Tag Archives: Regulation

Is Govt Over-Regulated?

I heard a talk recently by Jal Mehta on his new book Allure of Order, where he says how he’d reform US (pre-college) schools. He wants the US to do like Finland where schools are great: select smarter folks as teachers, train them more, and give them more respect, time to prepare, and freedom to structure classes. When I asked him directly how he would pay for all this, he said to cut administration.

It seemed to me that Mehtra’s main complaint is that US teachers are over-regulated. And it occurs to me that this is a common complaint about US government. For example, we hear that US police are over-constrained by rules. And a similar problem would befall US single player health plans — while the UK National Health Service has lots of discretion that is mostly accepted by the UK public, US versions would instead be regulated in great detail.

If you think that private actors in the US tend to be over-regulated, you should wonder why. Perhaps it is because government regulators just act spitefully toward non-government actors, but more plausible are over-confidence and do-something biases. When problems occur, people want something done, and more regulations are something to do. Voters and regulators both overestimate their ability to anticipate future problems and what would help them.

But if this is why US private actors are over-regulated, then US government actors should be over-regulated too. For example, people should see things go wrong in schools, and so add more rules to “do something,” rules that assume too much about what rules can do, and that require too many administrators to implement.

This view suggests that being pro- or anti-regulation isn’t the same as being pro- or anti-government, and it suggests a possible left-right deal: reduce regulation in both private and public sectors. Have more trust in private competition to deal with the problems we leave to the private sphere, and in smart well-trained civil servants to deal with the problems we leave to the public sphere. And have less trust in lawyers, judges and rule-specialists of all sorts to fix our problems with more rules.

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Tax Old Firms More?

It is widely believed that free markets tend to undersupply innovation, and that new firms tend to be more innovative. Here is yet another compatible academic analysis:

A subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-[quality] firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-[quality] incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-[quality] entrants. (more)

Many have suggested that we subsidize firm research, though it still seems puzzling that we don’t do more of this. Yes it can be hard to measure research spending, but that probably isn’t the whole issue. However, one rarely hears serious proposals to tax old firms more relative to young firms. (Exception here.) And the age of a firm seems even easier to measure.

Why not tax old firms more, or young firms less? This doesn’t seem to be a left vs. right issue, or to favor any other side of a familiar political divide. Is this another example of our pretending to oppose dominance by big powers, but really accept it?

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In Praise Of Ads

As Katja and I discussed in our podcast on ads, most people we know talk as if they hate, revile, and despise ads. They say ads are an evil destructive manipulative force that exists only because big bad firms run the world, and use ads to control us all.

Yet most such folks accept the usual argument that praises news and research for creating under-provided info which is often socially valuable. And a very similar argument applies to ads. By creating more informed consumers, ads induce producers to offer better prices and quality, which benefits other consumers.

This argument can work even if ads are not optimally designed to cram a maximal amount of relevant info into each second or square inch of ads. After all, news and research can be good overall even if most of it isn’t optimally targeted toward info density or social value. Critics note that the style of most most ads differs greatly from the terse no-nonsense textbook, business memo, or government report that many see as the ideal way to efficiently communicate info. But the idea that such styles are the most effective ways to inform most people seems pretty laughable.

While ad critics often argue that ads only rarely convey useful info, academic studies of ads usually find the sort of correlations that you’d expect if ads often conveyed useful product info. For example, there tend to be more ads when ads are more believable, and more ads for new products, for changed products, and for higher quality products.

Many see ads as unwelcome persuasion, changing our beliefs and behaviors contrary to how we want these to change. But given a choice between ad-based and ad-free channels, most usually choose ad-based channels, suggesting that they consider the price and convenience savings of such channels to more than compensate for any lost time or distorted behaviors. Thus most folks mostly approve (relative to their options) of how ads change their behavior.

Many complain that ads inform consumers more about the images and identities associated with products than about intrinsic physical features. We buy identities when we buy products. But what is wrong with this if identities are in fact what consumers want from products? As Katja points out, buying identities is probably greener than buying physical objects.

So why do so many say they hate ads if most accept ad influence and ads add socially-valuable info? One plausible reason is that ads expose our hypocrisies – to admit we like ads is to admit we care a lot about the kinds of things that ads tend to focus on, like sex appeal, and we’d rather think we care more about other things.

Another plausible reason is that we resent our core identities being formed via options offered by big greedy firms who care little for the ideals we espouse. According to our still deeply-embedded forager sensibilities, identities are supposed to be formed via informal interactions between apparently equal allies who share basic values.

But if we accept that people want what they want, and just seek to get them more of that, we should praise ads. Ads inform consumers, which disciplines firms to better get consumers what they want. And if you don’t like what people want, then blame those people, not the ads. Your inability to persuade people to want what you think they should want is mostly your fault. If you can’t get people to like your product, blame them or yourself, not your competition.

Added 10a: Matt at Blunt Object offers more explanations.

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Policy Trial By Combat

It was once thought appropriate to settle legal disputes by combat – the winner of a physical fight won the case. This accomplished two key functions of a legal system: it clearly settled cases, and in a way that seemed legitimate to most observers. The fact that who won was poorly correlated with the truth of their claims mattered less.

Today we have better legal systems, but our policy debate system has a big element of trial by combat. I was reminded of this while reading The Infinite Resource by Ramez Naam, which he was nice enough to send me. Like many respected policy books, it is well written at a sentence and paragraph level, takes positions on important subjects, and is full of engaging and entertaining examples. The book makes many claims, illustrating them with simple plausible supporting arguments and detailed examples. Most of these claims are accepted by some relevant community of experts, and in fact I agree with most of them.

My problem with such books is this: little is said that is is original, and the arguments and examples given are mostly not the main reasons that relevant experts say are why they accept such claims. So experts shouldn’t change their beliefs on the basis of such a book. And if ordinary people knew this fact, they shouldn’t change their beliefs that much either, except as the prominence and acceptance of the book signals that experts agree with it.

But it is easy to see why such books are popular. Readers want to affiliate with impressive authors, and want to collect impressive sounding and unlikely-to-be-embarassingly-wrong examples and arguments with which to impress associates in conversation. So of course policy book authors compete to be eloquent and engaging while taking the sort of positions readers will find plausible and worthy of embracing. Given such a competition, the policy positions that gain the most public support are those, among the popularly plausible positions, that can attract the best writers. This is policy trial by writing combat.

Yes, if this is the game and you want your position to win, you want a good writer like Naam to write a book like his supporting your position. And yes you can infer something from the fact that such a person has been enticed to write such a book, and that the powers that be have endorsed it or at least not criticized it. But one could wish for another world where the popularity of policies was more strongly correlated with good arguments and evidence.

To illustrate my criticism, here is Naam on why the US should unilaterally tax carbon heavily:

I believe the United States should press ahead with adopting a carbon price and driving our emissions down by 80 percent by 2050, even if China and India don’t. Why? Three reasons.

First, we created this mess. Carbon dioxide lingers in the air for an average of 100 years before breaking down. …On that basis the rich countries are responsible for two-thirds of the heating of the planet that is happening today. …

Second, its in our best interests. Shifting away from oil and coal will shield us from recessions cause by global oil and coal price spikes. It’ll reduce the dollars we send to the Middle East and Russia. It’ll drive our long-term energy costs down by further fueling innovation in capturing the nearly endless supply coming from the sun. If we want energy independence, health economic growth, and long-term cheap energy, a carbon price is the way to go.

Third, the best way to get China, India, Brazil, and the rest of the developing world off of fossil fuels is to drive down the price of the alternatives. If it’s cheaper to produce electricity from solar and wind that it is from coal, if if that electricity can be supplied 24/7, then countries will switch. Make it cheaper, and they will come. And the best way to make it cheaper is to invest in R&D in those areas, and to shift business and consumer spending into them.

Here Naam takes a position that many experts have taken, and he gives plausible supporting arguments. But he doesn’t consider the contrary arguments that I find on net to undermine this position. Such policy books rarely consider contrary arguments – since such arguments usually require more sophisticated conceptual understanding to engage, most readers won’t want to hear about them unless they are especially likely to actually encounter such arguments when they pontificate on the subject.

FYI, here are the contrary arguments that persuade me. First, if rich countries should be blamed for hurting the rest of the world via past carbon emissions, they should be credited with helping much more via their past innovations. On net the world owes them, not vice versa. Second, it is bad economics to not buy the cheapest product that does what you need just because its price fluctuates. Paying steadily more for something else is a worse deal.

Third, it requires a coincidence of magnitudes for a big carbon tax and solar research subsidies to be a good selfish unilateral policy for the U.S., but not for smaller nations like China, India, and Brazil. If our best explanation for these smaller nations not unilaterally adopting big carbon taxes and subsidizing solar energy research is that they correctly expect to selfishly lose by such plans, even if the world overall gains, then we should guess the same is true of the US, which in PPP terms has only twice the GDP of China. The cutoff nation size for this being a selfishly good vs. bad policy would have to just happen to fall between the size of China and the US, and even then because we’d be near the cutoff it wouldn’t hurt us that much to pick the wrong policy. And Naam offers no arguments for why this cutoff just happens to fall in this range.

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R&D Is Local, Global, But Not National

A recent Post article by Brad Plumer illustrates what is wrong with the usual research funding arguments:

One of the few things Republicans and Democrats have been able to agree on in recent years is that the government should be spending more on basic scientific research … Thanks to budget pressures and the looming sequester cuts, federal R&D spending is set to stagnate in the coming decade. …

As a result, scientists and other technology analysts are warning that the United States could soon lose its edge in scientific research — and that the private sector won’t necessarily be able to pick up the slack. “If you look at total R&D growth, including the corporate and government side, the U.S. is now at the low end … We’re seeing other countries, from Germany to Korea to China, make much bigger bets.” …

There’s a long, long list of world-changing innovations that can be traced back to federally funded R&D over the years. .. The key question here is how much of this innovation might have happened without government involvement. … Many economists agree that private companies tend to under-invest in very basic scientific research, since it’s hard for one firm to reap the full benefits from those discoveries. …

When the Congressional Budget Office reviewed the evidence in 2007, it concluded that government-funded basic research generated “substantially positive returns.” And it found that, on the whole, government R&D helped spur additional private-sector R&D rather than displace it. … The United States will soon spend less on all types of R&D as a percentage of its economy in the coming decade than countries like Australia and South Korea …

The sanguine view is that other countries are tossing more money at scientific research that will have positive spillover benefits for the entire world — including us. If China invents a cure for cancer, we all benefit. Others worry, however, that the U.S. economy could suffer from the fact that a greater share of research is happening elsewhere. (more)

Note the conflicting arguments: each small part of the world invests too little in R&D, because other parts gain without paying, but the US should fear falling behind nations that invest more. These two only makes sense together if the nation is the natural scale for innovation – innovations mostly leak away from their source within a nation, but mostly stay within each nation. The academic literature, however, suggests the natural scales are global and local – while there are gains to the world as a whole, gains are focused on related industries in the local area:

A recent body of empirical evidence clearly suggests that R&D and other sources of knowledge not only generate externalities, but such knowledge spillovers tend to be geographically bounded within the region where the new economic knowledge was created (Griliches 1992). That is, new economic knowledge may spill over, but the geographic extent of such knowledge spillovers is limited. … greater geographic concentration of production actually leads to more, and not less, dispersion of innovative activity. (more; see also and also)

While it would be great if the world could coordinate to promote R&D spending worldwide, there is little economic justification for forcing Wyoming and Louisiana, who spend 0.4% and 0.56% of GDP respectively on R&D, to pay for R&D spending in Massachusetts and New Mexico, where those figures are 5.49% and 7.65% (source), any more than the rest of the world pays for such spending. If the US government funds less R&D, it will be mainly states like Massachusetts and New Mexico that suffer, not states like Wyoming and Louisiana, relative to the rest of the world.

If R&D spending mostly helps the particular regions in which it happens, why do we pay for it at the national level? Probably because many see it as a national prestige good – people in Wyoming look good to foreigners by being in a nation where lots of impressive research happens in Massachusetts. Are they right, or is Massachusetts just getting a nice juicy transfer?

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Bike Helmet Laws Fail

Two years ago I posted on evidence that called into question the effectiveness of bike helmet laws. A new NBER paper confirms this skepticism:

Using hospital-level panel data and triple difference models. … We consider the effects of the [US bike helmet] laws directly on [’91-’08 US] bicycle related head injuries, bicycle related non-head injuries, and injuries as a result of participating in other wheeled sports (primarily skateboarding, roller skates and scooters). For 5-19 year olds, we find the helmet laws are associated with a 13 percent reduction in bicycle head injuries, but the laws are also associated with a 9 percent reduction in non-head bicycle related injuries and an 11 percent increase in all types of injuries from the wheeled sports. ..

The estimated reduction in head injuries resulting from helmet laws is robust to changes in the definition of the control group, to changes in the type of fixed effects included (state versus hospital), and to changes in the samples of states and hospitals evaluated. … Considering the different offsetting results, we run our preferred specification on injury counts for 1) all head injuries and 2) total (all head and body) injuries arising from cycling and wheeled sports. The net effects of the helmet laws are small and are not statistically different from zero. (more)

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Democracy Is Competition

How much should business be regulated? This is often framed as a choice between the good feelings of freedom, and the costs of unmanaged cut-throat competition. But consider: the democracy that most people want to use to manage business is itself a form of cut-throat competition. That is, candidates usually have wide freedoms as they compete to get elected.

Oh sure there are places like Iran or China where democratic competition is highly regulated, such as via restrictions on who can run for office and what can be said to whom. But such places are usually seen as shams – real democracy must have highly competitive elections.

Fans of democratic regulation of business thus need to explain why mostly unregulated business competition is bad, while mostly unregulated candidate competition is good. In both cases ignorant customers are often exploited, and there can be lots of waste and duplication of effort.

Libertarians, who want pretty free business competition but more limits on what regulations democratically-elected governments can choose, also need to explain why business competition is good but democratic competition is bad. It is autocrats and Adictators who are the most consistent here – they usually want strong regulation of both.

Added 12Jan: Campaign finance rules seem more to regulate business than candidates. The intuition is that unfair business competition makes some people unfairly rich, and we shouldn’t let that unfairness influence elections.

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Schools Are For War

The main reason we had rules to force kids to attend primary school was to make obedient soldier citizens to support their nation in time of war. This effect was even stronger for democracies:

Using data from the last 150 years in a small set of countries, and from the postwar period in a large set of countries, we show that large investments in state primary education systems tend to occur when countries face military rivals or threats from their neighbors. By contrast, we find that democratic transitions are negatively associated with education investments, while the presence of democratic political institutions magnifies the positive effect of military rivalries. …

We study historical panel data on education spending and enrollment – for Europe since the 19th century and a larger set of countries in the postwar period – to assess the correlation between military rivalry (or war risk) and primary education enrollment (or the occurrence of educational reforms). … [Our models] show a positive and significant effect of rivalry on primary enrollment, a negative direct effect of democracy, and a positive and significant interaction term between the two. Overall, our empirical results indicate a causal relationship from rivalry to primary educational enrollment. …

An economic literature … finds robust correlations between past wars and current state capacity in international panel data. … [A study] shows that military rivalry raises fiscal capacity in postcolonial developing states. … [Others] find that democracy does seem to have a systematic influence on top rates of estate taxation, whereas wars with mass mobilizations do significantly raise those rates. …

[Prussia pushed schools] to arouse a moral, religious, and patriotic spirit in the nation, to instill into it again courage, confidence, readiness for every sacrifice. …

[France pushed schools to] teach Frenchmen to be confident of their nation’s superiority … It should … eliminate disruptive conflicts and promote the unity of the classes. … The new teaching program … was … designed to teach the child that it was his duty to defend the fatherland, to shed his blood or die for the commonwealth, to obey the government, to perform military service, to work, learn, pay taxes, and so on.

In Prussia, France and Japan … military defeats and/or perceived military threats appear to have prompted an otherwise reluctant ruling class to invest in mass primary education. …In most countries of the sample a war preceded the educational reform, while a democratic transition rarely occurs before the education rise … Most often, the democratic transition instead takes place *after the education reform period. (more)

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Fair Date Reporting Act

A week ago I heard an NPR radio interview with an FTC representative on web and phone privacy. She said the FTC protects your privacy by making sure firms who collect info on our activities can only use it to sell us stuff, but not to decide on hiring, renting, lending, or insuring. I thought: why is this where we draw our line of “privacy”?

Looking up a recent FTC report (quotes below), I see it goes back to the 1972 Fair Credit Reporting Act (FCRA), which required firms that rate you or collect info on you for hiring, renting, lending, or insuring to show you everything your rating is based on, and let you challenge any part of it. And given how completely infeasible it would be to show you all internet info collected about you, or let you challenge any of it, this law basically says that hiring, renting, lending, and insuring decisions must not benefit from the vast increase in info that web/phone tech now creates.

Adverse selection, where the people you least want are mostly like to apply, can plague hiring, renting, lending, and insuring. This is a big problem, and many regulations are said to be designed to deal with it. Yet the FCRA clearly makes this hidden info problem worse, by greatly limiting the info on which such decisions can be based.

To see how far this can go wrong, imagine a Fair Date Reporting Act, requiring all dating decisions to be made on the basis of documented information that potential dates can inspect and challenge. You couldn’t reject someone for a date unless you could clearly document that they are unsuitable. You’d end up relying heavily on some very crude indicators, like weight, education, income, and hair color, and enjoy your dates a lot less. And then they’d probably pass laws prohibiting some indicators as unfair, such as weight.

So why are we more willing to mess up decisions about hiring, renting, lending, or insuring, relative to dating? Because we see those deciders as dominating, because they choose to accept or reject us, and we see big firms as evil. Why don’t we similarly restrict the info firms can use to try to sell us stuff? Because we see ourselves as doing more of the choosing there, making us the dominant party.

Added 11p: Imagine that you were required by law to score all job offers on objective verifiable criteria, such as salary and location, and had to take the job that scored highest. How close would that be to slavery?

Those promised FTC report quotes: Continue reading "Fair Date Reporting Act" »

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Ban Election Arguments?

While Intrade has betting markets on the US presidential election, they are unregulated and of questionable US legality. Nadex went through the expensive legal hoops to apply for permission to run a regulated market. Last week:

The CFTC determined that the contracts involve gaming and are contrary to the public interest. (more)


It could unduly influence election results. … the contracts could run afoul of the election process if traders had financial incentives to vote for particular candidates. (more)

They still allow election betting at the Iowa Electronic Markets, where stakes are limited to $500. They still let people work for campaigns and administrations, which gives them financial incentives to vote for certain candidates. And they let candidates take positions favoring some industries, occupations, and locations, over others, which gives people financial incentives to vote for and against candidates.

We also let people tell other people which candidates they favor, which gives people non-financial incentives to vote for those candidates later. And since every bet for a candidate is matched with a bet against that candidate, whenever a betting market gives anyone a financial incentive to vote for a candidate, it at the same time gives someone else a financial incentive to vote against that candidate. Why are all the rest of these “due” influences, while bets are “undue” influences?

Paula Dwyer argues:

Naked credit default swaps on Greek sovereign debt (buying a CDS without owning the underlying debt) are no more than a bet on a Greek default. Will the CFTC be barring them, too? (more)

Law and Economics professors Eric Posner and Glen Weyl support the CFTC:

Financial instruments that serve primarily as a means of speculation rather than hedging should be banned … Suppose that two individuals, neither of whom uses or produces oil, harbor different opinions about the future price of oil and decide to wager on it. Both parties willingly participate, because they think they’re each getting the best of their confused counterparty. Clearly, both of them cannot gain from this transaction, and the wager itself creates rather than reduces risk. While each party thinks it is getting the better of the other, both agree that on average both of them will be worse off because on average they will win and lose on the same number of bets, and both of their incomes will be less smooth and predictable on account of their wagering. As a consequence, this sort of speculation is socially harmful. …

In controlled and appropriate contexts, [gambling] can be a source of entertainment for people who are aware of and willing to accept the potential losses. But participants in financial markets are usually seeking financial security rather than entertainment, and they typically have little sense of the risks they are taking on. … A second potential benefit of allowing trading in derivatives is the information that they provide to market participants. The knowledge of the likely outcome of the presidential election provided by the wisdom of the crowds is useful for planning by businesses, individuals, and governments. But that information is only valuable to the extent that it enables real economic decisions to be made more effectively.

Consider: why should we let people argue on elections? Similar to the above, one could say:

People mainly argue in the hope of winning arguments, thinking that they are taking advantage of confused opponents. While each side hopes that further events and discussions will reveal them to have been more in the right, both sides understand that this can’t happen for both of them. Yes, people might argue just to have fun, but election pundits seem serious – wanting more to prove the other side wrong. And most people who argue politics seem to have little understanding of what they are talking about. Yes, arguments can produce useful info for others, but the value of the info produced in election arguments is small compared to the time lost arguing. Thus we should ban arguments on elections.

Election arguers and bettors both seem motivated by a similar mix of enjoying the process and hoping to win. But the info produced by bettors is far more persuasive, reliable, and useful – you have far better reasons to believe betting market odds than whatever the apparent winner of a political argument has claimed.

You might counter that people sometimes argue about who should win an election, rather than who will win. But betting markets can collect info on that topic as well – we can bet on outcomes after the election conditional on who wins the election. These sort of markets would be enormously helpful to tell voters about which candidate will best promote health, peace, or prosperity. Yet such markets are now banned because they might “unduly” influence elections, or let people “waste” their time “arguing” about elections. Heaven forbid we should waste time figuring out which candidate would actually help us more.

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