Tag Archives: political economy

Political parties claim inconsistent patience

If the stated preferences of politicians are taken at face value, then they have inconsistent patience across different policy areas. Left-wingers want to invest in education, infrastructure and prevention of climate change. These investments have a present cost and a long-delayed benefit, which suggests patient preferences (high discount factor, low discount rate). On the other hand, the left wants to increase borrowing, redistributive transfers and government spending in general, which have a current benefit (including electoral, but focus on societal for now) and a future cost. Preferring a current benefit and a future cost implies impatience.

For right-wing parties, these preferences are switched (impatient on education, climate, but patient on redistribution), so their inconsistency is the mirror image of the one described above. In summary, both sides of the political divide claim policy preferences that simultaneously imply patience and impatience, which suggests motives other than societal benefit. One way to reason about these other motives is described in https://sanderheinsalu.com/ajaveeb/?p=1015

M-diagram of politics

Suppose a politician claims that X is best for society. Quiz:

1. Should we infer that X is best for society?

2. Should we infer that the politician believes that X is best for society?

3. Should we infer that X is best for the politician?

4. Should we infer that X is best for the politician among policies that can be `sold’ as best for society?

5. Should we infer that the politician believes that X is best for the politician?

This quiz illustrates the general principle in game theory that players best-respond to their perceptions, not reality. Sometimes the perceptions may coincide with reality. Equilibrium concepts like Nash equilibrium assume that on average, players have correct beliefs.

The following diagram illustrates the reasoning of the politician claiming X is best for society: M-diagram of politics In case the diagram does not load, here is its description: the top row has `Official goal’ and `Real goal’, the bottom row has `Best way to the official goal’, `Best way to the real goal that looks like a reasonable way to the official goal’ and `Best way to the real goal’. Arrows point in an M-shaped pattern from the bottom row items to the top items. The arrow from `Best way to the real goal that looks like a reasonable way to the official goal’ to `Official goal’ is the constraint on the claims of the politician.

The correct answer to the quiz is 5.

This post is loosely translated from the original Estonian one https://www.sanderheinsalu.com/ajaveeb/?p=140

Economic and political cycles interlinked

Suppose the government’s policy determines the state of the economy with a lag that equals one term of the government. Also assume that voters re-elect the incumbent in a good economy, but choose the challenger in a bad economy. This voting pattern is empirically realistic and may be caused by voters not understanding the lag between the policy and the economy. Suppose there are two political parties: the good and the bad. The policy the good party enacts when in power puts the economy in a good state during the next term of government. The bad party’s policy creates a recession in the next term.

If the economy starts out doing well and the good party is initially in power, then the good party remains in power forever, because during each of its terms in government, it makes the economy do well the next term, so voters re-elect it the next term.

If the economy starts out in a recession with the good party in power, then the second government is the bad party. The economy does well during the second government’s term due to the policy of the good party in the first term. Then voters re-elect the bad party, but the economy does badly in the third term due to the bad party’s previous policy. The fourth government is then again the good party, with the economy in a recession. This situation is the same as during the first government, so cycles occur. The length of a cycle is three terms. In the first term, the good party is in power, with the other two terms governed by the bad party. In the first and third term, the economy is in recession, but in the second term, booming.

If the initial government is the bad party, with the economy in recession, then the three-term cycle again occurs, starting from the third term described above. Specifically, voters choose the good party next, but the economy does badly again because of the bad party’s current policy. Then voters change back to the bad party, but the economy booms due to the policy the good party enacted when it was in power. Re-election of the bad is followed by a recession, which is the same state of affairs as initially.

If the government starts out bad and the economy does well, then again the three-term cycle repeats: the next government is bad, with the economy in recession. After that, the good party rules, but the economy still does badly. Then again the bad party comes to power and benefits from the economic growth caused by the good party’s previous policy.

Overall, the bad party is in power two-thirds of the time and the economy in recession also two-thirds of the time. Recessions overlap with the bad party in only one-third of government terms.

Of course, reality is more complicated than the simple model described above – there are random shocks to the economy, policy lags are not exactly equal to one term of the government, the length of time a party stays in power is random, one party’s policy may be better in one situation but worse in another.

Social welfare functions derived from revealed preference

The social welfare functions used in policy evaluation typically put more weight on poorer people, justifying redistribution from the rich to the poor. The reasoning is that the marginal benefit of a unit of money is greater for the poor than the rich. However, people with a greater marginal value of money are more motivated to earn and save, other things equal, so more likely to become rich. In this case, the rich have on average a higher marginal benefit of money than the poor, or a lower marginal cost of accumulating it. If the justification for redistribution is an interpersonal utility comparison, then revealed preference suggests a greater Pareto weight for richer people, thus redistribution in the opposite direction to the usual.

If the marginal utility of money decreases in wealth or income, then people earn until the marginal benefit equals the marginal cost, so the comparison between the rich and the poor depends on their marginal cost of earning, evaluated at their current wealth and income. The cost and benefit of earning may both be higher or lower for richer people. In a one-shot model, whoever has a greater benefit should receive redistributive transfers to maximise a utilitarian welfare criterion. Dynamic indirect effects sometimes reverse this conclusion, because incentives for future work are reduced by taxation.

Those with a high marginal utility of money are more motivated to convince the public that their marginal utility is high and that they should receive a subsidy. The marginal utility is the difference between a benefit and a cost, which determine whether the poor or the rich have a greater incentive to lobby for redistributive transfers. The marginal cost of an hour of persuasion equals the person’s hourly wage, so depends on whether her income is derived mostly from capital or from labour. For example, both rentiers and low-wage workers have a low opportunity cost of time, so optimally lobby more than high-wage workers. If lobbying influences policy (which is empirically plausible), then the tax system resulting from the persuasion competition burdens the high-wage workers the heaviest and leaves loopholes and low rates for capital income and low wages. This seems to be the case in most countries.

A tax system based on lobbying is inefficient, because it is not the people with the greatest benefit that receive the subsidies (which equal the value of government services minus the taxes), but those with the largest difference between the benefit and the lobbying cost. However, the resulting taxation is constrained efficient under the restriction that the social planner cannot condition policy on people’s marginal costs of lobbying.

Democracy may be the best system due to political economy constraints

Democracy picks the leader who is best at getting elected, not necessarily the best at leading the country. The ability to become a leader differs from the ability to lead. For example, populism and overconfidence in oneself may help one’s election prospects but harm performance at governing.

Even if there was some very accurate way to select the best leader (e.g. test their honesty, intelligence, work ethic, in addition to electability), it may be not be feasible in practice to make this person govern for long. The reason is the political economy constraint that someone better at obtaining power can depose the best leader (one whose government would maximise social welfare, however defined). The disruption resulting from the coup may even harm society more than the difference between being governed by the best leader as opposed to the best power-grabber. In this case, the leadership of the most electable person may maximise welfare, subject to assumptions like „the best power-grabber is also good enough at retaining power, preventing coups once in government”.

The skills of getting elected and organising a revolution probably differ, so an elected government has some of the same vulnerability as the best leader. The political economy constraint of preventing a coup may then favour making the strongest dictator or the most dangerous revolutionary lead the country. However, this may not be the best system for selecting leaders due to a tradeoff between the ability to govern and the ability to overthrow a government. The welfare-maximising selection system subject to the political economy constraint would pick the person who is best at governing among those who can successfully resist a coup. Democracy may be such a compromise, choosing reasonably popular leaders who have a low probability of being overthrown and are adequate at governing. On the one hand, democracy may avoid a ruthless dictator whose rule is very stable, but harmful, and on the other hand a saintly leader who would be deposed quickly.

Mugs, pens and USB sticks as advertisements

Several universities I have visited give free mugs to seminar speakers as advertisements for themselves. Similar branded objects (pens, USB sticks, T-shirts, baseball caps) are handed out by firms and political campaigns as part of their marketing.

The idea of giving people practical objects instead of flyers, junk mail or banners is to make the recipients use these objects (as opposed to throwing these away or storing them at the back of a closet), preferably in a public setting, and thus increase the visibility of the advertiser. For this, the more usable the handout, the better.

Unfortunately, the people ordering these objects in bulk and paying for the brand logo to be printed on these are busy administrators who do not connect the overall purpose the marketing campaign to the properties of the objects. Specifically, the mugs should have a large handle that lets more than two fingers hold it, the mug should be short with a wide mouth for easy filling and washing, and should not be too fragile.

Pens should write well and be ergonomical, not angular or too narrow. I have seen branded pens violating all these suggestions. For example, the Australian National University pens are of flimsy plastic, create ink splotches and the ink runs out quickly.

The USB sticks handed out by the University of Queensland had a metal cover which increased the USB drive’s bulk and scratchiness. Also, the USB was wide and thick, making it impossible to plug in side by side with another USB. The small capacity of the USB was also behind the times.

To advertise with an object, it would make sense to print the advertiser’s name and other relevant information in large readable font on the object. The logo is not useful unless it is already widely known by the target audience and associated with the advertiser. The readability suggestion is violated by the Singapore Management University’s mug, which has SMU written on it in complicated calligraphic script that is difficult to decipher even for someone who knows what the abbreviation SMU means.

For people to develop a positive view of the advertiser, the object should not seem too cheap or bad quality. By contrast, most free T-shirts are the cheapest ones that could be bought wholesale, made of the most threadbare and transparent cotton, which discourages their use.

Poaching reduction using lab-grown ivory

Poachers kill elephants for tusks and rhinos for horns because these can be sold for a high price on the black market. The killing has occurred both in the wild and in zoos, and thieves have broken into nature museums to steal rhino horns from exhibits. Sometimes news reports describe how police crush or burn seized illegal ivory, which seems counterproductive, because it reduces supply and thus drives up the price. A higher price increases future poaching. Perhaps the police are in the pay of some illegal ivory dealers and are deliberately helping drive up the price by destroying competing dealers’ products.
Instead, the price of ivory and rhino horn should be reduced so that poaching becomes unprofitable. Many organs have been grown in the lab using a collagen scaffold seeded with stem cells from the appropriate tissue (bladder, skin, heart). Growing elephant tusks or rhino horns in the lab should be feasible using similar techniques. Flooding the market with cheap lab-grown horns and tusks would eliminate the incentive to poach.
The demand for ivory and rhino horn is mostly due to silly beliefs about their medicinal properties, so the buyers may not want lab-grown substitutes, believing these to be ineffectual (which these are, just like wild-type horns and tusks). In this case, the lab-grown horns and tusks should be made indistinguishable from animal-derived ones and inserted into the illegal supply chain covertly. The dealers on the black market are not too honest people and would probably be happy to lie to their customers that lab-grown products are from wild animals.

“Relative to opportunity” evaluation and anti-discrimination laws

Most countries have some anti-discrimination laws, requiring employers to pay people with different productivities equally, or to give someone who took parental leave their job back after they return. One reason why unequally productive people are paid equally is evaluation “relative to opportunity”, i.e. the bar for a promotion or a raise is lower for someone from a historically disadvantaged group or who has family responsibilities. Suppose that there is a consensus in society for supporting certain groups. Why might the cost of this support be placed only on specific employers, namely those who employ the target group? Why doesn’t the support take the form of direct subsidies from the government to the target group, financed by taxing all employers equally?
An explanation from political economy is as follows. Clever people in society or government want to pay a larger subsidy to high-income members of the target group, perhaps because the clever people are themselves high-income and belong to the target group. However, the majority of voters would not like high-income people getting a bigger subsidy. So the clever people disguise the subsidy as something that looks equal, namely every member of the target group gets the same duration of parental leave, the same guarantee of their job back at the end of leave, the same privileges and special treatment for promotions and raises. The value of these guarantees and privileges is greater for higher-paying jobs. For example, a promotion from a high-paying job usually gives a bigger salary increase than from a low-paying job. A guarantee of getting a high-paying job back after parental leave is worth more than a guaranteed low-paid job. Thus the support provided to the high-income members of the target group is more valuable.
Further, productivity at a high-income job is typically more responsive to the employee’s human capital, and the skills deteriorate faster. A truck driver who has not driven for some years retains a greater fraction of driving ability than a surgeon retains from surgical technique after not operating for the same number of years. The productivity difference between an employee returning from parental leave and someone continuously employed is on average greater for higher-paying jobs. So the cost to an employer of keeping a job for a returning employee instead of hiring a new person is greater if the job is higher-paid. The subsidy to the high-income members of the target group thus costs more per person.
Income is positively correlated with intelligence, so the smart members of the target group are likely the wealthy members who benefit from this kind of unequal subsidy. They are likely to vote and campaign in favour of the unequal support, instead of an equal cash subsidy for everyone. The less smart members of the target group who lose from an unequal subsidy (compared to an equal one) are less likely to understand that they lose. This makes them abstain from opposing the unequal subsidy.
In effect, the smart members of the target group redistribute a baseline-equal subsidy from the less smart (and less wealthy) to themselves, at the social cost of losing some efficiency in the economy. Keeping a job for someone when a more productive potential hire is available means losing the difference in the productivities of the two people. Such efficiency losses are typical of re-distributive policies that are not cash transfers.
In principle, the cost of the current policies could still be equally distributed between employers by taxing them all and subsidising those who employ the target group. Or equivalently, taxing only those who don’t employ the target group. However, to equalise the cost to employers, the firms employing highly-paid members of the target group must be compensated more than the ones employing low-paid members. The differential compensation to firms would call attention to the unequal support that people with different incomes are receiving, thus weakening the disguise of the subsidy. The clever people want to avoid that, so do not campaign for equalising the costs of anti-discrimination laws across employers.

Teaching and research and division of labour

Universities usually prefer that the same person both teaches and does research. There are some purely teaching or purely research-focussed positions, but these are a minority. Both teaching and research achievements (and service as well) are required for tenure. This runs counter to Adam Smith’s argument that division of labour raises overall productivity. One possible cause is an economy of scope (synergy), meaning that teaching helps with research, or research helps to teach. In my experience, there is no such synergy, except maybe in high-level doctoral courses that focus exclusively on recent research. Revising old and basic knowledge by teaching it does not help generate novel insights about recent discoveries. Complex research does not help explain introductory ideas simply and clearly to beginners.

Another explanation is that universities try to hide their cross-subsidy going from teaching to research. The government gives money mainly for teaching, and if teachers and researchers were different people, then it would be easy for the government to check how much money was spent on each group. If, however, the same person is engaged in both activities, then the university can claim that most of the person’s time is spent teaching, or that their research is really designed to improve their teaching. In reality, teaching may be a minor side job and most of the salary may be paid for the research. This is suggested by the weight of research in hiring and tenuring.

The income of universities mostly comes from teaching, so they try to reduce competition from non-university teachers and institutions. One way is to differentiate their product by claiming that university teaching is special, complicated and research-based, so must be done by PhD holders or at least graduate students. Then schoolteachers for example would be excluded from providing this service. Actually the material up to and including first year doctorate courses is textbook-based and thus cannot consist of very recent discoveries. With the help of a textbook, many people could teach it – research is not required, only knowing the material thoroughly. For example, an undergraduate with good teaching skills who was top of the class in a course could teach that course next semester. Teaching skill is not highly correlated with research skill. The advantage someone who recently learned the material has in teaching it is that they remember which parts were difficult. A person who has known something for a long time probably does not recall how they would have preferred it taught when they first learned it.

Researchers forget the basics over time, because they rarely use these – there are more advanced methods. The foundations are learned to facilitate later learning of intermediate knowledge, which in turn helps with more complicated things and so on up to research level. Similarly in sports, musical performance, sewing, the initial exercises for learners can be quite different from the activity that is the end goal. A sports coach is rarely an Olympic athlete at the same time, so why should a teacher be a researcher simultaneously?

On journalistic privilege

Journalists have certain privileges over the average citizen – they get access to inside information, public figures and press conferences. An attack against a journalist creates more outrage, because it is seen as damaging the free press. These advantages are not given so that journalists could make money or satisfy their curiosity. The privileges are provided to help journalists serve the public interest, similarly to the delegation of decision power to politicians. People being people, some journalists abuse the privileges. They do not inform the public, only entertain to make money. This takes the form of sensationalism: covering frivolous topics that sell well, but do not provide useful knowledge. For example celebrity gossip, funny animals, manufactured controversy.

It would be fair to remove journalistic privileges from tabloid reporters and stop calling them journalists. They are just nosy people. The problem is that whoever decides on giving or taking privileges, gets power over the media. Therefore this authority should not be the government, but an independent organization. However, some rights and protections of the media are legislated, so a non-governmental body cannot change them. The legislature would have to delegate its authority in this sphere to the hypothetical independent regulator first. Given how much politicians wish to influence journalists, this decision seems unlikely.