Politics

How Should We Teach Public Goods Theory?

Jeremy Horpedahl1 Comment

Joshua Hendrickson recently wrote about the provision of public goods, and how we teach public goods in economics. My post today is not so much a reply to Hendrickson, but is inspired by his mediation on public goods as I gear up to teach another semester of Public Finance.

The theory of public goods that economists discuss among themselves is pretty straightforward: when a good is both non-rival and non-excludable, there is a strong case for government intervention of some sort (though not necessarily public provision). The opposite is true when a good is both rival and excludable: there is a strong case for laissez faire.

Seems simple enough, right? But communicating this concept to undergraduates and the general public has been a major challenge. Part of the confusion arises from the term itself, “public good.” Non-economists tend to use the term interchangeably with the notion of “the common good, as is clear from Wikipedia, a dictionary, or a conversation with your grandma. For this reason, I sometimes substitute the awkward phrase “collective consumption good” (this is actually Samuelson’s term in his classic article on the topic), but all the textbooks so use it so I often default to the standard terminology.

From Jonathan Gruber’s Public Finance and Public Policy

But I think there’s a deeper problem than just terminology. Economists have put themselves in a box. Literally. Here’s a standard 2×2 matrix from Jonathan Gruber’s undergraduate public finance textbook. I don’t mean to pick on Gruber here — this is a pretty standard presentation. You can find it in many microeconomics textbooks too, or on Wikipedia. Everything goes in a box! It’s a nice stylized way to think of the terminology. It makes for nice test questions. But here’s the real problem with it as a pedagogical tool: it doesn’t seem to help many students! Or at least, it doesn’t seem to help them retain the knowledge between their micro principles courses and upper division courses (at least in my experience, I’d be happy to hear others chime in here).

So how can we teach this concept better? I have a few ideas. I’d like to hear yours too.

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Taxes and Commitment

nortonnoleLeave a comment

An American tourist in a foreign land surveys the surroundings. Down on the river he sees a boat at a distance coming into town. The men are being whipped as they row the boat filled-to-the-brim with fresh produce. Angered at the sight, the tourist rushes down to the dock to meet them as they unload. He tells the men of their value and worth. He yells at the man who whipped them. Then, a twist happens. The men explain that they were concerned they would not row fast enough and therefore were worried the fresh produce would spoil before getting to market. They hired the monitor to ensure they all rowed fast.

The source of that apocryphal story is unclear, but the economic content is rich. The men were concerned with the free-rider problem and sought a commitment device to ensure their fast rowing. How often are we willing to suffer the lashes of inefficiency to obtain some measure of the public good?

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What’s the Worst Tax?

Jeremy Horpedahl2 Comments

It’s the most wonderful time of the year, when we start to get all those little documents in the mail and electronically showing how much you earned in the past year. The purpose of these little documents, of course, is to complete your federal and state income tax returns. While many Americans dislike paying income taxes, there is another tax that is rated as even worse in surveys: the property tax.

Why do Americans dislike the property tax so much? One popular explanation is that people don’t like the idea that “you never really own your property.” In other words, even after you have paid off your mortgage, you must continue to pay property taxes, which feels like a form of “rent” that you pay to the government. Of course, that “rent” does pay for a variety of public services, primarily K-12 education in most locations, but this still seems to rub many Americans the wrong way. The libertarian phase “taxation is theft” conveys a similar sentiment for income taxes, that you never “really own” your own labor if you must pay taxes on your earnings.

But there is also an economic explanation for the hatred of the property tax: it is very salient, especially to taxpayers that no longer have a mortgage. While those of us that still have a mortgage on our home pay property taxes through our normal monthly mortgage payment, Americans that have paid off their mortgage typically write a check (or two) to pay the full amount of their property tax bill. An interesting paper by Cabral and Hoxby finds that jurisdictions with more taxpayers using escrow for their property taxes (meaning they have a mortgage) also have higher property tax rates. And furthermore, they “find that owners with tax escrow report their taxes much less accurately than those without tax escrow” (look at Figure 2 in the paper to see the huge differences).

Income taxes, on the other hand, are not salient for most Americans. Payroll withholding means that the taxes are taken out before we even get our paycheck, and you’ll only notice them if you look at your pay stub. And about three-quarters of US taxpayers get a tax refund at the end of the year. For most Americans, the only salient part of the income tax system is a check they receive as a refund, rather than writing a check for their property taxes.

What does all this mean? Should income taxes be made more salient? Should property taxes be made less salient? A simple answer could be that all taxes should be equally salient. Or if you view one tax as superior in some way, maybe that tax should be less salient, so there is less opposition to it.

I don’t have the answers to these questions. But I do have a question for readers: do you know your own income tax rate? Specifically, what is the marginal rate on your federal income taxes? I invite readers to write down their guesses, then look up the correct answer. How close were you? Please leave a comment, and be honest!

The Political Center is Endogenous to You

mdmakowskyLeave a comment

I stumbled into a twitter conversation about this relatively innocuous breakdown of news sources:

Now there are plenty of ways to pick this apart. No, I don’t care that you are socially liberal and fiscally conservative. I also do not care that a one-dimensional political spectrum can’t capture the fine nuance of your political ethos. Yes, the farthest left and right bins equivocate between often very different levels of bias, but that’s mostly of a product of only having five bins. Obviously greater accuracy could be had by delineating into 9 bins (and yeah, there is some real weird stuff in tails of this distribution). But coarseness or inaccuracy at the margin is not what grabbed by attention. I don’t really care that the lunacy at OAN and largely evidence-based reporting at Vox are in bins of seemingly reciprocal bias, as I know that’s just an artifact of the 5 bin structure.

Rather, what I was intrigued by were the frustrations and bias attributed in the comments about news sources, such as the BBC and NPR, improperly classified as the center. I’m well aware that many people are annoyed by “centrists”. They are traitors to the cause who should know better than to side with the enemy and will, of course, be first against the wall when the revolution comes. There is, more seriously, a frustration that centrists think they can make a claim to the truth by simply splitting the difference of the political distribution, like using the mean surveyed number of jelly beans in a jar. This aggravates people partly because it is a gross misuse of the wisdom of crowds, but mostly because we often think our position is the truth against which all other political identities should be gauged. It’s an old George Carlin joke – everyone driving slower than you is an idiot, everyone driving faster than you is an asshole. The “right wing” is everyone to the right of me. The “left wing” is everyone to the left of me. As for the crazies, well, that depends on your social identity. If you think of yourself as a right (left)-of-center, well then the far left (right) is full of lunatic socialists (corporatist fascists) out to destroy everything we love. The far right (left)? Well, they are a bit much I admit, but they are just spirited activists doing their best in a hostile environment.

Everyone hates centrists in large part because so many of us, on some level, think of ourselves as the reasonable political center. For some right or left-wing yahoo to plant their flag in to the rich soil of the center and call it their own is not just an affront to our sensibilities, it’s an act of political war.

To be fair to the Twitterverse, one person did manage to bring to this cavalcade of frustration an excellent alternative chart that had 7 bins (!) and a second dimension (!!!) regarding the reliability of information. That should have calmed most people down, obviously social media is neither the time nor place for such things.

It’s in this wonderful figure that so much of the story really comes out. People are rightfully upset that honest news sources are being conflated with tabloid rags. They’re also upset, however, that excellent and reliable sources are being attributed centrist neutrality. How dare they attribute the power of veracity and truth to those well-known right-wing whackos at the BBC! We tell ourselves we ignore the BBC/NPR/Economist/WSJ because of its gross bias, but the reality is we ignore them because they’re boring and never tell us we’re smart and pretty and righteous.

The original post was trying to suggest to people they consider balancing their political diet. My suggestion would not be to balance the bias in your diet (we like what we like), but rather to focus on the most reliable sources (the green bullseye in the second figure) and cut out the fried BS. All of that rage and confirmation bias, it’s nothing but empty calories.

Dan Wang’s 2020 letter on China

Joy BuchananLeave a comment

Dan Wang is a writer who currently lives in Beijing. He’s released another long letter about what is going on in China. I’ll share the part that caught my attention.

Waiting politely in line is a pretty strong norm in America. I had heard from several sources that Chinese norms for waiting in an orderly line were weak. Here’s an update on that:

And for years, Xi has emphasized following clear rules of written procedure, under the rubric of “law-based governance.”  Since then, the state has improved regulatory systems, for example in setting clear standards for license approvals and in securities and antitrust regulation. The state has removed some of the arbitrary aspects of governance, thus bringing serious enforcement actions following the passage of relatively clear regulations. That has improved facts on the ground. Companies and lawyers tell me that a decade-long effort by the State Council to ease doing business has yielded real results. Obtaining business licenses no longer requires a relentless pace of wining and dining, and has instead become close to a matter of routine. I haven’t been able to verify this fact for myself, but one of my friends told me that the office of the National Development and Reform Commission used to be ringed by some of the fanciest restaurants in Beijing, offering mostly private rooms; many of these restaurants have now closed, following the professionalization of business approvals.

The lived experience of being in Beijing has improved in parallel. I remember what a nightmare it was to buy a high-speed rail ticket for the first time years ago, which involved lots of yelling and multiple people cutting in line. Today, I purchase one on my phone, with no need to obtain a paper ticket, and the lines to board are more or less orderly.

China is changing.

Incidentally, I tried to start a company when I was about 19 in New Jersey. Applying for a tax ID number for my sole proprietorship was quick and easy. All I had to do was fill out a form and pay a small fixed fee to some government office.

One Acceptable Truth or a Million Fantasies

mdmakowsky1 Comment

Humans are soft, slow, and (to the best of my knowledge) make for fairly nutritious meals. Brains for tool-making, and the opposable thumbs for using them, are significant evolutionary adaptations, but it is our capacity to act collectively that placed us at the top of the food chain.

By the end of a standard undergraduate economics curriculum, one couldn’t be blamed for coming to the conclusion that the failures of collective action are the greatest obstacle to mankind – Oh what we could have accomplished if only we had ever found a way to just cooperate. Alas, all those externalities, Prisoners’ Dilemmas, free riders, easy riders, market failures, government failures, they just stopped us at every turn…

I’m not doubting the pedagogical value of teaching any of these obstacles, I teach them myself, but I believe we spend insufficient time reminding students that humans have been solving collective action problems with great success for thousands of years. Every national government, book club, homeowners association, and sorority has managed to produce public goods. So has every military coup and angry mob (if only sometimes for fleeting moments), but collective action is collective action, regardless of how we may feel about the outcome.

More often than not the most interesting question to me isn’t can a collective action problem be solved, but rather i) how has it already been solved and ii) how is that solution going to be threatened or hijacked? When I look to the current political landscape and the only mildly-exaggerated state of political and social polarization, I see not just rival ideologies, but alternative strategies for engendering and ensuring cooperation. On the left, I observe greater recent emphasis on purity – there is a narrow band of acceptable truth and any deviation from that, be it however accidental or benign in intent, can lead to significant punishments, including purges colloquially referred to as cancellations. On the right, I see required public professing of incorrect, often seemingly absurd, beliefs. I might talk about purity tests and purges on the left another times. What I’m interested in at the moment are the public untruths of current right wing identities (broadly conceived) and how they fit into the sacrifice and stigma theory, or club theory, of religion.**

I’ve written a lot about sacrifice and stigma theory. It has become the hammer than has left me forever searching for nails. Originally put forth by Laurence Iannaccone in 1992, it is nothing short of brilliant to my mind. A tool for solving collective problems so profound that when it shows up we barely notice it, and where it shows up tends to be the most powerful clubs shaping our societies: the religious, martial, and extremist political groups that bend the arc of history.

Groups produce what we call “club goods” i.e. public goods only accessible to members of the group. What Iannaccone demonstrated was that a group could actually increase their production of club goods by burdening its members with completely unproductive costs. Why do religious groups require clothing, behavior, or language that could stigmatize their members in broader society? Why are members required to sacrifice their resources at the literal or figurative altar of the group? Because if you impair members’ private productivity, or if the fruits of that private production are skimmed away, they will invest more of their resources into the group. If all group members face these same altered incentives, guess what, you’ve solved the collective action problem!

When I see educated women and men declaring the earth is 5,000 years old, that evolution isn’t real, that climate change is a hoax, or that Donald Trump is a brilliant human being, what I see is public profession of beliefs that might limit social or even occupational opportunities and, in turn, further commit them to a specific subset of affiliations. In the constellation of beliefs that might end up as political shibboleths, of course, there stand to be some more costly than others. In fact, there might even be beliefs that impose negative externalities on others, such antipathy towards vaccines or mask-wearing during a pandemic. Excessive burden might hurt the group, of course – remember, club membership must to be a net gain to persist. In a polarized society, however, vitriol created in rival factions by the externality-generating belief could actually intensify the commitment of group members. The liberals hate real-Americans like me so much now, they’d never accept me as anything but a dumb redneck, so the rational thing to do is double down on my commitment to the only group that will have me. Beliefs that reduce private productivity, increase group productivity, and create long-run antipathy in rival groups can serve to create something incredibly valuable to the group: a captured membership. If there is one thing that is evolutionarily hard-wired into human beings it is the knowledge that isolation is death. A member so stigmatized by past public behavior that rival groups would never accept them stands to be very committed to the group going forward.

The vulnerability of sacrifice and stigma born of public adherence to false beliefs, however, is the capacity of leaders to incept preferred false beliefs into the dogma. This is one way that minority groups can become scapegoated, the carbon costs of fossil fuels denied, quack remedies pedaled, or the reliability of electoral institutions undermined. Religious texts exist (mostly) unedited for long periods of time for a very important reason: core rules of behavior, methods of tithing, and sets of beliefs must be inoculated against opportunistic actors who would hijack the club goods they produce.

Sacrifice and stigma through club-specific false beliefs is a dangerous strategy for political parties for the simple reason that without the constraints of fact or scripture, leaders will feel the pull of their own preferences. Far more dangerous however, is the megalomaniacal conman that any political party institutionally designed to demand cognitive dissonance of its members will eventually attract. Political parties need to solve collective action problems, yes, but they also need immune systems. One might point to social norms, both within and outside the group, as key means of protection. Recent years, however, would seem to suggest that norms are not sufficiently robust in the long run. The US court system has held up well, and has in many ways served as the nations constitutional immune system. Perhaps the major political parties should consider updating and reinforcing their own constitutions, and put in place mechanisms to protect themselves from the next inevitable invasion.

American political parties need to update and upgrade their immune systems.

Inspiring research:

Iannaccone, Laurence R. “Sacrifice and stigma: Reducing free-riding in cults, communes, and other collectives.” Journal of political economy 100.2 (1992): 271-291.

Aimone, Jason A., Laurence R. Iannaccone, Michael D. Makowsky, and Jared Rubin. “Endogenous group formation via unproductive costs.” Review of Economic Studies 80, no. 4 (2013): 1215-1236.

**Note: this is not to suggest that left-wing identity affiliations don’t utilize sacrifice and stigma mechanisms. There is no shortage of what I suspect are completely ineffective, but highly visible, ostensibly pro-environment behaviors that are demanded. But the “headline” mechanisms of herding left-of-center identities under the progressive banner look more like threats of exile than sacrifice and stigma.

Logrolling: An Efficient Institution

Jeremy HorpedahlLeave a comment

Along with the colorful phrase “pork barrel” spending, logrolling is a term used to describe the process of vote trading in elected legislative bodies. The process has long been maligned by political scientists, pundits, and the general public. It’s also come up in the debate about the proposed Budget/COVID Relief Bill.

President Grant tried to stop logrolling. He failed.

What’s bad about logrolling? I think there are two general lines of argument. First, it just seems immoral. Citizens can’t legally trade their votes, and many see any attempt to do so as wrong. You get one vote, and one vote only. For someone to have more votes than others rubs our intuitions the wrong way, similar to the ability for wealthy individuals or corporations to essentially have more votes by influencing politicians through campaign contributions.

More pragmatically, logrolling gets a bad name because it could lead to wasteful spending, particularly the “pork barrel” type that Americans really hate (unless it is coming to their district, of course). If you vote for my bill, I will vote for yours, even though I might not care about your bill. Maybe even I think your bill is kinda bad, but I think my bill is really good, so I am willing to hold my nose and vote for your bill, if it gets me what I want.

Buchanan and Tullock (1962) turned this logic on its head. Logrolling is efficient because it allows members to express their preferences, specifically the intensity of their preferences. Moreover, it allows legislative bodies to get things done that are beneficial for society, even if none of those things would pass in a simple referendum.

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Invasion of the Cooperation Snatchers

mdmakowsky1 Comment

If you can tolerate a moment’s grandiosity, there’s no more important application of game theory than the evolutionary transition from prokaryotic cells to eukaryotic cells. All due deference to every game theorist ever, but the solution to the Prisoner’s Dilemma is literally in our DNA. One day cells were swimming around the primordial soup competing with each other in a zero-sum fight to the death for resources, the next they’re bonding together to form tissues to jointly acquire them. A couple billion years later and you’ve got hyper-specialization to the point of which cellular differentiation remains a bleeding-edge subject of biological research.

But this isn’t a post about the miracle of a body when it’s functioning perfectly. It’s about what happens when a cell goes rogue. When it defects on its neighbors and a cooperative strategy literal eons in the making. It starts gobbling up resources and reproduces at rates that threaten the whole enterprise, growing into a terrible little tumor of defection. The cooperative strategy in question moved passed simplicity countless generations ago: tissues employing Tit-for-Tat disaggregated back into the soup the first evolutionary round through. No, the strategy now is so fine-tuned it hasn’t had to deal with a major defector in eons of its collective evolutionary memory. If it is to succeed, it will have to selectively cut out those defecting cells without abandoning its core strategy, and do it fast, before it’s too late.

Which naturally brings me to the Republican party.

Political parties succeed based on two achievements. 1) They solve the collective action problem and, in doing so, achieve a scale of cooperation and exceed some critical mass threshold sufficient to self-perpetuate through the electoral process. The number of parties that can succeed at once, and the critical mass necessary to get to that point, are determined by the governing political institutions. 2) They maintain their cooperation at a scale sufficient to thwart the emergence of an alternative rival party.

Staying a dominant party is much easier than becoming one, but that doesn’t mean continued success is guaranteed. The weakness(es) of a party will depend on how it got there in the first place. The strategies for solving the collective action problem of this scale will be far more complicated than Tit-for-Tat or “Walk Away” and similar solutions distilled to the point of abstraction. They will involve all the solutions employed by cartels, religious groups, military forces, and every other collective dependent on high-levels of persistent cooperation. With that complexity comes weaknesses. Fault lines and backdoors that are typically guarded through a variety of social and legal barriers.

And they must be guarded, because the combination of scale and success will never cease to attract defectors. Those roaming cells, ostracized and cast out, always met with a wary eye, looking for a way in. Just imagine you are that rogue cell and you come across a population trained to always cooperate no matter what so long as it is deemed a member of the group. They seems so naïve! So vulnerable. But that’s how we succeeded! Always cooperate within the group. How big might your greed grow knowing you could defect and defect for all eternity, growing fatter and fatter off this suddenly maladapted globule of political ambition that can’t help but tear itself to shreds while giving you everything you ever wanted? It’s not just about the weakness of the party, but the kinds of agents these prospects are likely to attract.

In the coming weeks I’ll revisit this and ramble more about discuss some of the specific strategies employed by political parties, and the kinds of invasive agents and strategies they should expect. I’ll also speculate on how groups might institutionally respond and better protect themselves from both invading sociopaths, as well as their own hubris.

Inspiring articles:

Aimone, Jason A., et al. “Endogenous group formation via unproductive costs.” Review of Economic Studies 80.4 (2013): 1215-1236.

Aktipis, C. Athena, et al. “Cancer across the tree of life: cooperation and cheating in multicellularity.” Philosophical Transactions of the Royal Society B: Biological Sciences 370.1673 (2015): 20140219.

Allocating the vaccines: central planning or the free market?

Jeremy Horpedahl5 Comments

In the short term, there are only a few million doses of the COVID vaccines available, but well over 100 million adults in the US that want to take the vaccine if offered for free to the consumer. There are also billions worldwide that would like the vaccine.

So who should get it first? In practice in the US, the allocation method has already been determined politically: the federal government will allocate vaccines to the states, and states will allocate them to individuals based on a priority list: health workers and the most vulnerable first, then teachers, etc. The NY Times has a tool that shows you your probable place in line.

But essentially the allocation method being used is central planning.

John Cochrane has proposed a “free market” solution: sell the vaccine to the highest bidder. Or at least, sell some doses to the highest bidder.

As an economist, there is always some appeal in thinking about a free market solution. But there is a problem in this case: there are positive externalities from taking the vaccine. It not only benefits me, but it also benefits others. My willingness to pay only reflects the benefit to me, the private benefit. The social benefit is mostly ignored by a simple auction, and in the aggregate for a vaccine most of the benefits are likely to be social benefits. But positive externalities don’t imply we need to use central planning!

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Locals react to new condos

Joy Buchanan1 Comment

My local Facebook community group is a treasure trove of unfiltered NIMBY and YIMBY sentiments. I’m creating a “nimby” tag for blogs I write about them.

This FB post went up last week about some proposed townhouses that would be built on what is currently an ugly empty paved area of land on the side of a highway.

There were 40 “likes” and only 5 angry face reactions. Given some of the vitriol I have seen against building previously, I was surprised at how many people reacted positively. This can’t be treated as a scientific poll, but the fact that so many people bothered to say they approve was interesting to me.

Most of the land in our city is zoned for single-family detached houses, meaning most of it looks more like what people call suburbs.

Here’s what people said in the comments:

“I like the look. I also like Chaise’s term ‘vibrancy’.”

“ I wish they weren’t going to be so tall.” (Note that they are not tall. Most of this town used to be one-story 1-bathroom ranch houses, and there is a lot of nostalgia for those tiny houses.)

“Why are we junking up our downtown with condos.” (That one got 8 likes, and someone replied “because they sell.” Isn’t it astounding that someone would call this “junking”?)

“Almost Anything built in that location is a step in the right direction.” (8 likes)

Some people complained that this is not adding “affordable housing” to our city because these units are expensive. I might post more explicit debates over affordable housing in the future.  

Apparently, currently, there isn’t much opposition to developing an empty lot on the side of the highway with a few expensive units. There has been a WAR for the past year after a proposal to increase the density of housing closer to downtown. Anti-development types are angry that the city council is not doing more to block new building.

The prospective developer for this empty weed lot needs approval from the city council. Our city elections last month became rather contentious. It was, in part, a struggle between people who want to preserve curbs and doors just as they were in 1970 versus newer younger residents who are more pro-development.