Tag Archives: Regulation

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)

Why?

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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Econ Advice Confirmed

We … construct management data on over 10,000 organizations across twenty countries, … [and] use a new double-blind survey tool. … We define “best” management practices as those that continuously collect and analyze performance information, that set challenging and interlinked short-and long-run targets, and that reward high performers and retrain/fire low performers. … Our management scoring grid … was developed by McKinsey as a first-contact guide to firms’ management quality. … We also test (and confirm) that these practices are indeed strongly linked to higher productivity, profitability, and growth. (more)

Not a bad quick measure of the quality of management practices. They find:

In manufacturing American, Japanese, and German firms are the best managed. Firms in developing countries, such as Brazil, China and India tend to be poorly managed. American retail firms and hospitals are also well managed by international standards, although American schools are worse managed than those in several other developed countries. We also find substantial variation in management practices across organizations in every country and every sector, mirroring the heterogeneity in the spread of performance in these sectors. One factor linked to this variation is ownership. Government, family, and founder owned firms are usually poorly managed, while multinational, dispersed shareholder and private-equity owned firms are typically well managed. Stronger product market competition … [is] associated with better management practices. Less regulated labor markets are associated with improvements in incentive management practices such as performance based promotion. …

Publicly (i.e., government) owned organizations have worse management practices across all sectors we studied. … Multinationals appear able to adopt good management practices in almost every country in which they operate. … The level of education of both managers and nonmanagers is strongly linked to better management practices.

So, the world would get more productivity and growth if it had fewer government-owned organizations, less labor regulation, stronger product market competition, and more things run by multinational firms. Gee, sounds a lot like standard economists’ advice.

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Trade Dominance

Me two years ago:

I surveyed the last ten China new articles in the Post and NYT. … Top US newspapers are in full fledged China bashing mode. (more)

I expect similar results today. Often, hostility to foreigners appears as opposition to letting locals buy stuff from foreigners. Yet sometimes it also appears as opposition to letting locals sell stuff to foreigners:

As China moves to invest billions in businesses around the world, one major industrial nation has so far soaked up very little of the cash: the United States. … Chinese business owners who want to invest in the United States say they often have a difficult time obtaining a U.S. visa to be able to travel and see projects. …

In 2005, the Chinese oil company CNOOC dropped its $18.5 billion bid for the U.S. oil firm Unocal, after some members of Congress expressed security concerns and asked whether CNOOC had unfair access to cheap financing. In early 2011, China’s largest maker of telecommunications equipment, Huawei Technologies, withdrew its bid for the assets of the American company 3Leaf after a review by a U.S. government panel on foreign investment raised concerns about Huawei having links to China’s People’s Liberation Army, which the firm denies. “After that, Chinese investors are kind of lost and bewildered; they don’t know what they can invest and what they can’t.” (more)

Presumably this stupidity is due to some sort of psychology, but what? Why object to both buying and selling to foreigners? Can people really think both sides are hurt by a trade?

My guess: because firms are larger than customers and employees, we see the firm as dominant in both firm-customer and firm-employee relations. So buying into ownership of a firm is buying into a position of dominance. Thus people object both to locals buying stuff from foreign firms, and to foreigners buying into local firms, because they object to locals being submissive to foreigners.

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Classical Music As Tax

Imagine that the government required people to wear a nice suit in public spaces like sidewalks, airports, and parks. Or required a precise haircut (e.g., within the last three days). Or imagine that signs had to be most easily read in latin. Or that Mormon sermons were loudly broadcast. Such policies would reduce the rate of crime and related complaints in public spaces, by imposing higher costs on the sorts of people who commit crimes (and on many others). Is that a good enough reason to implement such policies? Now consider that some public spaces play classical music to push away undesirables:

The Port Authority is one of many public spaces across the country that uses classical music to help control vagrancy: to drive the homeless away. … [In] the mid-1980s … a 7-Eleven began playing music in the parking lot as a deterrent to the crowds of teenagers congregating there. Plenty of stores continue to use the technique. … In 2001, police in West Palm Beach, Fla., blasted Mozart and Beethoven on a crime-ridden street corner and saw incidents dwindle dramatically. In 2010, the transit authority in Portland, Ore., began playing classical music at light-rail stops, and calls to police dropped. When the London Underground started piping classical music into its stations in 2005, physical and verbal abuse by young people declined by 33 percent. … Some sources report that Barry Manilow is as effective as Mozart in driving away unwanted groups of teens. (more)

The basic question: when is it ok for the government to impose costs on some subset of people in public, because that subset contains a higher fraction of those who commit crimes? Should there be any limits on the types of people a government can favor in public spaces?

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Religion Gets Bad Rap

Indonesian police say a civil servant who posted “God does not exist” on Facebook faces a maximum penalty of five years behind bars for blasphemy. … He was attacked by a mob on his way to work. (more)

I’m an atheist, and dislike mistreatment of atheists. But I also have to admit religion often gets a bad rap. For example, I’ve been reading more science fiction than usual lately, some old and some new. I notice that they almost all include the trope of religious folks trying hard to hold back progress, often via terrorism. Perhaps this was once fair, but it doesn’t seem remotely so today. (And I don’t see it listed among other science fiction tropes.)

When religion helped turn foragers into farmers, it paid a lot of attention to sex. So religious folks still care a lot about sex, and have resisted sex-related techs, such as birth control, abortion, and IVF. But those techs are pretty old today, and only abortion remains strongly opposed. Yeah there are stem cell treatments, but that is a pretty tiny fraction of medicine.

A science fiction author from fifty years ago might have imagined strong religious oppositions to VCRs or the internet, because they aided porn. Or to cell phones with cameras because they allow sexting. Or to all sorts of “unnatural” medical techs. But overall, religious folks today seem just as pro-tech as others.

That doesn’t mean we don’t erect social barriers to new techs. But instead of being religious, most barriers today are regulatory and risk-based. As we have grown rich and eager to regulate each other, we have become more risk-averse and made it harder to introduce new disruptive techs. For example, computer-driven car tech is basically here and ready to go, but it will be a long time before we allow it. Same for automated flight and medical diagnosis,

Alas science fiction authors are reluctant to blame over-regulators as their anti-tech villain. Religion makes a safer target – most sf readers like regulation, but few are religious. Also, we tend to overestimate the importance of doctrine and dogma, relative to habits of behavior. Most religious dogma is silly and doesn’t meet our usual intellectual standards. But it also doesn’t much influence behavior. In fact, religious folks tend to have exemplary behavior overall. They work hard, are married and healthy, avoid crime, deal fair, help associates, etc. While it may seem plausible that people with crazy beliefs would do crazy harmful things, the opposite seems to apply in this case.

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Old Money Goes Broke

My last post talked about inequality among sand grains, diamonds, firms, and cities. Specifically, that their sizes are distributed like lognormals, but with thicker power law tails. I noted that firms and cities are distributed quite unequally, with a (Zipf’s law) upper tail power near one.

In this post I’ll focus on wealth. In the 1890s Pareto found that the (upper tail of) wealth and income are distributed as power laws. Recent studies of US and world rich folks

estimate powers of 1.3 to 1.5, similar to Pareto’s original findings. This distributes individual wealth more equally than firm and city sizes.

Consider a simple differential equation model:

w‘ = s*w + c*(1-w)

Here the time rate of change w’ of an individual’s wealth w is given by a zero-mean randomly-fluctuating proportional growth s, and a redistribution c. This equation gives a steady state distribution proportional to:

exp((1-a)/w)*w^(-1-a)

This approaches a power law for large wealth, with power a = 1 + c/s. This model illustrates two key points:

1) While a (Zipf’s law) power of one implies no local net change, as with cities and firms, a power above one implies net local change. In particular, the wealth of individual rich (w>1) folk tends to fall on average, while the wealth of individual poor (w<1) folk tends to rise on average. The numbers of the slowly-getting-poorer rich are only held steady by a large influx of recently poorer folks. On average, old money goes broke, while the poorest bounce back.

2) Risk-averse folks (i.e., most everyone) dislike fluctuations s, and would prefer to eliminate them. But when people are forced to suffer larger fluctuations s, the distribution of wealth will spread out, creating more very rich people. Thus policy changes that result in there being more very rich people do not necessarily favor rich people. Policies that induce larger fluctuations s create more very rich but hurt each one of them. In fact, very rich folks are often especially risk averse, investing primarily in bonds. While the US has more very rich folks than other nations, and more than in prior decades, this might be because of policies forcing the rich to suffer more challenges to their positions, and to hold larger stakes in their enterprises.

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