Tyler Cowen's Blog, page 415
December 21, 2012
Do interest groups reward politicians for their votes in the legislature?
That is the title of the job market paper of Sungmun Choi, here is the abstract:
Abstract: Interest groups lobby politicians in various ways to influence their policy decisions, especially, their voting decisions in the legislature. Most, if not all, of the studies on this issue examine “pre-vote” lobbying activities of interest groups that occur before politicians vote in the legislature. In this paper, however, I examine “post-vote” lobbying activities of interest groups that occur after politicians vote in the legislature. I first develop theoretical models to show how such post-vote lobbying can be sustained. Then, by using data on the amount of monetary contributions given by interest groups to the members of the U.S. House of Representatives who have served in the 109th (2005-06) through 111th (2009-10) Congress, I find evidence that the politicians who voted in favor of the Emergency Economic Stabilization Act (EESA) of 2008, one of the most significant pieces of legislation and possibly the biggest government bailout in U.S. economic history, received more monetary contributions from the interest groups in the financial sector after passage of the EESA.
Ideas and Political Entrepreneurs: Explaining Institutional Change
None of my entries this week has directly discussed Wayne Leighton’s and my new book, Madmen, Intellectuals, and Academic Scribblers. This post briefly conveys the book’s motivation and argument. A follow up post will illustrate the argument with the case of airline deregulation.
Alex describes Madmen as “revolution without romance,” analogous to Jim Buchanan’s account of public choice as “politics without romance.” It’s an apt comparison because although Madmen is rooted in public choice, we explain why public choice cannot account for political change without incorporating ideas and entrepreneurship.
To do so, we focus throughout the book on three questions:
1. Why do democracies generate policies that are wasteful and unjust?
2. Why do failed policies persist over long periods, even when they are known to be socially wasteful and even when better alternatives exist?
3. Why do some wasteful policies get repealed (for example, airline rate and route regulation) while others endure (such as sugar subsidies and tariffs)?
Traditional public choice answers question #1 (concentrated benefits & diffuse costs) as well as question #2 (transitional gains trap). Yet wasteful institutional arrangements do sometimes get repealed or reformed. In addition to airlines, other network industries such as trucking and energy pipelines were significantly deregulated in the 1970s, followed by income tax reform in the 80s, spectrum license auctions and welfare reform in the 90s, and more.
Madmen argues that better institutions derive from better ideas, through a political process that is driven by key players: madmen, intellectuals, and academic scribblers.
The academic scribblers originate ideas, which must then face off with vested interests and long-held beliefs in the status quo. The “intellectuals” (Hayekian traders in ideas) propagate the ideas they think are best. When political opportunity strikes, it then becomes in the interests of the madmen in authority (those who grip the levers of political power) to implement the new idea and change the rules of the game (that is, to change the institutions). New rules reshape people’s incentives, which in turn directs people’s decisions toward different outcomes—for better or worse.
The process can be revolutionary, creating new institutions through a crisis such as war or depression. Lenin and the Bolsheviks come to mind; so do the American Founders and Franklin D. Roosevelt. At other times, this process can be evolutionary, not born out of a crisis but emerging as part of a nonviolent battle of ideas.
At the end of the day, ideas do not surmount established interests on their own; nor do ideas automatically shape new institutions when political opportunity strikes. Instead, institutions change when political entrepreneurs notice areas of weakness in the structure of ideas, institutions, and incentives, and then find ways to implement different rules in those areas. The entrepreneurs in political change may be philosophers, opinion makers, political leaders, or other types of influencers. What they have in common is access to a stock of ideas, a knack for perceiving times when a different idea can take hold, and the grit to drive madmen in authority toward changing institutions accordingly.
That’s stating things generally. Alex’s post gives flavor to the argument in the case of spectrum license auctions. And tomorrow I will follow up to show how Alfred Kahn and Teddy Kennedy were political entrepreneurs who revolutionized the airlines by implementing a different idea.
Some links for you
Good reads that haven’t been covered here on MR:
1. Institute for Justice on too much eminent domain discretion imparting bad incentives on redevelopment agencies.
2. The beginning of the end for corn ethanol?
3. My co-author Wayne Leighton on Bruce Yandle’s Bootleggers and Baptists: “it’s much more than a clever label for an interesting phenomenon; it’s serious political theory”.
4. Robert Sirico and Jeff Sandefur’s new book on how to be a hero.
5. Michael Makowsky and Stephen Miller on the effect of intelligence and education on the intensity of environmentalist beliefs.
Maxim Pinkovsky on managed care
This result is not a shocker, but I have never seen the actual work done on this point:
The Impact of Managed Care Backlash on Health Care Costs
During the late 1990s, there was a substantial cultural, media and legal backlash against the cost-containment practices of managed care organizations (particularly, HMOs). Most states passed a variety of laws in this period that restricted the cost-cutting measures that managed care firms could use. I exploit panel variation in the passage of these regulations across states and over time to investigate the effects of the managed care backlash, as proxied by this legislation, on health care cost growth. I find that the backlash had a strong effect on health care costs, and can statistically explain much of the rise in health spending as a share of U.S. GDP between 1993 and 2005 (amounting to 1% – 1.5% of GDP). I also investigate the effects of the managed care backlash on intensity of care, hospital salaries and technology adoption. I conclude that managed care was largely successful in keeping health care costs on a sustainable path relative to the size of the economy.
The paper is here, and it is Maxim’s job market paper from MIT. A number of his other papers, at the link, look interesting as well.
December 17, 2012
Why Does Government Spending Increase Under Term Limits?
Many thanks to Alex for introducing me yesterday. Having written several papers on term limits, I will use my first post of the week to raise a new question that has emerged from this aging policy intervention: Why does government spending increase under term limits?
Back in the 1990s, when about half the states’ voters slapped term limits on their state legislators, the idea was to rein in government spending and decrease the growth of government. Instead, spending per capita increased in those states relative to states without term limits. See this empirical paper, this survey article, or this book this book for details.
These results are counterintuitive insofar as we put stock in the intended mechanism, which was simple: As legislators spend more time in office, they tend to vote for more government spending – so if legislators are required by law to spend less time in office, they’ll spend less money.
There are two problems with this. First, the premise that tenure and spending positively correlate has not held up to empirical scrutiny. Most papers found no positive link between tenure and spending, although a few reported small effects.
Besides, even if there were a strong tenure-spending correlation without term limits, that correlation is not likely to hold up once term limits are imposed. This is due to a version of the Lucas Critique (or Goodhart’s Law), which in general argues that observed behavioral patterns are not invariant to policy interventions. In this case, term limits will change the dynamics between voters and politicians in ways that lead to greater spending. More specifically, three explanations seem plausible.
Term limitation exacerbates fiscal commons problems within the legislature. Because term limits decrease the variance of tenure within a legislature, the relative power of party leaders and ranking committee members will decrease. As the distribution of power flattens, this increases the proportion of legislators who possess access rights to budget items, thus decreasing the control rights that a relatively few leaders and committee chairs would otherwise have. When everyone can get their pet project through, more projects get through.
Term limits shorten legislators’ time horizons. If legislators use their time in office to advance their careers, and if the career-value of being in the statehouse increases with the support of more spending, then term limits can impart an incentive to spend more and sooner. For example, rank-and-file legislators support more spending to secure leadership positions, and leaders let more projects through in order to quickly build durable coalitions.
Term limits might lure legislators into very wasteful forms of pork spending, according to this paper by Michael Herron and Kenneth Shotts:
Term limits can, in some cases, inhibit voters from selecting representatives who deliver particularistic benefits, and, in these cases, term limits reduce pork spending. On the other hand, when pork is extremely socially inefficient, representatives who want to deliver pork to their districts have incentives to refrain from doing so to reduce future pork in other districts. In this scenario, term limits actually prevent legislators from promoting future spending moderation and thus paradoxically increase pork spending.
These explanations can, of course, be mutually inclusive. I suspect there is more to #1 and #2, if only because they are more salient.
In general, term limits increase spending because voters and legislators rationally respond to changes in their institutional environment. As this question invites further study, good papers will unpack the specific mechanisms that drive those responses.
— Notes: Since most people seem surprised by the actual effects of term limits, here are pointers to similar findings: Gubernatorial term limits worsen fiscal volatility — this paper (co-authored by my co-author Pete Calcagno) and this paper (by my dissertation advisor Bob Tollison) — because governors invest less in reputation (this paper). States with legislative term limits might also have worse bond ratings (here). Here on MR, neither Alex nor Tyler have put much stock in term limits, though Alex is less skeptical.
December 16, 2012
Bits of wisdom from the FT
On the new EU banking arrangement, here is Wolfgang Münchau:
If you study the details of what was agreed last week, the substance evaporates. The common supervisory structure will affect only about 100 to 150 banks out of a total of 6,000 – those with assets of more than €30bn. The ECB can usurp supervisory powers from national regulators but the rules of engagement are not clear. Wolfgang Schäuble, the German finance minister, said when he left the meeting that the ECB would need to make a well-argued case. But it is not clear how this would work in practice.
If you can get through the link there is much more, all devastating. There is of course no banking union whatsoever and no set of mutual guarantees. And this:
What happened was that the OMT has killed any appetite for a fiscal union, and has turned the banking union into a phantom.
The effect of the OMT will be negative in the long run because it has provided policy makers with a false sense of security. That was not the intention but the effect.
Let’s not leave Larry Summers out of the mix:
…the richest taxpayers actually make relatively little use of deductions and credits.
It is an excellent piece on tax reform.
On the implied theology of Indian hotel butlers
As the eldest of the three-man team, Mr. Guha. 29, said, he is fluent in 22 subjects related to five-star doting, which include in-room dining, knowledge of international customs and, of course, complaint handling. His skills also extend to fixing the remote, getting spots off the carpet and something called “power dressing.” Mr. Guha says that his primary role, however, is to act as a super-efficient liaison between the guest and the hotel staff — part fixer, part personal assistant, and all yes-man.
“I would never consider a request to be bizarre; we always say it’s challenging,” Mr. Guha said. “I have always been taught that guest is god, and god cannot have a bizarre request.”
Of course I interpret this last quotation in entirely Straussian fashion (furthermore he doesn’t say it’s true, only that he has been taught as such, a classic Straussian move). Here is more, interesting throughout, and for the pointer I thank Apoorv Trivedi.
December 15, 2012
From the comments, on UID
This is concerning the forthcoming Indian attempt to register individuals through unique eye scans and implement more cash transfers:
The domestic debate in India has largely been around :
1) This is just a sop before elections, a kind of brazen legitimised bribery. 2) The welfare architecture will not simply be migrated, it will be expanded. 3) Is conditionality critical to success? There remains no clear method to establish conditionality. 4) Identification of deserving families remains the problem. Until that is solved, nothing changes. 5) This is basically a turf war between ministeries and the previous operational/financial failures of the UID program are being hidden through the hasty implementation being planned now. 6) Getting in-kind subsidised goods through regular intervals during a month is superior cash flow management for a poor family than a lump-sum cash transfer at the end of the month
All the criticisms could be partially true. But the operational costs of the welfare delivery infrastructure will surely go down. Food and fertilizer have not yet been shifted – too politically sensitive – but amazingly, fuel has been. The biggest no-distortion gain is likely to come from there – the consumption of kerosene will most likely take a massive beating. It reduced by about 90% in a pilot.
The other corollary benefit – of using an Aadhar card as a means of establishing identity and for KYC norms in banks – is also absolutely tremendous.
It is indeed a top 5 most important economic policy issue in the world. But India is generally a low-trust society and in particular this gov’t is distrusted in most policy circles. Hence the rabid skepticism all around. I tend to be a lot more optimistic than that.
The great public choice question is – will they ever manage to bring food under this? For one, the PDS system was showing signs of an organic improvement. Second, the popular imagination has always conceived of the ‘man of the house’ frittering away hard earned money on country liquor if the woman of the house is not given grains directly. Third, giving away PDS distributorships has been an effective method of giving favours to those who the dirty work for national politicans at local levels – it is perhaps the longest running and biggest scam in India.
If they actually conclude that the greater ease for a poor family will convert into more votes than the losses they might take on the previous three fronts, it would be absolutely amazing. My sense is, like most great policy decisions, this will go through simply because it’s an idea whose ‘time has come’, and we will invent post-facto justifications of how it was politically rational to go through with this.
That is from Ritwik, who started off his comment with this sentence:
Privacy is actually a non-issue for most Indians.
Here is a good survey of what we know about cash transfers.
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