The Economics of the Startup Visa

For a long time, Silicon Valley types have been agitating for more immigration visas. One idea is the Startup Visa, which would enable entrepreneurs who get US venture capital investment of at least $100k to move to the United States. Today, Senators Kerry and Lugar introduced the Startup Visa Act in Congress.

I support expanding immigration in whatever form I can get it, so I am happy to endorse the Startup Visa Act. Nevertheless, this idea is clearly suboptimal.

One way the government can help the American economy is to encourage people to move to the US and start a new business which produces goods and services people want to consume. But another, equally useful tactic is encourage people to move to the US and help an established business be more productive. Startups are great; I love startups. But there is no a priori reason to favor them over other businesses, and vice versa. You can argue that established businesses tend to be more sclerotic (I do think this), but maybe what they need is someone with a different perspective to help them innovate.

Furthermore, an important ingredient in dynamic or adaptive efficiency is the process of shutting down failed ventures. An entrepreneur who relies on his business for his immigration status will draw out the process of shutting down a business that he knows to be a failure. This delays the reincorporation of the resources of the failed business into new and potentially profitable ventures. While this is less inefficient than immediate deportation or than not allowing him in the country in the first place, it would be better if immigrants felt free to close their businesses and try something new (or just get a normal job) without risking their residency status.

Finally, the bill will not bring in immigrants in nearly the numbers we could use them. During the 2008 financial crisis, I argued that the best solution would be to let in 50 million new immigrants; this would drive up the price of housing and make the ex ante malinvestments in housing ex post profitable, averting the crisis. And one way to deal with the looming fiscal crisis is to let in millions of immigrants to expand the tax base. Given that no one seems to want to raise taxes, cut spending, default, or inflate, I am surprised that more people are not interested in the immigration free lunch.

So by all means, pass the Startup Visa Act. But don’t stop there; a more liberal immigration policy would benefit both Americans and the immigrants themselves.

Why I Like Buzz (or Die, Facebook, Die!)

When Google Buzz came out last week, most of my friends spent the first day messing with it and then promptly turned it off or ignored it. Everyone is already using Facebook, and some of them are on Twitter; the last thing we need is another social network to check. Nevertheless, I think there are some important reasons why we ought to hope that Buzz supplants Facebook as the dominant social network.

While I still find the Buzz user interface to be inferior to Facebook’s, it is important to look beneath the UI to see what Buzz is all about: open protocols. You can visit the Buzz API page to see what protocols are in use. The three that I find most interesting are PubSubHubbub (a.k.a. PuSH), Salmon, and WebFinger.

PuSH is about distributing content in real time. Any subscriber or client that is PuSH enabled can subscribe to any publisher that is PuSH enabled and get new content as soon as it is available. I recently outfitted my blog with PuSH, which means that new posts show up immediately in Google Reader and in Buzz.

Salmon is about unifying comment streams. If you spend time on both Google Reader and Google Buzz, you will notice that comments on one service get transferred to the other service. Imagine this happening across the whole web. That is the point of Salmon.

WebFinger is a way to get profile information and other data from an email address. If your email provider supports webfinger (just Gmail so far), someone who knows your email address can access whatever profile information you want to be made public. This means that disparate web services can find each other, so your Twitter account can discover your Flickr account.

Putting these protocols (and others) together, it becomes clear that Buzz is not just another social network. It is a recipe for a decentralized social network. Once the Buzz API is complete, if Yahoo! wanted to, they could launch a social network that would completely integrate with Buzz. So could anyone else. The result will be a less monopolized social networking experience, which will ultimately be a better social networking experience.

Dear Facebook: 1994 called, and they want AOL back.

The VAT vs. Sovereign Default

One of the great joys (or frustrations, depending on your personality) of being a libertarian is the opportunity to participate in the infighting. Tyler Cowen’s recent post, in which he muses about a VAT in an uncommitted fashion, has generated some of it, e.g. from Fred Sautet and Dan Mitchell. Tyler responds here.

My favorite argument comes from Mario Rizzo, in a comment on Sautet’s post:

I would prefer the harms of the collapsing welfare state due to the unwillingness to compromise rather than the maintenance of (even a semblance of) the present system through any increase in the tax-take of government. We do not have to get the advocates of the welfare state to agree to reductions explicitly. Crisis will force it. I realize this may sound crazy to some people. But I am just being candid about my preferences.

I like Rizzo’s comment because it is characteristically honest and it addresses the real question: given that a sovereign debt crisis is coming without big fiscal changes, and that cutting spending is unlikely for political reasons, would you prefer a debt crisis and all that it entails or a more efficient tax system that will give the government more money?

We can think about the issue in terms of positive liberty and negative liberty. Here is my crude model: positive liberty is positively correlated with C + I + X, and negative liberty is negatively correlated with G. We can classify libertarians as those who want more negative liberty, other things equal; that is, you are a libertarian if MUG is negative.

In the state of the world in which a VAT is enacted and a debt crisis is avoided, C + I + X is higher, but so is G. In the state of the world in which a debt crisis occurs, G is lower, but so is C + I + X. The problem can be boiled down to two issues: what is the expected magnitude of these changes, and what is your marginal rate of substitution between negative and positive liberty?

No one knows for certain what effect a debt crisis would have on GDP or its components. My suspicion is that it would be quite large. Most countries that experience debt crises have deep and painful recessions that last many years. However, we have no experience with a default by a government like the US, because the modern US is unique. The world is so exposed to US Treasuries that a US default could destroy most of the banks and bank-like institutions in the world and cause a truly global recession. It would probably be much worse than a default by, say, Argentina, which mostly hurt the Argentines.

You can acknowledge the possibility of these consequences and still oppose a VAT if you are sufficiently libertarian. The question is then how negative is your MUG/MUC + I + X? If it approaches negative infinity, then you should still oppose a VAT. If it is close to zero, then you should support a VAT.

For now, I am (like Tyler) in the anti-VAT camp. However, as the probability of a debt crisis increases, due to failed attempts to decrease spending or simply the passage of time, at some point I would prefer a VAT. If a debt crisis were a week away, I would push the VAT button. Wouldn’t you?

The Greek Bailout

Officials from EU governments have just now pledged to bail out the Greek government. In my view, this is a bad idea, at least for the people of Germany and France, who will bear a lot of the cost. Since I am having some trouble organizing my thoughts into fluent paragraphs, I will present them as talking points.

  • The right model for thinking about the Greek government’s large and chronic deficits is the budgetary or fiscal commons. Richard Wagner says it well (in the context of the US government): “Most collective or corporate organizations, profit-seeking and nonprofit, do not suffer from continued deficits. What distinguishes the federal government from other corporate bodies is that the federal budgetary process illustrates the ‘tragedy of the commons.’ The federal budgetary process is a natural product of common property budgeting, where choice is divorced from responsibility for the consequences of those choices.” Interest groups within Greece compete for tax revenue, knowing that if they abstain, someone else will benefit from their abstemiousness. This leads to “overgrazing” of the budgetary commons, or chronic deficits.
  • By bailing out Greece, other EU governments are extending the range of the commons. They are further divorcing choice and responsibility for decision-makers in Greece and in other profligate member governments.
  • A Greek default need not harm the Euro very much. The strength of the Euro depends most heavily on the willingness of the European Central Bank to keep inflation low, and much less on Greece’s finances. If Greece’s default causes a debt crisis in Spain, Italy, and Portugal, this could eventually weaken the Euro as the ECB would be expected to apply monetary stimulus. But letting Greece default could also force those other governments to take their finances more seriously, and in any case, the principle of triage applies to bailouts as well as medicine.
  • If the Greek government is not bailed out, as is my preference, things will sadly be very, very bad for Greece. Creditors of the Greek government would have to take a haircut; there would be no way around that. The Greek economy would suffer a long and deep depression. This would be painful for the Greek people, but the goal is to prevent something worse from happening down the road.
  • Greece should never have joined the Euro because they now have no control over monetary policy. When people discuss so-called “optimal currency areas” they rightly emphasize labor and capital mobility, and factors which affect these. Perhaps one underappreciated additional issue is fiscal responsibility. If one government in a currency union is relatively fiscally responsible and one is not, then the responsible one will always be called upon to bail out the irresponsible one. If the bailout occurs, this is bad because it extends the fiscal commons, as discussed above. But if the bailout does not occur, the irresponsible government is harmed by more than it would have been if it had its own currency and monetary policy. Note that this logic applies to currency pegs as well, as Argentina learned.
  • It is dangerous to anthropomorphize governments, but putting this concern aside, the right metaphor for better policy is not “austerity” but “enlightened self-interest.” The key question facing the Greek government is Can you solve the fiscal commons problem? Solving a commons problem is not about ascetic self-denial, but about far-sighted self-improvement: building the institutions that will make the country better off in the long run.
  • In general, I think it would be a good thing if investors looked at sovereign debt more skeptically. First, sovereign debt is subject to the “Black Swan” problem. Second, bond markets are one of the major constraints governments face. (As James Carville said, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”) It would be better if the bond market intimidated the government sooner rather than later on the road to insolvency.
  • I worry a lot about a US sovereign debt crisis. With such a big economy, the fiscal commons problem is in many ways more severe. I think Congress could overcome the commons problem in order to avoid a debt crisis, but debt crises have a very quick onset. By the time people realize it is happening, it may be too late.

Free Speech for Foreign Corporations

There is lots going around about Justice Alito’s Joe Wilson moment at the State of the Union address.  In reference to the recent Citizens United case, Barack Obama said:

With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests—including foreign corporations—to spend without limit in our elections. I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities. They should be decided by the American people. And I’d urge Democrats and Republicans to pass a bill that helps to correct some of these problems.

To this, Alito, J. was clearly seen contorting his face and mouthing the words “not true.” And it wasn’t true. As Linda Greenhouse notes, the Court did not overrule a century of law. And according to PolitiFact, the court did not reach the question of free speech for foreign corporations:

The majority opinion, authored by Associate Justice Anthony Kennedy, maintained that the court was not specifically overturning this barrier to foreign campaign spending, essentially saying that it was outside the scope of the opinion.

“We need not reach the question whether the Government has a compelling interest in preventing foreign individuals or associations from influencing our Nation’s political process,” the majority wrote.

While Obama’s statement was indeed not true, I wish it were true. There is nothing pernicious about foreign corporations being able to buy TV ads making a case for how Americans ought to vote. The idea of a corporate nationality is murky to begin with. Should the nationality be determined by where the corporation’s headquarters are located? By where it does the most business? By the nationalities of its shareholders, of which none may constitute a majority?

But more importantly, the case for free speech is persuasive not because it gives people the right to speak in a vacuum, but because it gives people the right to listen to whatever speakers they wish. For the government to hold that I do not have the right to listen to what foreign corporations have to say, but that this is nevertheless consistent with the principle of free speech is shockingly Orwellian. Even if foreign corporations want to argue that the US government is evil and should be overthrown, what is the harm in that? If they are wrong, I can ignore them, and if they are right, I would want to know.

The Elitist Case Against Bernanke

Wednesday will be an interesting day, and not just because of the introduction of the iPad. It is also likely to be the start of Fed Chairman Ben Bernanke’s confirmation hearings for a second term. The final result no longer seems to be in doubt. Intrade now reports over a 90 percent probability of confirmation; last week it was in the 70s.

Bernanke’s confirmation was momentarily in jeopardy because politicians are beginning to fear the rise of populism, especially after the surprising election of Scott Brown as the new Republican Senator from deep-blue Massachusetts. Indeed, most Tea Party/End the Fed types probably would like to see Bernanke’s confirmation fail. But I think there is a strong elitist case for why Bernanke should be dismissed.

The role of the Fed is or ought to be to do whatever it takes to keep Congress and the President from messing with the economy. Among other things, this means:

  1. Using monetary policy to keep nominal GDP growing at a predictable rate.
  2. Discouraging the use of fiscal policy, both by doing #1 and by saying that it is a bad idea.
  3. Displaying an appearance of control and competence, so that the elected politicians do not get involved.

Whatever your views on the relative theoretical merits of abstract monetary and fiscal policy, monetary policy conducted by the Fed is more effective than fiscal policy conducted by Congress. In my view, even in pure theoretical terms, monetary policy can do everything that fiscal policy can, so there is no reason to use fiscal policy. Some will of course dispute this. But in practice, fiscal policy indisputably ends up being far less effective because:

  1. It is not timely. Much of the recent fiscal stimulus will not be spent until after the economy returns to full employment.
  2. It is not targeted. To be effective, fiscal policy should target idle assets and produce relatively useful stuff. Members of Congress are of course eager to spend money, but their incentives are to use the funds for political purposes rather than on useful projects employing idle people and assets.
  3. It is not temporary. When politicians use fiscal policy as an excuse to increase government expenditures on a permanent basis, any stimulative effect gets completely wiped out by increased deadweight loss of taxation and increased risk of a debt or currency crisis.

On Bernanke’s watch, nominal GDP fell below trend beginning in 2008. This slip-up caused or at least exacerbated a financial crisis that made nominal GDP fall further. Bernanke then got on TV with Hank Paulson, told everyone the sky was falling, and got Congress involved in the financial rescue effort. In addition, Bernanke has refused to say anything that might constrain Congress or dissuade it from wasting money on pseudo-stimulus. Had Bernanke kept nominal GDP growth steady, used the tools the Fed already had (quantitative easing) to buy toxic assets in the milder financial crisis (without Congress’s or Treasury’s approval or involvement), spoken out against fiscal policy, and appeared in control, the economy would be in a much better state today. For these reasons, Bernanke does not deserve to be confirmed.

Nevertheless, I do worry about who would replace him. If populist sentiment really is as powerful as they say, it could be a lot worse. I have seen lots of calls online to “End the Fed,” but proponents do not seem to realize that this would give Congress much more power over the economy and that they would not like the results. The Fed is the lesser of evils, and the Fed Chairman ought to believe this. A more populist nominee, even if he would not go so far as to abolish the Fed, would be even less likely than Bernanke to view his role as Protector of the Economy from Congress. Perhaps it is a good thing after all that there is a 90 percent chance Bernanke will be confirmed, but in a just world, he would be on the first train back to Princeton.

It’s Still OK to Hate the Government

William D. Eggers and John O’Leary have an article in Reason to support the release of their book, If We Can Put a Man on the Moon: Getting Big Things Done in Government. The premise of the article is clear from its title: “Five Reasons Why Libertarians Shouldn’t Hate Government.” The article has attracted a lot of positive attention in the libertarian corners of the internet in which I lurk, but I think this positive sentiment is unwarranted. Most of the arguments presented in the Reason piece are overstated or unsound.

To justify and introduce their position, Eggers and O’Leary appeal to the Founding Fathers:

Our Founding Fathers, fondly quoted by limited-government advocates, didn’t view government as evil, but as a flawed institution with some important jobs to do. They studied how government worked and they served in office, not because they viewed government with disdain, but because they knew the importance of good government.

All of this is true. While the Founding Fathers eloquently express many libertarian sentiments, it is nevertheless puzzling to me why they should be so fondly quoted, at least by libertarians. The project of the Founding Fathers was this: to constrain the state by writing down rules for its constraint. I think that any candid assessment of the results, at least from a libertarian perspective, would conclude that the project was an abject failure. Today, policy in the US is decided by some combination of majority rule and special interests with little regard to any written rules of constraint. When a Constitutional provision begins to cause problems, it is generally reinterpreted to support the proposed intervention. Libertarians should not seek to naïvely imitate the Founders unless they wish to experience a failure similar to theirs.

The authors list five specific reasons why libertarians should not hate government. The first reason, based on a single NBER working paper, is that “the worse government performs, the more citizens demand greater government intervention.” This is a gross oversimplification and misrepresentation of the paper, which develops a mathematical model in which investments in social capital lead to lower regulation, and vice versa. The model produces two equilibria: one in which investments in social capital are low and regulation is high, and another in which investments in social capital are high and regulation is low. The study authors explicitly state that “[c]ulture shapes institutions, and institutions shape culture. The causality runs in both directions.” Furthermore, they admit that omitted variable bias makes it very difficult to empirically untangle the relative magnitudes of causal influence: “Unfortunately, it is very difficult to test this prediction of the model using instrumental variables, since many exogenous factors that influence trust might also directly influence regulation, and vice versa.” Their argument for causation running from distrust to regulation is especially flimsy: all evidence presented to support this claim is based on simple regressions with no discernible identification strategy. In other words, they show that causation in this direction is at best plausible, and by no means necessarily true. Furthermore, the data for the relevant portion of the paper is cross-sectional; it simply does not test the hypothesis that if people in one country begin to distrust government more, they will demand more regulation.

Second, Eggers and O’Leary argue that “[t]o shrink government, you need to love government.”

Until small-government types better master the nuts and bolts of the public sector—how to design policies that work in the real world and how to execute on large public undertakings—their initiatives to downsize government will continue to disappoint.

There are a number of possible responses to this. First, it does not follow that to know the intricacies of government, you must love it. Second, there is certainly no need for all libertarians to master the nuts and bolts of the public sector. Specialization. Third, the fact that one needs to “know which bureaucratic levels to pull” is in fact one of the problems with government and a further reason for hating it.

The third reason cited by the authors is that “[m]arket-based reforms are not self-executing.” They cite the botched deregulation of electricity markets in California to support this claim. There is a bit of irony in Eggers and O’Leary counseling moderation and citing an example in which the principal problem was insufficient radicalism. Putting this irony aside, it is instructive to consider what proportion of the libertarian agenda relies on careful execution of a complex transitional mechanism and what proportion really is self-executing. A partial list of policies on the self-executing side of the continuum includes privatization of education, legalization of drugs, legalization of organ sales, abolition of occupational licensing, privatization of marriage, elimination of trade barriers, and elimination of immigration restrictions. Of greater complexity we might cite liberalization of financial regulations. While it is useful to have a few libertarian policy wonks, it seems to me that the majority of truly market-based reforms are at least somewhat self-executing. The remaining reforms hardly constitute a reason for fostering a love of government.

Fourth, the authors argue that government-bashing alienates ordinary people.

According to many libertarians, politicians are corrupt, bureaucrats are lazy, and public unions are a collection of thugs…

Incessant government-bashing may make you feel good, but alienates most everybody who knows and loves a police officer, firefighter, teacher, social worker, anyone who has ever collected an unemployment check, and anyone who saw NASA put a man on the moon.

I agree that libertarians should not bash politicians, bureaucrats, or unions. Their corruption, laziness, and thuggery, to whatever extent it exists, is not the result of markedly lower character than the rest of us, but of the institutional environment in which they find themselves. But how is it then alienating to deplore that institutional environment?

Lastly, the authors quaintly argue that “[n]obody will care what you know until they know you care.” But libertarian policy proposal are often cited as evidence that libertarians do not care. “Many voters today may indeed want smaller government, but what they want most of all is competent government.” I don’t think this is true. First, as Bryan Caplan argues, voters are interested in indulging their irrational beliefs. Second, as Robin Hanson argues, voters are interested in participating in status competition.

The ultimate goal is the pursuit of happiness, and when a properly limited government does its job well, it fosters freedom, peace, and prosperity. That is a noble goal. Why not embrace it?

I agree that enabling people to flourish is a noble goal, and I do embrace it. I am merely skeptical that government can be properly limited and that improperly limited government contributes much, on net, to human flourishing. This may sound pessimistic or cynical to some, and in some ways it is, but I find great comfort in knowing that I needn’t bother waiting on government to get better in order to pursue happiness.

None of the above is to suggest that libertarians must hate government. Certainly, libertarians should feel free to love government if they wish to do so, and there may be good reasons not to get emotionally involved in the first place. But to my libertarian friends who do hate government, it’s OK; do not be ashamed.