Tyler Cowen's Blog, page 393

What Republicans are thinking on the sequester (one man’s guess)

Ezra on Twitter asks for a Republican version of this Jonathan Chait column, which basically suggests the Republicans don’t know what they are doing with their policies on sequestration.  Ezra has himself raised similar questions.  I am not a Republican, but I do like a challenge, so here is a brief attempt.

Correctly or not, many Republicans believe some mix of these propositions:

1. Much of government spending is massively wasteful.

2. Deep historical pessimism is justified, as the United States is sliding into a morass of ever greater statism on the economic, government spending, and taxation fronts, if not right now over the next ten to fifteen years.  Currently a majority of the public does not agree with the conservative Republicans and that is where the pessimism comes from.

3. All recent Republican strategies to stop this slide have been failing (this is evident to the Republicans, although not always admitted publicly so gladly, for obvious reasons).  Furthermore, short-term deal-making and policy trade-offs, even if they represent moderate improvements, will not reverse or even much slow down this slide.

4. There is a long-term dynamic whereby the rich will get taxed more and more in an unstable dynamic, ending in the Frenchification of the American economy or worse.

OK, now let’s go to the sequester.  The upfront costs are not viewed as so high, even on the defense side (see #1).  Furthermore something must be tried (see #2).  Given #1, there is some chance the public might see that government spending can be cut without causing disaster and this gives some chance the public might then support yet further cuts in government spending.  Maybe this chance isn’t so high, but all other approaches have been failing (#3).  Ideally, a big budget deal might be better on paper, but a line must be drawn in the sand on taxing higher earners (#4), especially given recent tax hikes, so right now a big budget deal is out of the question; this isn’t 1986 any more.

Draw up the Venn diagrams, or do the expected utility calculations, and you are left with sticking to the sequester.  Furthermore it allows some Republicans to take a “victory” back to supporters, and that gives a “practical” reason to support the “intellectual” ones.  Keep also in mind that a despairing group is a skeptical group, so how would Republican voters really know or trust that they got a good bargain with the Democrats, especially given the Democrats would have to sell it as a good bargain to their voters?  Who understands baselines anyway?

Here is a related Justin Green piece.

I’m not seeking to debate the points in this post, but rather consider this anthropology.  But if you ask about my views, I largely agree with #1, have mixed feelings about #2 (lately there is evidence of the health care cost curve bending; we will see), agree with the first sentence of #3 (though with a different normative slant), and don’t much agree with #4.  In my view the ranks and influence of the rich are growing, some factions of the Democrats will become more like the old anti-tax Republicans, and I don’t see U.S. tax rates on the rich as having a big chance of reaching unsustainable or catastrophic levels.  (If anything I worry much more about regulation stultifying the economy.)  So I would myself definitely prefer a “grand bargain” to the sequester.  The grand bargain would of course raise taxes further, but I don’t see this as a “slippery-slope-beginning-of-the-end.”

That I said, I have an affinity with #1, over fifty percent of the sequester cuts are obviously good ideas, and we could reverse the worst aspects of the sequester rather easily.  So while the sequester is far from my first choice, I also don’t think it is the end of the world.  I am distressed by the number of blogs posts emphasizing the “seen” costs of the spending cuts rather than the “unseen” benefits.  I am distressed by the notion of agencies which might play the “Washington Monument” strategy.  And I am distressed by the unwillingness of both sides — and possibly Obama will end up as the greater villain here — to make the cuts more flexible.  (It is funny by the way how much Republicans distrust Obama, and yet want to give him that discretion so that he will own the costs of the spending cuts to a greater degree.)  Given all that behavior, is a total shock to think that the public — or at the very least the Republican public in the partially gerrymandered House districts — might not want to trust so much of its money with those institutions?

The public funding of research and development

This is one of the best of all government programs (or it can be viewed as a collection of programs).  Here is a good survey of the issue, by Brad Plumer, excerpt:

There’s a long, long list of world-changing innovations that can be traced back to federally funded R&D over the years. The Department of Energy’s research labs spawned digital recording technology, communications satellites, and water-purification techniques. Pentagon research laid the groundwork for the Internet and GPS. The current shale-gas fracking boom couldn’t have happened without microseismic imaging techniques that were developed at Sandia National Laboratories.

It also can be said that this is probably the worst side of the sequester.

Markets in everything the culture that is Japan there is no great stagnation

You can basically create a gummy replica of yourself to eat. It looks absolutely delicious.

FabCafe in Japan is offering the service for approximately $65 (6,000 Yen), which sounds like a complete steal to me. It’s apparently a 2-part process that requires a 3D body scanner and a lot of gummy colors. FabCafe, which made a chocolate replica for faces, is doing this for Japan’s White Day (in Asian countries, White Day is like Valentine’s Day but the girls give the gifts to the guys. Awesome).

Here is a bit more with photo, hat tip goes to Rob Raffety.

The effects of pharmaceutical promotion

Here is a new paper by Dhaval M. Dave:

This review discusses the role of consumer-directed and physician-directed promotion in the pharmaceutical market, based on the classic conceptual framework of whether such promotion is “persuasive” and/or “informative”. Implications for public health and welfare partly depend on whether, and to what extent, advertising: 1) raises “selective” or brand-specific demand versus “primary” or industry-wide demand; 2) impacts drug costs; and 3) impacts competition. Empirical evidence from the literature bearing on these effects is surveyed. These studies show that pharmaceutical promotion has both informative and persuasive elements. Consumer advertising is more effective at enlarging the market, educating consumers, inducing physician contact, expanding drug treatment, and promoting adherence among existing users. Physician advertising is primarily persuasive in nature, effectively increasing selective brand demand. There is no strong evidence the drug promotion deters entry, and there is some suggestive evidence that it may even be mildly pro-competitive. There is also no strong evidence that either consumer- or provider-directed promotion substantially raises retail-level prices. While all of these effects point to welfare improvements as a result of pharmaceutical promotion, there is also evidence that consumer ads may induce overuse and overtreatment in certain cases. Market expansion, overtreatment and shifting brands for non-therapeutic reasons further raise the concern of a sub-optimal patient-drug match at least for some marginal patients. A comprehensive evaluation of the welfare effects of pharmaceutical promotion requires a balanced assessment of these benefits and costs.

You may recall my requesting a more balanced approach from Ben Goldacre.  In terms of measuring and comparing actual costs and benefits, this goes well beyond the more negative (and I would say one-sided, though often quite on the mark)  evidence in his book, entitled Bad Pharma: How Drug Companies Mislead Doctors and Harm Patients.  And you will notice that this paper is a survey, based upon a fairly broad published literature.

The Netherlands is not immune

A string of gloomy figures from the national statistics office CBS on Thursday show the Dutch economy is still in crisis.

The jobless rate in January hit 7.5%, the CBS said, a rise of 0.3 percentage point on December. Over the past three months, an average of 19,000 people have joined the ranks of the unemployed. The northern provinces were particularly hard hit, the CBS said.

The jobless rate among the under-25s continues to grow. The youth unemployment rate has now risen to 15%, up from 13% in December.

The source is here.  And:

House prices have also continued to decline, dropping nearly 10% in January compared with the previous year.

There is more:

Spain and Ireland are the only two countries in Europe where house prices have fallen more sharply than in the Netherlands over the past four years, according to Dutch national statistics agency CBS.

Two of the country’s four largest banks are now nationalized and the largest is still paying off state aid.

*An Economist Gets Lunch* in paperback

You can order the paperback version — out tomorrow — here.  Barnes and Noble link is here.

Assorted links

1. Scott Sumner speaks up for China, and Scott on movies.

2. On Finnish “preschool by any other name,” my previous post was wrong on this topic.

3. Paul Romer is on Twitter; so far he seems to be taking it seriously.

4. FDI performance for France, better than you might think but can it last?

5. How easily can the Fed back out of its portfolio?  Sober Look and Arnold Kling.

6. Jobs where the gender wage gap is largest and smallest.  And do the costs of minimum wage hikes fall mainly on outsiders?

7. How the Italian Senate works (doesn’t work), further explanation here, and why there was no real alternative to Monti’s Italian austerity.

Cognitive Democracy: Condorcet with Competence

We usually think of democracy as a way of aggregating diverse preferences but we can also imagine that we share similar preferences and that what we disagree about is the best way to achieve those preferences. From this perspective, democracy can be thought of as a tool for information aggregation. Using simple probability theory, Condorcet showed in 1785 that even when each individual voter has only a slightly better than chance probability of choosing the bettier of two options the probability that majority rule chooses the better outcome quickly goes to 1 as the number of voters increases (the wisdom of the crowds).

A number of writers at Crooked Timber have been discussing Knight and Johnson’s The Priority of Democracy, one strand of which involves such an cognitive defense of democracy. Cosma Shalizi, for example, writes:

Democratic debate is a tool for cognition, for harnessing the dispersed knowledge of the citizens and their diversity of perspectives and insights.

But does an cognitive defense of democracy lead to universal suffrage? Or does it suggest what Melissa Schwartzberg calls “epistocracy”, rule by the educated? (See also Henry Farrell’s comments). The wisdom of the crowds breaks down when the crowd’s errors are systematically biased rather than random. As Peter Boettke notes, Bryan Caplan makes a strong case in The Myth of the Rational Voter that better educated voters are less systematically biased than the average voter and more likely to agree with experts on questions of fact.

When voters are not equally competent some remarkable mathematical results show that the best cognitive democracy is not universal suffrage and one-person, one-vote but a specific form of weighted voting.

Begin with a simple example. Suppose there is one correct decision and there are three voters each trying to reach the correct decision with competence levels of {.55, .55, .55}, where the competence levels are just the probabilities that each voter chooses the correct decision. The best a dictator could do in choosing the correct decision is .55 but if use majority rule the probability of reaching the correct decision is 0.57475, higher than that of any individual voter. (We reach the correct decision if all three voters reach the correct decision which has prob .55^3 or if two voters reach the correct decision and one does not, as this can happen in three ways the probability of the latter is 3*.55*.55*(1-.55) for a grand total of .57475.) Moreover, if we were to increase the number of voters to 100, the probability of majority rule reaching the correct decision goes to 84%–far above that of any dictator, this is the essence of Condorcet’s theorem.

Now let’s assume that the voters have competences of {.55,.60,.70}. Majority rule, using the same reasoning as before, gets us a democratic competence level of .673, not bad but notice that this is less than the competence level of the highest competence individual. The ideal voting system in this case would weight voter three enough so that she determines the outcome, thus giving democracy a competence level of .7.

More generally, if the voter competences levels are {p1,p2,p3} then the cognitively most efficient voting scheme gives each voter a weight of Log[pi/(1-pi)]–the result is remarkable for a being such a simple formula of the voter’s own competence level (note that the individual’s weighting is not a function of the competency levels of the other voters.) The result was shown first in this context by Nitzan and Paroush, Nobel-prize winner Lloyd Shapely and Bernard Grofman also made important contributions and see Grofman, Owen, Feld for some related results.)

Democracies make many decisions which are information based (Does Iraq have weapons of mass destruction? Will an invasion make the US safer? Do phthalates cause significant health risks?). Note also that we might also use this method for many committee decisions. Which scientific approach is deserving of greater funding? Which marketing plan should we adopt? Is surgery the best option? and in these decisions weighting votes by a measure of competence, which can be estimated from past decisions, may lead to significant improvements in outcomes.

Voters have diverse preferences not just competences but we could combine cognitive and preference aggregation theories of democracy by using high competence voters from different demographics categories to estimate what people would think about issues if only they were better informed. In this way we can distinguish differences due to knowledge from those due to preferences and we could upweight the competent while maintaining demographic balance thus creating a cognitive democracy based on enlightened preferences.

Estimates about Italy

Italians born in 1970, who are about 43 now, will pay 50% more in taxes as a percentage of their lifetime income than those born in 1952, according to research from the Bank of Italy and the University of Verona. The research also found they will receive half the pension benefits that Italy’s 60-somethings are getting or are poised to get.

The story is here.

Arrived in my pile

Peter Blair Henry, Turnaround: Third World Lessons for First World Growth.

Here is a good interview with Peter Henry, who is also Dean of NYU Business School.

Then, upon my return from the Oklahoma trip, I saw Robert M. Edsel’s Saving Italy, and was surprised when the subtitle read The Race to Rescue a Nation’s Treasures from the Nazis.  (Perhaps Berlusconi would nonetheless give his autobiography that title.)  So far all I can learn about saving the current Italy is that electoral turnout seems to have been quite low, which lowers the reliability of previous estimates I suspect.  Does anyone out there know more?

My two-volume Liberty Fund edition of John Stuart Mill’s Principles of Political Economy arrived, and I will be rereading those for a future MRU course.