Thursday, May 24, 2007

The government we deserve

Bryan Caplan recently published a book "The myth of the rational voter", arguing that bad policies are less often the result of vested interests than of politicians responding to the irrational biases and ignorance of voters politicians pandering to the biases of stupid and ignorant voters- biases which the politicians often share.

Greg Mankiw called it the best book he has read lately.

I came across the story of Sergei Mavrody while browsing Blanchard's Marcoeconomics- it could have been used as a case study in that book.

From Blanchard (emphasis added):

In 1994 a Russian "financier," Sergei Mavrody, created a company called MMM and proceeded to sell shares, promising shareholders a rate of return of at least 3000% per year.

The company was a huge success, its share price increasing from 1600 rubles in February t0 105,000 rubles in July.

The trouble was that the company was not involved in any kind of production and held no assets, except for its 140 offices in Russia. The shares were intrinsically worthless. The company's initial success was based on a standard pyramid scheme..Despite repeated warnings by Government officials, including Boris Yeltsin, that MMM was a scam and that the increase in the price of shares was a bubble, the promised reurns were just too attractive to any Russian people, especially in the midst of a deep economic recession.

The pyramid collapsed by the end of July 1994 and the company closed but

Mavrody tried to blackmail the government into paying the shareholders, clamining that not doing so would trigger revolution or civil war. The government refused, leading many shareholders to be angry at the government rather than Mavrody. Later that year, Mavrody actually ran for Parliament, as a self-appointed defender of shareholders who had lost their savings. He won!

Warms the cockles.

Postscript: I was reminded of this post in Free Exchange, which quotes Anthony de Jasay

There is a subconscious belief in France that the state does not pay Paul by taking the money from Peter. It just gives it to Paul, and Peter is not made worse off. This is so because the money sits in an imaginary reservoir and the state can "unblock" it (debloquer is the French word used to describe this happy event). . .

Is this true? I don't know. Does it seem plausible? Sure does.

The Economist as Science Fiction writer

Tom Schelling repeatedly surprises you.

From his essay Self-command in Practice, in Policy, and in a Theory of Rational Choice

A second experiment: some anesthetics block transmission of the nervous impulses that constitute pain; others have the characteristic that the patient responds to the pain as if feeling it fully but has utterly no recollection afterwards. One of these is sodium pentothal. In my imaginary experiment, we wish to distinguish the effects of the drug from the effects of the unremembered pain, and we want a healthy control subject in parallel with some painful operations that will be performed with the help of this drug. For a handsome fee you will be knocked out for an hour or two, allowed to sleep it off, then tested before you go home. You do this regularly, and one afternoon you walk into the lab early and find the experimenters viewing some videotape. On the screen is an experimental subject writhing, and though the audio is turned down the shrieks are unmistakably those of a person in pain. When the pain stops the victim pleads, "Don't ever do that again. Please."
The person is you.
Do you care?
Do you walk into your booth, lie on the couch, and hold out your arm for today's injection?
Should I let you?

Worthy of Philip K. Dick.

Where are those huddled masses?

George Borjas asks why anyone still lives in Puerto Rico

Ever since I was first exposed to the music from West Side Story as a teenager, some of Stephen Sondheim's lyrics stuck with me. They appear in the song America. In the movie version, Bernardo and Rita are arguing over the costs and benefits of migrating from Puerto Rico to New York.

BERNARDO: I think I'll go back to San Juan
ANITA: I know a boat you can get on
BERNARDO: Everyone there will give big cheer
ANITA: Everyone there will have moved here


There are no legal restrictions whatsoever that hamper the mobility of Puerto Ricans to the mainland--they are American citizens by birth--and transportation costs are low. Yet here we are, 60 years on (to use an Elton John song title) from the onset of Puerto Rican migration after World War II, and there are still quite a few people left in Puerto Rico. Why hasn't Puerto Rico emptied out?

Between 30 to 40 percent of the Puerto Rican population chose to move out. But that means that about two-thirds did not. Why?

If people are not leaving Puerto Rico even though wages are so much lower there, is capital flowing in the other direction, anxious to exploit these poor, dumb people? Appears not.

There are also no restrictions that hamper the flow of capital between the two places. Yet despite all these unrestricted labor and capital flows, there is still a sizable income differential between the United States and Puerto Rico. By 2003, price-adjusted per-capita GDP in Puerto Rico was still only two-thirds that of the United States (according to the Penn World Table). Whatever happened to the factor price equalization theorem? If 60 years is not the "long run," maybe Keynes was right after all.

Its not just Puerto Rico and the United States.

In London, I was struck by the number of East Europeans around- rather like Hispanics in New York City. New Economist writes that that was an illusion.

Meanwhile, the Daily Star announced: "An army of 600,000 Romanian and Bulgarian immigrants will start entering Britain on Monday - and they won't even have to show a passport."

None of this actually happened. Officially, only 8,000 Romanian and Bulgarian migrants came to work in Britain in the first three months of this year and it is clear now that there will be no "tidal wave".

Of course, they are writing about the migrants who were expected to arrive after Romania and Bulgaria acceeded to the EU this year- not the ones who 800,000 young Bulgarians who left in the 18 years since the Berlin wall fell. I guess those are the ones I met.

I totally understand this fellow

Besides all that, the UK is not the most preferred destination for Bulgarian workers with low qualifications - Greece, Spain and Italy are. The United States also provides opportunities for immigration. I remember a friend who told me that he would always prefer the United States. One of the main reasons was that when you say "I am from Bulgaria" in the United States, the next question usually is: "Where is that?" When you say "Europe", most Americans think "Ah, Europe - Paris", great. And no further questions asked.

Quite right.

Its good to have tenure

Arnold Kling blogs (emphasis mine)

Economic conferences rarely produce great papers. Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies, a conference dedicated to the work of William Baumol, is typically pedestrian, with particularly forgettable contributions from Kenneth Arrow and Robert Solow.

Anyway, he quotes Barry Weingast on what constitutions do (to paraphrase: they restrict the power of the government and put in mechanisms to enforce those restrictions. This lowers "the stakes of politics"), on how they do this (to paraphrase, they make all elites sufficiently better off so that they have an incentive to protect the new arrangement), and on how the U.S. constitution almost collapsed

many Federalists sought to expand the powers of the federal government beyond those enumerated...Alexander Hamilton expand national power...the Federalists sought to deal with growing opposition through the Alien and Sedition Acts (1798), allowing them among other things to jail opposition newspaper editors. The situation was sufficiently desperate that both Madison and Jefferson thought the Constitution had failed...

Yet the Constitution did not fail, in part because a sufficient number of Federalist voters agreed with Jefferson that the Federalists' use of powers was illegitimate, switching allegiance and booting out President John Adams in the election of 1800...With Jefferson taking power in 1801, the Jeffersonians (including many former Anti-Federalists who opposed the Constitution) joined the remaining Federalists in supporting the Constitution.

How does one map this to the situation in India in 1947? Which were the relevant elites? What kept them in line?

In particular, why did the Army (so far as we know) never intervene in politics?

Wednesday, May 23, 2007


From Citizens by Simon Schama

Controller-General Silhouette, for example, in 1759, had proposed a tax on luxury items like gold and silver plate, jewelry, carriages- as well as on celibacy- and was drummed out of office for his temerity, amidst a chorus of execration.

And on tax avoidance

At the level of the urban bourgeois it meant accumulating enough money to buy one of the many thousands of petty municipal offices that would confer tax exemption. So that in every major town and especially in Paris, there were wardens of the oyster sellers' guild and gaugers of cheese and curds and inspectors of tripe who gloried in their small dignities and enjoyed their exemptions