Tag Archives: political economy

The Utopia of Infinite Elasticity

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In 1993, James Carville famously 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.” Even if your goal is not to intimidate people, it is undeniable that bond markets have a lot of power. If bond markets express their displeasure with the state of a government’s budget, it matters little in the long run how big that government’s army is; financial repression does not work forever, and at some point the government’s spending will decrease.

It’s tempting to think that the bond market is powerful because of corruption, but that is at most a proximate source of power. The real source of power is elasticity. The supply of financial capital is highly elastic; it moves around the globe in milliseconds. Try to tax it and the incidence of the tax will go elsewhere; burden it with regulations and it will flea to a more hospitable climate.

Imagine a world in which all factors of production were as mobile and elastic as financial capital. If labor and physical capital could flea instantaneously and at low cost from bad policies, there would be little danger from either the predatory or incompetent state. In short, it would be a libertarian utopia.

This utopia seems hard to realize. It’s hard to believe that labor and physical capital could ever be as elastic as financial capital is today. Nevertheless, I think this framework provides a way forward for libertarians who have given up on political reform (and maybe even those who haven’t yet). Even if we can’t make the supply of most factors of production infinitely elastic, maybe we can make their supply more elastic. To the extent we succeed, we reduce the power of governments around the world.

Here are a few ideas for building a more libertarian world through higher elasticity:

  1. Labor would be more internationally mobile if there were no language barriers. Consequently, libertarians should (without coercion) support the removal of barriers to language standardization. In practice, this means subsidizing English, which is already the globally dominant language of business and science. As a libertarian, I obviously do not support forcing anyone who does not wish to use English to learn it, but Rosetta Stone’s market capitalization is only around $150 million as of this writing. It should take only a fraction of that amount to induce it to release the English version of its language learning software for free. Alternatively, other methods of learning English could be developed on an open-source basis. Because language has network externalities, this endeavor would not only improve the wellbeing of those who would learn English, it would help those who already know English by giving them more exit options.
  2. We need better and more secure options for telecommuting and for being paid for work. In particular, it would be very good if people could telecommute across legal jurisdictions without the government in the jurisdiction in which they reside being aware of it. It’s hard to imagine how the modern state could be as redistributive as it is without income tax withholding. If people who live in the US, say, could work in a jurisdiction that does not have income tax withholding and be paid covertly, the power of the US government to tax would be greatly diminished. And if workers could shop around between jurisdictions in which to work, the governments in which the firms were located would be forced to adopt efficient policies to attract economic activity. Consequently, libertarians should support an Internet infrastructure that is decentralized, encrypted, and hard to tap, and a payments system that is hard to track, such as Bitcoin or some successor that operates along similar principles.
  3. Almost all factors of production would be more elastic if we could open up new frontiers. Libertarians are excited about seasteading and space colonization. I am not so sure that they will be feasible in the medium term, but I do hope they succeed.
  4. As I argued in a previous post, there are more mobile forms of physical capital in development, and these would serve to limit the amount of control the state can exercise. 3D printers are more mobile and elastic than assembly lines, and solar power is more mobile than the electricity grid. Science fiction has even better examples; witness the (Seed-driven) matter compiler in The Diamond Age or Mr. Fusion from Back to the Future.

I’m not sure what other options there are. Maybe commenters or other bloggers will weigh in. But if I were Peter Thiel or a Koch brother, something like this framework would guide my philanthropy. Libertarian ideas will never be popular; this is how we can create a better society anyway. No, we’ll never get to the utopia of infinite elasticity, but the land of pretty high elasticity is not such a bad place to live.

The Political Economy of Debt-Ceiling Chicken

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Lots of smart economists are worried about what will happen if the US federal debt ceiling is not raised by August 2, which is when the Treasury Department has estimated that it will bump up against the $14.2 trillion limit. The worst-case scenarios include a run on Treasuries and a collapse of the financial system. I don’t have any special insight into what will happen, but I think my perspective as a political economist gives me a contrarian view. I’d probably vote against an increase in the debt ceiling if I were in Congress, though not for reasons that any current member of Congress would be likely to endorse.

The fight over the debt ceiling is widely viewed as an argument over the size and scope of government. Superficially, this is correct: the Republicans have little political power with which to prosecute the argument, so their best strategy is to act erratic and crazy, and to threaten mutually assured destruction if Democrats do not agree to their terms. Democrats are trying to determine exactly how much of Republicans’ behavior is an act, and how much is due to their actual craziness, which one imagines is difficult to disentangle, particularly since accusations of craziness are fashionable in modern politics and it’s difficult at some point not to believe your own PR. It is basically right to characterize the argument over the debt ceiling as a slow-motion game of chicken.

But on a deeper level, there is much more going on. While the argument over the debt ceiling is about the size and scope of government, my thoughts on this issue are much more colored by the scale of government. If we think about the scope of government as the spheres over which the government has influence, and the size of government as the percentage of GDP that is constituted by the public sector, the scale of government is the denominator of the size variable. How much territory, how much economic activity, how many people should be united under a single government?

While people have differing ideological priors about the optimal size and scope of government (full disclosure: my priors are small to none), I don’t think there is nearly the same partisan disagreement over the scale of government. Republicans and Democrats agree: the optimal scale of government is basically the status quo United States of America. This agreement can hardly be claimed to be the result of any serious reflection by either party. Yes, there are disagreements about federalism and nation-building, and these have some bearing on the effective scale of government. But neither party wants to split the USA in two, or to take over the rest of North America; this is simply not an issue that is very salient in modern politics.

While the observed size and scope of government gets worked out through political wrangling, the observed scale of government comes about more indirectly. There are conquests, and the EU, and decisions to secede, and to some extent these are intentional, but for the most part the scale of government is a product of human action but not of human design and also of real economic forces; if your mind immediately goes to political transaction costs, value heterogeneity, etc., you are on the right track.

What we have in the debt ceiling fight is not just a political argument, but a political-economic equilibrium working itself out. Whatever your views on the proper size and scope of government, the scale of the US government is probably too big for the institutions that compose it. There are too many heterogeneous values, too many interest groups, too many hold-up problems. When politicians play chicken with financial markets on the line, that’s a sign that politics is pretty dysfunctional. My point is not to castigate the politicians involved but to draw attention to the fact that such games of chicken are exactly what you would expect to observe if the scale of government were too big.

Failing to approve an increase in the debt ceiling gives politicians the chance to prove me wrong. If forced to come together and work out a deal to balance the budget in a hurry, could they do it? If so, then great. If not, then the inevitable day of fiscal reckoning has come; better for it to come now than later when an irreparably dysfunctional political system has made the problem even worse.

The Political Economy of 3D Printing

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Last week’s Economist has two articles, a leader and a longer piece, on 3D printing technology. As the leader explains:

Three-dimensional printing makes it as cheap to create single items as it is to produce thousands and thus undermines economies of scale. It may have as profound an impact on the world as the coming of the factory did.

The articles do a good job of describing the technology, which appears to be quite revolutionary, and running through some of the straightforward implications.

But like any good political economist, what intrigues me most about 3D printing is its political effects. One of the most robust constraints on government is the ability of subjects to exit. Some especially evil governments have sought to take direct action to prevent exit, but these restrictions tend not to last.

The logic of exit is simple: when a government gives a subject a worse deal than he could get somewhere else, he can leave. When people can exit easily, governments compete with each other for subjects, and this tends to make all people (except for some of the rulers and rent-seekers) better off.

One of the major barriers to exit is the high cost of abandoning fixed capital. If you own a factory and you want to get out from under the thumb of your government, you either have to sell your fixed assets or leave them behind. Selling may be problematic. After all, if you want to get out from under the thumb of your government, so likely does everyone else. People are probably not eager to invest. Furthermore, many factories are specific forms of capital. They are good for making a particular thing, but much less valuable at making other things. There will be some loss of value from liquidation, even if everyone else isn’t yet trying to leave.

3D printers are more mobile and less specific forms of capital than factories are. This means that if 3D printing becomes a more common, cost-effective form of manufacturing, the cost of exercising the exit option will go down. In terms of one paper I am working on, the demand for quasi-governmental services becomes more elastic.

I think the political effects of 3D printing have the potential to dramatically improve the lives of billions of people, over and above any straightforward economic effects. Even if in equilibrium people don’t in fact exercise the exit option, the mere option tightens the constraint on government. In a world where parchment barriers have failed, real factors such as technology may yet succeed.

Do Elections Matter?

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I am told that there will be an election next week. Actually nobody told me; it’s what I gathered from the yard signs. Elections, for me, are a spectator sport. I will probably be up all night watching the Prop 19 returns come in, but I haven’t participated since Bryan Caplan showed me the mathematics of voter decisiveness.

While I agree with Caplan and others that voting doesn’t matter, my own research (very much in progress, caveat emptor) is making me wonder whether it’s possible, even in theory, for an election to matter. We all know that an individual vote doesn’t change the outcome of an election. But does the outcome of an election causally change policy, or does it just correlate with policy change?

Increasingly, I think the latter. Here’s one thought experiment: what would policy in the US look like if it were an autocracy instead of a democracy and nothing else were different? That is, let’s impose a strong ceteris paribus condition and change the form of government from democracy to autocracy.

My tentative reaction is that everything would be roughly the same as it is now. Think about it in Coasian terms. Government policies impose negative externalities on some people. Those people have an incentive to bargain with other people in order to get that policy changed. That can be as simple as bribing the autocrat to change the policy, or as radical as a coup in which defectors from the regime are promised larger returns than they are currently getting.

As in any Coasian theory, transaction costs matter, and insofar as transaction costs prevent exchange, it is possible for the nominal form of government to make a difference. This is why the nasty autocrats are so nasty; they have mechanisms, based on ethnicity, ideology, or external support, of preventing the exchanges that would remove them from power. But in the US, transaction costs seem reasonable even if they are not negligible. Furthermore, transaction costs must be evaluated relative to the externalities to be addressed. Modest transaction costs mean only modest externalities remain. As the externalities increase in magnitude, holding transaction costs constant, the greater is the likelihood that exchanges will resolve them.

If the US were a ceteris paribus autocracy, with the modest transaction costs and wide distribution of power that now exist, we’d get basically the same outcomes we have today. I’m not saying it would be exactly the same, but it would be close. And if that statement is true, then it must also be the case that elections mostly just correlate with policy change, they don’t cause it. Changes in electoral outcomes reveal changes in constraints faced by the government, they don’t themselves drive the change in policy.

This is not just a semantic difference. It means that your opinion gets counted about the same whether you show up to vote or not. In the long run, it doesn’t matter if voter turnout is 90 percent or 10 percent, or if voter turnout is ideologically lopsided. The real constraint that the government faces is still the same. Elections don’t matter.

This is where I resist the urge to water down my conclusions with statements about how tentatively I hold these views. I hold these views. Tell me, is this my most absurd belief?

An Olsonian Puzzle

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In a series of works beginning with his 1993 article Dictatorship, Democracy, and Development, Mancur Olson lays out his theory of the stationary bandit. The idea is simple enough. A roving bandit has an incentive to loot, to take everything he can. A bandit who is going to be around a while has an incentive to steal only moderately, so that people have an incentive to invest and grow the pool of resources from which the bandit is stealing. Autocrats who feel securely installed will therefore institute lower tax rates than those who fear being deposed, other things equal. They will also be more likely to invest in public goods.

How about democracies? Olson argues that self-interested majorities will tax at an even lower rate than the stationary bandit.

Though both the majority and the autocrat have an encompassing interest in the society because they control tax collections, the majority in addition earns a significant share of the market income of the society, and this gives it a more encompassing interest in the productivity of the society. The majority’s interest in its market earnings induces it to redistribute less to itself than an autocrat redistributes to himself.

In other words, the deadweight loss of taxation hurts the majority more than it hurts the autocrat, so the majority will select lower taxes than the autocrat.

There is a problem with this theory: it does not seem to be true. Using government expenditure data from the Heritage Foundation and the Democracy Index from the Economist Intelligence Unit, I checked the correlation between government expenditure and degree of democratization in 162 countries. The more democratic countries have larger public sectors. I tried a number of regression specifications—using tax burdens instead of expenditures and controlling for per capita GDP—and the correlation between democracy and the dependent variable was positive and statistically significant in each of them. Roughly speaking, a hypothetical completely autocratic government in a country of average wealth would be expected to spend about 24.5 percent of GDP; a hypothetical completely democratic government would be expected to spend about 37.5 percent of GDP.

What accounts for this unexpected result? I have some thoughts. But before I reveal my hypothesis, I’m curious to see if anyone else has any ideas. Why would democracies, which have stronger incentives to avoid deadweight loss, have higher taxes and government spending than dictatorships?