive 29% of UFF dues); moreover, the unions can endorse candidates. Finally, the union employs out-of-town salaried employees who are a staple on campus for the next two months calling folks, visiting offices, and drinking coffee with professors all the while giving them a slanted sales pitch about exaggerated importance (Here is the break down of union expenditures). This is essentially the public choice argument about bureaucracies (see post here)

In fact someone could spread these benefits and costs like papers on a table. Stand back, look, and then say, "On balance the union seems like a good deal because I value protecting the faculty with low outside options." But, like I mentioned in a previous post economists will look at the unseen (in this case the opportunity cost). Put another way, any good economist will ask the question, "Compared to what?" Certainly there are some benefits to unionization (for some people), but, compared to what? Other options include a strong faculty senate or an independent faculty association. Both of these options could wield bargaining power without the unwieldy expenses of a large-scale union operation. The point is there are other institutional arrangements besides the Union that retain some of the benefits without some of the costs. Even in the case of the Union saving some faculty positions, this could have been accomplished at less expense. If each faculty member who were part of the Union were paying 1% (the amount of union dues) into a general account at the University there would be more than enough money in such a general account to hire back all the faculty who were losing their jobs.

In writing this post it did occur to me, "Will anyone really care to read about UFF-FSU?" It really does seem hum-drum and monotonous and hardly contributes to the overall theme of the Wise as Serpents mission. What are the key lessons: 1) People can choose to organize into one centralized negotiating agent which gives them more leverage at the bargaining table, 2)When faced with claims of benefit we good economists ask the question, "Compared to what?" , and finally 3) Soak in the lessons of public choice. These unions and other bureaucracies have an incentive to make exaggerated claims about their importance.

Seeds, Seeds, Everywhere

2011-05-05T10:51:00.000-04:00

There are many agricultural parables in the Bible, but, my favorite comes from Luke Chapter 8 "Parable of the Farmer Scattering Seed":

While a large crowd was gathering and people were coming to Jesus from town after town, he told this parable: “A farmer went out to sow his seed. As he was scattering the seed, some fell along the path; it was trampled on, and the birds ate it up. Some fell on rocky ground, and when it came up, the plants withered because they had no moisture. Other seed fell among thorns, which grew up with it and choked the plants. Still other seed fell on good soil. It came up and yielded a crop, a hundred times more than was sown.”
When he said this, he called out, “Whoever has ears to hear, let them hear.” His disciples asked him what this parable meant. He said, “The knowledge of the secrets of the kingdom of God has been given to you, but to others I speak in parables, so that, “‘though seeing, they may not see; though hearing, they may not understand.'

“This is the meaning of the parable: The seed is the word of God. Those along the path are the ones who hear, and then the devil comes and takes away the word from their hearts, so that they may not believe and be saved. Those on the rocky ground are the ones who receive the word with joy when they hear it, but they have no root. They believe for a while, but in the time of testing they fall away. The seed that fell among thorns stands for those who hear, but as they go on their way they are choked by life’s worries, riches and pleasures, and they do not mature. But the seed on good soil stands for those with a noble and good heart, who hear the word, retain it, and by persevering produce a crop.

One reason for my affinity goes back to when my Christian faith was new. In reading Donald Miller's phenomenal book Blue Like Jazz there was a portion of the book that sticks with me because of its tenderness and honesty. Miller is describing a conversation he had with a woman named Penny about her conversion story (centered around the parable in the same parable as it is written in Matthew):

There is a part in Matthew where Jesus talks about soil, and He is going to throw some seed on the soil, and some of the seed is going to grow because the soil is good, and some of the seed isn't because it feel on rock or the soil that wasn't as good. And when I heard that, Don, everything in me leaped up, and I wanted so bad to be the good soil. That is all I wanted, to be the good soil! I was like, Jesus, please let me be the good soil!

Her whole story is great (the whole book is really good too). But, that part stuck out to me because I want to be the good soil too. This is important: We have some control over our own soil. And, we can impact the soil others have too. Through spiritual disciplines such as prayer, reading our bible, studying, fasting, and other disciplines that act as vehicles into God's transforming love our soil will be altered. When our soil is good we can help others have good soil.

Notice that the farmer does not strategically set a seed into the ground. Instead, the word of God is lavished indiscriminately to all people. When the seed lands what kind of soil will it find?

Justice Vs. Revenge

2011-05-04T15:10:00.003-04:00

Here is another excellent piece, this one by Ramesh Ponnuru, about Christians and the killing of Bin Laden. For a deep and extended spiritual workout on this topic, I also recommend any reading of Dietrich Bonhoeffer's personal anguish over the decision to join in the conspiracy to kill (not capture) Hitler.

What?

2011-05-03T21:58:00.001-04:00

Topic for investigation tomorrow regarding Protestantism and Capitalism: what was the Speenhamland Law? More to follow.

Dancing in the Streets

2011-05-03T10:45:00.002-04:00

Here is a very thoughtful piece from the Huffington Post on the question "How Should Religious People Respond to Bin Laden's Death." I always appreciate the thoughts of Albert Mohler, and I think that his comments, near the end of the article, do a better job than I could of marking my own thoughts.

Those Inconvenient Tradeoffs

2011-05-03T10:23:00.008-04:00

I have to start by admitting my personal bias. When wind turbines were first proposed as an alternative energy source in the 1970s, I thought that they destroyed some of the most beautiful scenery in California. The small picture at the center right is of the San Gorgonio Pass between the Mojave desert and the Los Angeles basin. Apparently, the same debate is occurring elsewhere. The John Muir Trust is one of the leading environmental organizations in the U.K., and apparently they are concerned about the effect of wind farms on scenic vistas, especially in Scotland, as can be seen in a picture from the Daily Mail just above. The Muir Trust has recently released a statistical study arguing that wind farms are much less efficient than their supporters in the wind turbine industry and certain governments claim. The Muir Trust report claims that, at least in Scotland, they operate at lower overall levels of output, and with longer periods of "low wind events" than supporters of wind energy admit. The full report from the Muir Trust, together with complete links to their data, can be found here. A BBC report on the political debate on the report between the Muir Trust and advocates of wind farms in the U.K. can be found here. (Thanks to NCPA for the tip about the controversy).

This Does Not Look Promising

2011-04-30T20:56:00.005-04:00

World magazine reports on the "transitional" country of Turkey. It is a country with a strong secular tradition but currently with an Islamist government. It geographically straddles Asia and Europe, and would like to become more integrated with the European community. Yet, according to the article in the May 7, 2011 edition , "Dozens of journalists are currently in prison --- among the highest numbers of jailed journalists in the world, according to Freedom House....In March, Turkish police arrested 13 journalists on charges of conspiring to overthrow [the ruling party]."

I had no idea that Turkey had descended this far into autocracy. Just to be on the safe side, I decided to cross check these claims with the original sources. I found pretty much the same sad story here and here.

Doug and I recently completed a case study of the reform of corruption in the LAPD in the late 1940s and early 1950s. A free and competitive media was one of the institutions that clearly aided that successful drive against corruption. This does not look promising for the Turkish people.

Friday Links 4/29: Graduation Edition

2011-04-29T08:46:00.001-04:00

This whole year has been a raucous roller coaster ride, twists and turns, ups and downs, thrills and throw-ups (too much information?). Congratulations to the Class of 2011! Life is also about to dramatically change for me as I enter into the PhD program, taking on the form of a lowly student. In this edition of Friday Links I thought I would focus on education in general:

A Connecticut woman named Tanya McDowell has recently been in the news for committing larceny. She and her son were homeless at the time her son was enrolled in a local elementary school. The enrollment into a school was not the beef; rather, officials had a problem with which school. See the full story here. Why did Ms. McDowell need to send her child to a specific school? School choice anyone?

There were two interesting articles on the Freakonomics Blog (here and here). Dan Hungerman has new research that suggests that increased education leads to lower religiosity. Dan is able to control for the selection effect (that people who select into more years of education are different people than those who do not) because of Canada's compulsory schooling laws. I've emailed Dan about the results, because, I have a question about whether it is not just education but the type of education and those supplying the education. In the other blog post Dubner posts the conversation between him and Leavitt about whether college really matters. Leavitt responds,

Of all the topics that economists have studied, I would say one we are most certain about are the returns to education. And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8 percent increase in earnings over your lifetime. So someone who graduated from college will earn about 30 percent more on average than someone who only graduated from high school. And if anything, the returns to education have gotten larger over time. They’re as big as they have ever been.

Although there are questions about whether there are returns for PhDs of certain kinds. See Economist article "Doctoral Degrees: The Disposable Academic"

Similar to the argument made about the "type of education" is this recent article by Dan Klein called "In Praise of Ideological Openness". Klein notes that ideology is definitely going to color the lectures of even the most attentive speakers and social scientists are especially prone to these kinds of bias. Thus, why not openly admit your bias? One of my favorite lines:

Two professors can each teach a course in labor economics and make all of their statements reasonably true, by our lights. But the two courses may nonetheless be very different in ideological flavor. We may object strongly to one of the courses, not for its errors of commission, but its errors of omission.

Hats off to the graduates!

A Plethora of Rankings in Lake Nogebow

2011-04-28T21:05:00.003-04:00

I've lived in six states and the District of Columbia, and for some reason it took me years to notice the following pattern. Everywhere I lived there was, at some point, a debate in the public sphere that went something like this: "I don't know how we can expect people to want to move to ____ when everyone knows we rank [45th, 46th, ....51st] in Ranking X in quality of education." The thing is, I heard the same thing from people who lived in other states which were supposed superior to my state. One curious thing was that it was never a single, comprehensive criterion: it varied from state to state: per pupil spending for education, teacher salaries, spending on education as a percentage of personal income, class size, graduation rates, SAT scores, etc. etc.

So, a while ago I decided to try a little investigation of this phenomenon on the internet. I went onto search engines, and typed in, in Alphabetical order, "State A ranks 45th in education", State A ranks 46th in education"; etc . It was eye opening. Primarily in regional and local newspaper reports, editorials, and letters to the editor, I realized that the United States as a collective was a giant educational Lake Nogebow --a reverse Lake Wobegon where almost everyone is below average in education according to some ranking. I have a small map on my wall. Send me a comment if you want me to tell you how bad your underachieving state really is (I think I found that somewhere around 40 of the states ranked 41st - 51st in some category; unfortunately I didn't keep track of all of the categories by state).

The political economy of this rankings game is obvious. Create enough rankings and almost every state will fail in some category X, much to the delight of whatever lobbying group wants more taxpayer funding for X. The job of the education economist is to make some sense about which of these rankings actually matter. The whole class-size debate is ongoing and most of what I have seen is not encouraging to the idea that lowering class size is a cost-effective way of improving student performance, at least not in higher grades. Some of the rankings are undoubtedly in conflict: higher drop-out rates could correlate with higher SAT scores. It is well known that some of these rankings are completely perverse. Probably the best example is to report average SAT scores without taking account of what proportion of high school students actually sit for the SAT exams. For example, in a state in which in-state schools rely on the ACT, the SAT may be taken primarily by students who already know that they are qualified and/or have the resources to go to a private school out of state. That's an incredibly self-selected sample compared to a state that encourages every student to take the SAT.

Galt's Gulch, South Carolina

2011-04-28T11:41:00.006-04:00

Readers of this blog will recognize that I am not a fan of Ayn Rand. Therefore, it's somewhat distressing to read news reports that move me to say "Here's a case where Ayn Rand was prescient." I'm referring to the attempts by the National Labor Relations Board to tell the Boeing Corporation it cannot manufacture its airplanes in South Carolina. This is outrageous. The NLRB ought to be added to the list of federal agencies (EPA, FCC) where the power of the purse of Congress should be used to reign in abuses of federal power over economic activity. To go further, I suggest a sweeping re-examination of all of the Progressive Frankenbureaus who believe that they can order Americans around outside of the originally-understood concepts of separation of powers.

The Seen and Unseen

2011-04-26T13:46:00.001-04:00

Our training in economics sensitizes us to unseen effects. For example, Thomas Sowell, the Sage of Palo Alto, writes in his Basic Economics textbook that the question for any policy is, "What happens next?" In other words, we raise the minimum wage and workers will be compensated more money. Ok, but, what happens next? Mark touched on this in his previous post "Truth or Consequences". And, this was the topic of my last review for the Economics of Compassion class.

Economics fundamentally comes down to the seen and unseen:

What is seen in rent-controlled apartments? Lower prices. What is unseen? The underground market created for sub-leasing. The deterioration of property because landlords have no profit motive to improve the property.
What is seen with welfare payments? More resources for the poor. What is unseen? The high implicit marginal tax rates that reduces the incentive to work (sometimes for each additional dollar earned the poor lose more than one dollar in welfare receipts).
What is seen with subsidies to farmers? Farmers benefit from the receipt of money. What is unseen? This artificially lowers the price of the crop which makes it more difficult for developing nations to compete in agriculture.

***Contribute your favorite seen versus unseen distinction to our comments section***

This is well put by French political economist Frederic Bastiat in his book "That Which is Seen, and That Which is not Seen":

[The inability to think through beyond immediate effects] explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters - experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.

Moreover, I recently learned of 20th century American journalist Henry Hazlitt (influenced by Bastiat) from the APEE meeting. In the book Economics in One Lesson he writes,

The reason is that the demogogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desriable effects, or it could benefit one group only at the expense of all other groups.

To consider all the ramifications of any policy is wisdom ---at least from my "consequentalist" economic perspective. There is a Jewish aphorism that says (paraphrasing): A clever man can extricate himself from a difficult situation, but, a wise man never gets into such a situation in the first place. There will always be the messy business of trade-offs; however, a little foresight can go a long way to making trade-offs less painful.

Hope.

2011-04-25T10:13:00.000-04:00

This academic year at the FSU Wesley Foundation we had full-court coverage of the Bible. Beginning in the fall we learned about Act 1: The creative process and the declaration that God saw everything created as "good". Then, we learned about Act 2: The serpent spins a story that causes Adam and Eve to believe God is holding out on them. The Fall. Finally, we learned about Act 3: The longest of all the acts this is the story of redemption. Since The Fall we can see through the law and prophets how God worked to bring His people back to Him. On Sunday we celebrated the culmination of Act 3, the ressurection. The theme this year for Easter was HOPE. Not some wishy-washy, "Gee, I hope this turns out well." Not some "wishing upon a star". Not flimsy. The hope we have in Christ is sturdy and doesn't disappoint. Because He loved us and because His love can transform our hearts and minds we have hope. Let's hope for a better world.

***On a personal note I feel the need to tell more hopeful stories in my class. Reports of failure in compassionate activities abound and serve as warnings about what not to do. However, success is also instructive and far more hopeful.

Good Friday

2011-04-22T10:21:00.002-04:00

Last night at Maundy Thursday service, Pastor Bill Bess reminded us of the instructions in the Old Testament for the Passover supper to be held as though in haste for departure, so he organized a quickly moving service with sparse readings and words of institution. The topic of his homily was a contemplation on the grief of the disciples on Good Friday at losing a friend to a torturous murder.

And, I suspect I'm probably being repetitive from posts over the past couple of years, but if it is Good Friday it must be time for Jesus Christ, Superstar!

Maundy Thursday

2011-04-21T21:15:00.002-04:00

The Wesley Foundation is an odd and austere gray block building, students nicknamed the church, "the bomb shelter". It was built in the 1970s and designed for the very service we attended tonight: Maundy Thursday. On the exterior, the sides of the building are sloped to mimic the Cup of the Covenant. Meanwhile, the interior contains a focal stage perfectly sized for a long table with seating.

Each year our pastor delivers a message in the fellowship hall and we walk into the chapel, which is lit only by candles. The table is filled with half-eaten Passover food and represents where Jesus and his disciples had celebrated Passover. On this night the Jewish people remember the bitterness of slavery and the greatness of the God who brought them out of Egypt. We are invited to the table to reflect. Walking up and seeing the symbolic half-eaten food we remember the bondage of the Jewish people but also the spiritual bondage of sin.

Our mood is somber as we consider the weight of what happens next in the story. Jesus endured betrayal and Jesus knew his death was necessary to free us from sin, but, he suffered under the weight of that knowledge. (without the comfort of his friends). Then, tomorrow we will remember that Jesus loved us to the very end.

We inherit a great story. The story of God's redemption for everyone. I pray our hearts would be softened and prepared for Good Friday and Easter.

A broken heart

A fount of tears

Ask and it will not be denied

A broken heart love's cradle is

Jesus our Lord is crucified

Let us never allow this story to become hackneyed and stale but always stir our souls.

Wednesday Thoughts, Cont'd

2011-04-20T10:55:00.002-04:00

Pastor Bill Bess departed from the lectionary this past Sunday to preach from the following passage, which I think is very appropriate for Holy Week:

"[Jesus] who, being in very nature God, did not consider equality with God something to be grasped, but made himself nothing, taking the very nature of a servant, being made in human likeness. And being found in appearance as a man, he humbled himslef, and became obedient to death --- even death on a cross." (Philippians 2:6-8 [NIV]).

TOMS Shoes

2011-04-19T11:27:00.003-04:00

Monday morning one of my students walked in, sat down, and confessed that the Economics of Compassion course is challenging her thoughts about charity. Then, she asked about my personal opinion of TOMS shoes. This is a brief description of the conversation. But, first let me explain what TOMS is. From their website under "Our Movement",

In 2006, American traveler Blake Mycoskie befriended children in Argentina and found they had no shoes to protect their feet. Wanting to help, he created TOMS Shoes, a company that would match every pair of shoes purchased with a pair of new shoes given to a child in need. One for One. Blake returned to Argentina with a group of family, friends and staff later that year with 10,000 pairs of shoes made possible by TOMS customers.

Why Shoes?

Many children in developing countries grow up barefoot. Whether at play, doing chores or going to school, these children are at risk:
•A leading cause of disease in developing countries is soil-transmitted diseases, which can penetrate the skin through bare feet. Wearing shoes can help prevent these diseases, and the long-term physical and cognitive harm they cause.
•Wearing shoes also prevents feet from getting cuts and sores. Not only are these injuries painful, they also are dangerous when wounds become infected.

•Many times children can't attend school barefoot because shoes are a required part of their uniform. If they don't have shoes, they don't go to school. If they don't receive an education, they don't have the opportunity to realize their potential.

Their goal is what is commonly called a "double bottom line": profit and charity. And, they are doing quite well at both. Last year TOMS reached the 1 million pair sold plateau (which means they also gave away 1 million pairs of shoes). But, economics fundamentally boils down to what Bastiat called, "That which is seen and that which is not seen". What do people see with TOMS? First, they are fashionable and cool looking kicks but they also see photographs like the one pictured below. Is this a good thing? Maybe.

If that is what is seen then what is not seen? I'll argue that there are three things that may go unnoticed by most people: Opportunity Cost, Paternalism, and Unintended Consequences.

Opportunity cost is what we give up to get something else. The least expensive pair of TOMS shoes are $44 on their website. What else could $44 buy? My pair of sweet Nike's cost $30 on sale. If I wanted to give away $14 that could buy medicines, malaria nets, food, etc. through a variety of NGOs. Additionally, there are really inexpensive pairs of shoes that you could buy at Wal Mart for $14 but are more durable than TOMS. I wore the soles of my TOMS out in short order and my primary mode of transportation isn't my feet!

Paternalism is important because when buying TOMS we're determining what to supply rather than asking what is in demand. Perhaps giving the money to the people directly through a sponsorship program and allowing them to allocate their own resources is better. Do we really know their needs better than themselves? (Obviously Principal-Agent problems factor in when you just give people money, nevertheless, I think this is an important point)

Unintended Consequences are those positive or negative outcomes people did not anticipate. Vivek Nemana made two guest posts (here and here)on the Aid Watch Blog and notes that TOMS shoes actually can be harmful to local shoe markets. If TOMS targets people who would never have bought shoes this is a moot point; however, if TOMS is giving away free shoes to those people who would otherwise be customers in the local shoe market they are destroying demand. At this point you might be asking, "Why is this a bad thing? Now that person has extra money they can spend in alternative ways." That is true; however, what happens when TOMS become less fashionable and less shoes are being given away?

Certainly the work TOMS does in these developing countries has positive benefit. No doubt. Also, in our own country it has brought about awareness with campaigns such as the one on FSU campus a couple weeks ago called, "One Day Without Shoes". In the end my critique of TOMS comes down to the seen versus the unseen.

Truth or Consequences?

2011-04-19T11:22:00.009-04:00

The Association for Private Enterprise Education annual meetings had a refreshing number of discussions about the variety of voluntary activities. To use one of my favorite overly simplistic lines, the opposite of government coercion is not the market; the opposite of government coercion includes all voluntary activity, of which market processes are only one example. Speakers such as Elinor Ostrom, Deirdre McCloskey, and George Ayittey spoke on variations on this point in plenary talks, and those discussion continued into several individual paper sessions.

On the other hamd, after returning from the conference, I picked up an article in First Things entitled "The Emancipation of Avarice" by Edward Skidelsky. Anyone who reads this blog would understand why I was attracted to such a title. The topic of the paper is one that I find exciting for Christian economists to debate. Unfortunately, I found the argument of the paper jumbled. About midway in his article, he critiques Mandeville and the Parable of the Bees. If you recall one of my earlier posts criticizing Mandeville, you can imagine I found common cause with his criticisms. But then he seems to draw a direct, if not actually straight, line from Mandeville through Adam Smith and into all of modern economics for what he calls its emphasis on consequentialism. I'm not sure I buy this. (Smith's recent biographer, Phillipson, puts much more distance between Mandeville and Smith, and Skidelsky goes right to the Wealth of Nations, without visiting The Theory of Moral Sentiments. ). But let's stick with the issue of morality, economics, and consequentialism here. Suppose the civic leaders of a nation take Skidelsky to heart to study the writings of Aristotle, Aquinas and Agustine...to "express an aspiration to mold people's characters, to make them less greedy, more generous, and so forth." Further suppose that, steeped in such high philosophical idealism, they enact rent controls, minimum wages, and raise the tax on capital gains to 80%. Is it morally deficient of the consequentialist economist to pound home the empirical reality that these efforts very likely help well-to-do teenagers at the expense of inner city minority workers (minimum wage), create an appropriable property right that benefits mobile jet setters who can sublet their apartments at market rates, all the while degrading the quality of housing serving the poor (rent controls) and end up with the wealthy paying fewer taxes (very high capital gains tax rates)? Doug and I have discussed at length the reverse question: what is the moral position of someone who looks only at their own intrinsic motivations and refuses to discuss the consequences of their actions?

If someone argues that Aristotle believes that enacting rent control creates a virtuous citizen in a virtuous society, then I would argue that either a ) Aristotle is wrong b ) the person who interpreted Aristotle is wrong, or c ) I have a very different concept of virtue. Does that mean that I must necessarily be a consequentialist? I don't know. I do know that Skidelsky seems to support government intervention "to erect safeguards against the powerful human tendency to rapacity." But he has no model of public choice, except where, earlier in the essay, he admits that "In complex, fractured societies, any attempt to rule through direct moral exhortation can lead only to tyranny."

Who Wants to be a Spillionaire?

2011-04-15T15:08:00.004-04:00

For a variety of reasons (public relations, political pressure) BP approached the problem of damages along the Gulf Coast in a proactive way, that is, agreeing up front to pay damages through what were largely political rather than judicial processes. The investigative journalism group ProPublica has looked at the result, and it's not pretty. In fact, that title phrase "spillionaires" says a lot. It's the classic case a lot of money to be had through what are essentially political connections rather through competition in the market (or, in this case, rather than through a more measured, but slower, common law process). It's also a case study as to why economics students need to be repeatedly made aware of the "public choice" aspects of non-market decision making. Oftentimes, "market failures" are compared to some idealized non-market utopia. But nothing is going to cause human beings to discard the same human weaknesses that cause problems in the market just because they switch to some alternative resource allocation process, especially when there is so much money at stake, as in this case.

Portfolios of the Poor: A Book Review

2011-04-14T21:24:00.000-04:00

The World Bank introduced $1 poverty rates into our vernacular in 1990 with their World Development Report. However, little was known about how these people, classified as extremely poor, actually lived. Since then research such as that described in an earlier post titled "Economic Lives of the Poor" shed some light on this question. Carrying forward that research agenda is a 2009 publication from Princeton Press called Portfolios of the Poor. Four economists tell a fascinating story about the financial lives of the poor and how the world's poor live on such little money.

What is novel about Portfolios of the Poor is how it moves beyond the static story of year-to-year statistics and into a more dynamic realm. In other words, former studies were like pictures that represented snap-shots in time, this book is like the introduction of the motion picture. The authors are able to improve in this way because of their unique data. Throughout three countries Bangladesh, India, South Africa the authors employ financial diaries (which participants filled out fortnightly) as a vehicle to acquire information about how poor people make decision with their money.

What emerges from the diaries is a bounty of information about the daily grind. First, it was interesting to learn what kinds of occupations employed the poor. The occupations in their sample were varied from sheep intestine seller, rickshaw driver, construction labor, factory labor, small farmer, cab driver, cigarette roller, and many more. Secondly, it was a revelation to learn that their occupations and incomes were frequently irregular. Many of the households in their sample pieced work together from regular wages, casual work, and self employment (~65% in South Africa, nearly 70% in Bangladesh, and more than 85% in India. Moreover, the $1 or $2 per day measures used by the World Bank were averages over the course of the year. Put another way, they could earn $3 on Monday, $0 on Tuesday, $1 on Wednesday, $4.25 on Thursday and etc. The poor had to stitch together a livelihood from multiple sources.

At the most basic level the poor are in a particular bind because they suffer from what the authors call "The Triple Whammy": low incomes, irregularity, and a lack of financial instruments. These open the door to a myriad of questions: How do the poor handle negative and unpredictable shocks such as illness in the family?, How do the poor acquire enough savings with their low incomes to send their children to school, buy grains to store during the monsoon season, or host a special even such as weddings or funerals? The authors have distilled these kinds of questions into three categories of financial needs for the poor:

"1. Managing basics: cash-flow management to transform irregular income into a dependable resource to meet daily needs.
2. Coping with risk: dealing with the emergencies that can disrail families with little in reserve.
3. Raising lump sums: seizing opportunities and paying for big ticket expenses by accumulating large sums of money."

Currently the poor manage their money largely through informal channels. This is probably not surprising since there are a shortage of formal lending and borrowing institutions geared towards poor households. Moreover, microfinance institutions are often focused on helping the poor raise money for capital investments. There is nothing inherently wrong about that focus, but, the poor have immediate needs in addition to building up their long term prospects. In managing their money day-to-day the poor will rely on neighbors and/or family members who are marginally better off as lenders or "money guards". A money guard is simply a person who safely stores the money given to them by another person (sometimes for free but often for a fee). The rationale for this institution is simply a commitment to self-control. Seeking family for both lending and money guarding it is stressful for the poor for at least three reasons: unreliability, lack of privacy, and lack of transparency. For example, these informal loans are unreliable because the money guards might have spent the money (the money guards are still poor). A lack of privacy is important because people may not want to borrow because they feel ashamed and pay a big emotional toll. Moreover, if they borrow money they will later be expected to reciprocate. Finally, sometimes the transparency of the interest rate is questionable when lending through informal channels. All of this adds up to high risk in gathering substantial sums of money and a stressful situation for the poor.

Having access to some credit or savings is very important because the poor are rarely insured against a variety of events. For example, if a family member develops a sudden illness this acts as a large negative shock to their income. In rich countries we have various kinds of insurance to protect us against such risks; however, insurance is a difficult financial instrument to use amongst the poor. People have tried to provide so-called "micro insurance" with mixed results. In particular, in the authors' sample the results for insurance in Bangladesh and India were quite bad with poor management of funds that resulted in an inability to payoff the insured.

Alas, if the poor are uninsured they must have the ability to acquire a loan or dip into savings to absorb risk. Then, the question becomes, "How do the poor accumulate larger sums of money?". So far we've talked about informal loans which you can think of as "accelerators" but the poor will sometimes utilize different kinds of savings arrangements ---we'll call those "accumulators". The authors discuss a few accumulators such as savings clubs, rotating savings and credit associations (RoSCAs) and accumulating savings and credit associations (ASCAs). Savings clubs are simple commitment devices in which a large group of people save X dollars for Y months and then receive X*Y at the end. The purpose of joining a savings club is simply to encourage each other to stay committed. RoSCAs and ASCAs on the other hand are a little more complex because people take turns reaping the benefit of the savings. In RoSCAs each person puts in X dollars a month and every Y months it's your turn to receive all the money in the pot. Some RoSCAs are even more sophisticated where they auction the right to the money to people who haven't taken their turn (which essentially acts as an interest rate). Finally the ASCAs are like the RoSCAs but don't zero out the pot each time. Some money is left in the pot to act as loanable funds to increase the overall wealth of the membership.

Then, the authors discuss some of the most up-to-date innovations in microfinance and other commercial banks. With commercial banks the authors provide the example of "Kishan Credit Cards" which allow for small and marginal farmers to improve their cash flow. The farmers can use these credit cards anytime throughout the year and must pay them back by the end of the year to use the credit card in the subsequent year. This allows for farmers, whose incomes are seasonal, to smooth their consumption over the year. Another innovation that comes from microfinance is the concept of "top-up" for loans. Without top-up borrowers needed to pay the entire loan back before receiving more money; however, with top-up borrowers are able to refresh the loans to their original amount even when they haven't paid back the whole loan.

These innovations are an excellent example of institutions. Institutions are the "rules of the game" and small changes in the rules of the game can have a significant impact on the ability for the poor to meet their daily needs. Finally, after discussing some of the innovations the authors are able to cull some additional insights from their research about the what characteristics of financial instruments are most important for the needs of the extremely poor. The authors identify four such characteristics: reliability, convenience, flexibility, and structure.

Reliability - The poor need a safe place to store their money with someone who is trustworthy and will not be tempted to spend their savings. Reliability is crucial in their financial instruments because so many other facets of their lives are irregular from earned income to schools and clinics to care for them.

Convenience - One of the primary reasons the poor in the authors' sample did not take advantage of microfinance institutions is that they were not convenient. The poor needed to travel long distances or attend regular meetings to obtain credit. The more accessible the financial instruments the more likely they are to be used. The authors provide the example of some microfinanciers who have begun daily visits to provide people with more opportunities to repay and take-up loans.

Flexibility -Because incomes are so irregular the poor need some flexibility in the payment schedules for the loans. The Kishan Credit Card is a good example of providing such flexibility. The main objective is for the loan to be paid in full, but, it allows the poor to supplement their less abundant months with credit while paying off the loan in the more abundant months.

Structure -Even with flexibility there needs to be some structure because it is difficult to maintain self-control when you're living on such a small income.

There were many other interesting facets of the book such as how interest is charged in the microfinance industry and how the interest rates are not as exorbitant as they may look at first blush because they are nominal rather than compounded. Also, the interest rates must be somewhat higher because of high default rates and because debts owed are cancelled upon death. To me the book comes down to this really central point from the authors:

"In the rich world, a household's portfolio of financial instruments is usually managed on the basis of risk and return. The portfolios of the poor households are instead managed to ensure money can be obtained in the desired amounts at the desired times."

The book was a joy to read and gave me a lot of insight into how the poor actually live and the struggles they face. Below is a video of well-known development economist Bill Easterly discussing the book.

The Economic Lives of the Poor

2011-04-08T09:00:00.001-04:00

Today my Economics of Compassion class will be discussing two articles from Abhijit Banerjee and Esther Duflo. First, "The Economic Lives of the Poor" (2007) chronicles the living conditions and spending habits of people classified as living on $1 and $2 per day. Then, in a follow-up paper titled "What is Middle Class About Middle Classes Around the World?" (2008) Banerjee and Duflo investigate those people living on $2 to $4 and $6 to $10 per day. Both of these papers utilize the same World Bank Living Standard Measure Surveys and the RAND Family Life surveys which are considered high quality datasets. The authors also use data they have generated through field ". With these datasets the coverage of locales is a great feature of the articles. Countries from Mexico, Guatemala and Peru to South Africa, East Timor, and Tanzania, to India and Pakistan, and more were covered by these data. So, I thought the first thing I would start out with are 10 Facts about those living on $1 to $2 per day and 10 Facts about the middle class. Then, I will close with what I think are some interesting points I gleaned from the readings.

10 Facts from "Economic Lives of the Poor"
1. Those classified as extremely poor are often entrepreneurs, but, not in the glamorous way we think of entrepreneurs in the United States as inventing a new product and striking it rich. Often these entrepreneurs engage in activities such as rickshaw driving, selling sheep intestines, frying dosas (think Indian pancakes), or having a modest storefront operation. They engage in these activities in part because of the flexibility but often because they do not have other options for regular and steady work. In fact, the poor often work 2 to 3 jobs to try to cobble together income.

2. Rural households are more likely to engage in agricultural work but even rural households will work multiple jobs often migrating into city areas. The thought here is that the harvest season does not bring income all year. Also, many poor work multiple jobs to spread out risk. Because many times their jobs are temporary having multiple jobs is a benefit because it reduces risk.

3. In urban areas the extremely poor spend 56% to 74% (56% to 78% in rural areas) of their income on food. Moreover, when they spend this money they do not spend the money to maximize calories. Instead, the poor buy seasonings and sugar in addition to staple grains.

4. Households are often crowded with a median of 7 to 8 people per household. Access to electricity and sanitation varies enormously from country to country.

5. The extremely poor are "frequently sick or weak". For example, Banerjee and Duflo report data from Udaipur citing that 65% of men and 40% of women had a BMI below 18.5 which is the cut off for being underweight. Moreover, in Udaipur they have survey data that 72% of respondents had a disease and 46% report and illness that left them bed-ridden and unable to function. Moreover, only about 6% have health insurance. In theory this shouldn't so bad; however, many of the public health facilities available sometimes charge money when they're not supposed to and are often incompetent (give medical advice that harms rather than helps).

6. Banerjee and Duflo report that education expenditures "hover around 2 percent" for these extremely poor households. Even though the poor frequently attend public schools there is "mounting evidence . . . that public schools are dysfunctional".

7. The median household spent 10 percent of their income on festivals per year. They report the median because the Latin American countries spend substantially less on festivals each year.

8. Television ownership is all-over-the-map. In Udaipur almost nobody owns a TV; however, in Peru and South Africa there is 70% ownership

9. There are not many formal channels through which the poor can save and if they keep the money at home, "The money may be stolen or simply grabbed by your spouse or son. Perhaps equally important, if you have money at hand, you are constantly resisting the temptation to spend." This lack of saving really hampers critical investments in goods such as fertilizer or capital equipment such as a sewing machine.

10. Significant amounts of money are spent on alcohol and tobacco products about 4% to 8%. When asked what they believed they could trim in their budgets 44% of the poor viewed these consumption items as the things they would want to cut.

10 Facts from "What's Middle Class About . . . "
1. The middle class are far more likely to have steady salaried jobs. Banerjee and Duflo write, "The key distinction between the middle class and the poor is who they are working for and one what terms."

2. The middle class spend a much smaller share of their income on food. Where those living on $1 or $2 per day tended to spend upwards of 60% of their income on food the middle class tends to average around 50% of their income spent on food.

3.Fertility is difficult to measure because there is no consistent fertility histories in the survey. The authors try to figure out fertility by looking at the ratio of people aged under 18 to those above 18. It seems that the middle class are having less children.

4. The rural middle class spend approximately the same percentage of their budget on education as the rural poor; however, the urban middle class spend "a substantially larger fraction" of their income on education. (This is amplified when you consider that the absolute amount is higher and you consider Fact #3 that the middle class have less children). Moreover, in many urban areas parents spend money on tutors for their chidlren. Presumably these parents realize that the best way out of the middle class is through an education.

5. The middle class have significantly improved access to clean water. In rural areas over 30% compared to under 10% for those earning less than $4 per day. In urban areas the percentage gap is approximately the same though more of the extremely poor have access to clean water.

6. The middle class spend more money on health care (in countries where public health is not covered through government expenditures). The middle class are more likely to see a health care provider when they are sick. Moreover, when asked in a survey whether their parents are alive the middle class are far more likely to report their parents are still alive than the poor.

7. The middle class have better access to information through television ownership.

8. Better access to credit. These middle class people in poor countries are better able to obtain savings accounts and formal loans. They have collateral and are better credit risks because they have a steady job.

9. There is no clear pattern for what happens to alcohol and tobacco consumption as income goes up.

10. More entertainment. The poor spend more on festivals as their income increases.

These are really interesting stylized facts about the economic lives of the poor, but, causality is not specified in many of these facts. For example, are people poor because they have more children -or- are people who are in poverty having more children because children can earn more than they cost? Do people become poor because they became sick -or- are people who are poor more likely to be sick because they cannot afford good health care? There are a number of these questions where the arrow of causality is running amuck. With both of these questions causality likely runs both ways. But, understanding causality is no mere trifle ---what I mean is, causality isn't important only to academic economists. Identifying causality is important because policies are often designed in hopes of tackling "root causes" of problems. My next post will be a review of a book I recently finished called "Portfolios of the Poor" that discusses some of the on the ground money management strategies of the poor and how different financial instruments could potentially help the poor manage their cash flows.

Some interesting things I found when reading the articles were how similar humans in different parts of the world behave. First, even when earning a paltry $1 or $2 per day people do maximize on caloric intake, rather, people like the way food tastes. When people become middle class they do not buy more food but they buy "better food". Second, people have a difficult time not spending money. The temptation of "this money is burning a hole in my pocket" is real for the poor the same way it is for us. Third, poor people spend a sizable chunk of their income on festivals or other important ceremonies because there is this deep-seated desire to engage in social activity. For me these facts draw me closer to their humanity because I am able to see these people as not so different from myself and others I know. But, these vignettes of the poor also are vitally important because if we want to help the poor we must first know the poor. This has been the great tragedy of compassionate activities that we try to help people when we lack knowledge about what would help them.

Some Place Just Froze Over

2011-04-07T10:27:00.004-04:00

Who would have thought that San Francisco would be home to a bi-partisan (Bush and Obama administration supported) experiment to use the price system to allocate parking spaces? As the article says, it is going to be fun watching. Will the technology work? Will the economic winners (people who don't have to circle for long periods of time to find a parking place) be able to respond to any anti-market "fairness" complaints?

I Hate to Say it, but W_ T_ Y S_.

2011-03-31T21:24:00.004-04:00

With regards to Doug's review of The Big Short , it's too bad that more people didn't pay attention to this article in the American Economic Review, published just after the dot-com bubble crash and before the housing bubble and crash.

The Big Short: A (Short) Review

2011-03-24T11:01:00.001-04:00

This best-selling book showcased Michael Lewis' excellent writing style even on such an opaque topic as sub-prime mortgage backed securities. Filled with an intriguing cast of characters and colorful dialogue Lewis recounts the events leading up to the largest financial collapse in the history of Wall Street. He tracks
four groups of men: Scion Capital, FrontPoint, Cornwall Capital, and Deustche Bank who noticed that (or heard from others and believed that) loans were essentially being given to Americans who would soon have no ability to repay them. The mystery that befuddled these men was that Wall Street did not seem to pay attention to this fact. Lewis tells the story as if Wall Street financiers were under a trance and the misguided delusion that these people repay their loans. If that wasn't the case then a less savory explanation exists ---they knew and they didn't care (because these sub-prime mortage backed securities were making them rich).

Financial economics is not an area that I'm familiar with; however, it was interesting to get a perspective from "inside the doomsday machine". There were also interesting discussions at the end of the book about moral hazard, risk, and agency problems. People have an incentive to engage in risky behavior when they do not experience the negative consequences of their actions. Moreover, bosses could not easily monitor what their employees were actually doing with the firm's money. Some food for thought at the end was whether all this could be traced back to the 1980s. When Salomon Brothers transitioned from a partnership to a publicly traded company they essentially shifted the risk away from their clients and themselves and onto the shareholders. Also, as new financial instrument became more exotic they became more opaque and nobody could really understand them. If you can't explain what is a "collateralized debt obligation" or which mortgages are contained in the sub-prime mortgage backed securities then we're in trouble.

This leaves me with a final thought: Charles McDaniel spoke at ASSA meetings in a special session for the Association for Christian Economists a couple years ago. He was citing GK Chesterton and his belief that if the economics was too complex to explain there was probably something wrong and perhaps that road should not be traveled. After reading this book I couldn't agree more.