Book Review Darwin Economy by R. Frank

This is a book whose working title was The Libertarian Welfare State, which is the name of my upcoming book.

1. The most interesting part of the book is the importance of positional consumption. The examples he keeps coming back to are not very good. He mentions sports a lot, but this is a highly artificial setting where we do not care about anything but position and there are many artificial restrictions (if there was any general value of putting a ball through a hoop, we'd just use a staircase instead of relying on really tall people practicing for years on how to do it in a jumping motion). Similarly, school districts are so important because public policy decided that you must pay taxes to fund schools, but those will be tied to your address. The obvious alternative is a school-voucher system that travels across district boundaries.

The general mechanism is sound, however.

The author also avoids a common mistake in discussing positional consumption which is to think that it matters what people who are very different from us have. All envy is local (or a rich man is he who makes more than his brother-in-law). The idea of consumption cascades (I want more than my brother-in-law who wants more than his neighbour, ....) is more plausible and is based on local comparisions.

As Bryan Caplan asked (in a tweet), it is interesting, though, that R. Frank misses the single biggest positional item in modern society: higher education.

2. The whole book suffers terribly from the curious asymmetry where even smart left-wingers think that they arguing against extreme-libertarian positions is enough (it is a curious asymmetry because the argument that the free-market is good because the alternative is the Gulag is, correctly, confined to talk radio and other havens of stupidity; but I very much doubt that Robert Frank sees himself, or is seen, as sort of the liberal equivalent of Glenn Beck).

Around pages 123 (nook edition), the author discusses two men, Rand and Paul (yes, really). Rand earns twice as much as Paul does. After setting up an example, Frank argues how a head tax (i.e., each paying the same) would not be ideal and, therefore, we need a progressive tax system.

The problem is that everyone to the left of Murray Rothbard agrees that Rand should pay more than Paul. Even flat tax advocates say that Rand should pay more. They will just argue that they should pay the same percentage of their income.

And even this is not true, almost all flat tax proposals carry an exemption, so that Rand would pay a higher percentage of his income than Paul would. To see how this works: imagine a 30% tax with a 10k exemption. If Rand earns 80k, he pays 30% of 70k, i.e., 21k, or 26% of his income. Paul earns 40k and pays 30% of 30k, i.e., 9k or 22% of his income.

Every tax plan ever proposed by any serious person in the last 50 years has had Rand paying more and even a higher percentage of his income than Paul does. But Robert Frank wastes pages arguing against a position that nobody to the left of Murray Rothbard actually holds.

3. Frank also sometimes confuses a purely Potlach competition of wasteful spending with competition with positive spill-overs (including to one self). In one of the chapters, he argues that a young couple will be tempted to save less than they would really like to because they are pressured to buy a house in a nice neigbourhood so that their kids go to a better school.

This sounds plausible. However, while buying a house is often a bad investment on finantial terms, it is often great in behavioral terms: people will cut their savings first, their mortgages last.

And a couple who struggles to pay a higher-than-they'd-like mortgage in their 30s so their kids can go to the fancy Montesorri school, will be able to sell this position (to the next generation) in their 60s. Yes, some neighbourhoods come up and come down, but they generally don't lose all their value. In fact, if I wanted to design a saving scheme for 30-year-olds with kids, tying it to a good school for their kids would actually be the way to go. Not that I want to do this (I find it a too disturbingly paternalistic: "if you want your kids to go to a nice school, you need to save for your retirement"), but it makes behavioral sense.

Divisions

We tend to think of political divisions as left-right, but there are at least a few other important divisions:

1. pundits vs politicians (which is often pundits/public opinion). Left-wing and right-wing pundits will often agree on some issues and so will left-wing and right-wing politicians. Except that politicians will disagree with the pundits.

2. The extremes vs the centre. Look at who is saying do not bailout the banks: the extreme-left and the extreme-free-market right. Which is why you have Garett Jones approvingly quoted J. Stiglizt on banking regulation.

The centre is there, Very Serious People of the left and the right, bailing out the banks. The fringes, of the left and the right, protest. The left-wingers say how this is just an example of what is wrong with capitalism. We, on the right, say how this is just an example of how we are becoming socialist.

Austerity

1. Austerity is a mood. It is the mood of sacrifice, of bourgeois ascetism. It invokes Protestant sacrifice and a cleansing effort to redeem ourselves of sin.

2. Austerity is not a policy, although some policies may be said to embody austerity.

3. Different policies can be austerity. The same policy can be austerity and non-austerity.

4. Love of austerity is a disease of the Right, but the idea that we have sinned economically and need sacrifice to atone appeals to the Western psyche on a deeper level than the left-right divide (and much left-wing is Right-wing at a deeper level).

This was motivated by listening to callers in Forum TSF (a Portuguese radio call-in show which goes during my commute) being largely against austerity. However, a few argued that what was needed instead were more cuts in governmental spending (as opposed to higher taxes).

It seems that calling a policy a growth policy means "I like this" and calling it an austerity policy means "I don't like this."

Salary Cuts?

Someone on the Right says that wages need to be cut and, predictably, the Left goes bananas: how can people survive if their wages are cut?

Someone on the Left says that inflation should be higher and, predictably, the Right goes bananas: how can people survive if their cost of living goes up?

It's all a joke (because terms get mixed up and nobody specifies whether they mean real or nominal cuts) and fake outrage.

(Libertarian Welfare State) Introduction

Here is a first draft of an introduction to my book.

Comments are welcome.

Despite all the rhetorical polarization in modern day America, there is central ground on which both the Democrats and Republicans agree. The Democrats are not socialists (they will not completely nationalize industry and hand it to politically appointed technocrats) and the Republicans will not eviscerate the institutions of the welfare state (in fact, the last time that Republicans controlled both the Congress and the Presidency, they expanded the welfare state, in the form of Medicare Part D). No matter who wins the next election, the American government will be about as big as it is now (at most a few percentage points bigger or smaller). Of course, there are differences, there are important issues at stake, but that should not blind us the middle ground on which progress can be made.

The question is not whether to have a government or not, not whether the government is the problem or the solution (it is rarely either, but it can often be a hindrance or a help), nor even whether to have a welfare state or not. The question is, which forms the government it should take. This book will be part of this conversation.

There is a role for the state in guaranteeing everyone a set of basic goods so that they may fully participate in society as equal citizens. This book will not question this premise. However, the way in which state institutions perform their tasks does not always respect the recipients of such aid. The usual charge is that they breed dependency or complacency. I will also argue that they insult its recipients.

The welfare state is a big subject. I will focus on a few subjects: education, health care, basic income provisions, and the environment. The environment is, strictly speaking, not a welfare state topic, but it fits the rest of the book.

I will discuss how American institutions currently operate and talk about alternatives. These will not be utopian alternatives, but we will see examples from both American states and local regions or other societies. In particular, a few societies will keep coming up, the S-countries: Singapore, Sweden, and Switzerland. Neither is a perfectly good model for the US to follow. Singapore is a dictatorship and, no matter how mild of a dictatorship, its political system is abhorrent. Still, we can look at some of their economic policies as examples. Sweden and Switzerland are both democracies, but are small countries, with a culturally and racially homogeneous population (very different from the US). Still, we can learn from their examples. Denmark and Finland, even though they do not start with an S, will show up as well. The Nordic countries are often darlings of the Left, but they could as well be darlings of the free-market Right.

It may be the case that a complete rewrite of the system to a Universal Basic Income as favoured, for example, by Charles Murray, is a much better alternative. However, my focus here is, to borrow a phrase from the blog Marginal Revolution, small steps to a much better world.

There are a few interlocked goals to this book. One is to save the economic freedom arguments from those who have used them (and often abused them) from the conservative side. For example, conservative activists will often use the language of property rights to defend zoning laws that keep poor, dark-skinned, people away from rich people. However, zoning laws are very much anti-free-market. See the quote in this blog post for a perfect example. Matt Yglesias makes the same point in his wonderful book The Rent is Too Damn High.

The other is to present free-market solutions to social problems not only as more efficient than current alternatives (which is how they are typically defended), but as morally superior. Not morally superior only because they involve less coercion or better respect property rights (the traditional libertarian goals), but morally superior because of the way in which recipients are treated. At the interface of the welfare state and the recipients, there are no magic rights, but a real interaction between recipients and bureaucracies. The alternative models I propose here will empower (in the literal sense of the word, will give power to) the recipients.

A family who approaches a school system with a voucher that gives them choices is more empowered and will get more respect than a family who, because they cannot afford a private school, approaches their failing neighborhood school.

There is always almost complete choice for parents who can afford it. Well-off parents can resort to private schools or simply buy a house in their desired school district. The discussion is only whether that choice should be extended to not so fortunate parents. We should not lose track of this simple fact.

In fact, if the current system was a voucher system, then I do not think that there would be very strong arguments against moving to a limited-choice system (currently, in the US, we can find systems ranging from voucher to assigned school as well as many systems in between where there is a certain amount of choice, but not complete choice).

In the Eduction chapter, I will discuss the empirical evidence on school choice and whether children benefit from switching schools under that system. I think that there is evidence for a small positive effect, but even if there was no effect on grades or other outcomes, school choice would be the more moral system because it treats recipients with greater respect.

In other chapters, I will reverse the focus and look at provision of services. Too often the focus of welfare discussion is on the demand side. That is, how to pay for it? Almost all of the discussion on health care reform in 2008--10 was about how to pay and who should pay, given a fixed set of resources. In the health care chapter, we will look at the other side of the ledger, how to provide services and I will argue that health care costs are so high, at least in part, due to over-regulation in the provision of services. If it was easier for doctors trained abroad (including Americans who attended medical schools in other countries) to practice in the US, if it was easier to provide medical services in innovative ways; then health care could be cheaper for everyone. But over-accreditalization (demanding that even subsidiary staff have advanced degrees) and too many barriers to innovation have driven up costs. Again, we need not see the alternatives as either no-regulation or our current system. Every regulation has costs and benefits and the US has too often taken the view that no cost is high enough.

This is not a partisan book. I hope that both Democrats and Republicans can learn something from it and see that the middle ground is larger than the rhetoric lets on.

How to Leave the Euro

How to Leave the Euro in a Few Easy Steps:

1) At 18.00 on a Friday evening, announce that (a) the New Escudo will be legal tender for all contracts in Portugal and (b) all existing contracts are now converted at the rate of 1 Euro = 100 NE (New Escudos). All bank withdrawals at ATMs will be suspended while new notes can be distributed, but the automatic payment system will start working in New Escudos in less than 24 hours.

It is the conversion of contracts which is the most important step. If bank accounts were kept in Euro, everything would work just fine too, but I expect that the government will actually want some of those Euros for itself. So expect your bank account to now contain New Escudos.

After this, we are almost done.

2) Print money and mint coins as fast as you can and start giving them out at ATMs. I expect this to take a few weeks to fully normalise, but small amounts should be available for withdrawal by Monday (some printing/minting could be done ahead of time). Withdrawals would still be limited due to limited availability of notes and coins, but Portuguese people use electronic payments a lot and they would be working. A limit of 2,000 NE (equivalent to 20 Euro) per day would allow for small cash payments (drug dealers and other users of large cash transactions would be able to continue to operate in Euro).

3) Set up special courts to deal with the fall-outs. Almost all contracts are clearly under Portuguese Law and would be converted to NEs, so no questions there. It is only international contracts that would need sorting out. Of those, a large fraction could simply be renegotiated (it doesn't matter at what value they were set by the government, as they would be ripped apart).

Only a few would actually need a court decision. For those, make decisions as fast as possible in a way that is generally well-accepted by all (even if they are not happy). For this, one would need, at least, the acquiescence of the EU powers-that-be.

None of this is covered by any EU treaty or international law. But, hey, it's the EU, who cares about legality? (Unless by legal you mean what Germany wants or can be guilted into paying for, which is the legal standard that has traditionally been used in EU matters).

That's it.

Of course, by 18.01 on Friday evening, the NE would be trading at 1 Euro = 150 NEs or so, which is the point. It's 5 years of austerity in 5 microseconds.

The New Portuguese Central Bank can now allow more inflation and keep NGDP growing stably.

Money is mostly about coordination. Switching the currency is a major discoordination event. However, if it is done well, and there is a proper expectation that the system will henceforth be stable, then the one-time price that is paid would be worth it to get away from the ECB straight-jacket.

On the other hand, it might actually reduce uncertainty. Right now, nobody is sure of who (and most importantly, when) will leave the single currency. By settling this question, coordination might actually improve.

Why Portugal Should Leave the Euro

and so should Greece and Ireland, but Italy and Spain can stay, along with Belgium.

1. Here is the evolution of NGDP in the euro zone and a few select countries (normalized to start at 2002):

We see the typical large fall in 2008 followed by a new trend line. I added a dotted horizontal line from the 2008 value. In this environment, we should expect that the nominal effects lose importance every day as the new growth curve starts to assert itself.

Note that Germany was doing worse than the rest of the EZ before 2008, **but has been doing better since the crisis*, catching up.

2. Now, look at the PIIBGS (the black line is the same as in the plot above):

3. Greece is a basket-case and its statistics are all marked provisional (even those from 10 years ago). But both Ireland and Portugal have (nominally) stagnated since 2008. Portugal has had no nominal growth at all!

4. Now, while I too find the suggestion that the European Central Bank is unable to inflate borderline ridiculous. However, it is possible that the ECB is unable to make NGDP grow in the PIIGS without unacceptable levels of inflation in the rest of the EZ. It is possible that, even if they wanted to, the ECB could not raise NGDP in the periphery without major negative effects in the centre.

Banks in Germany are charging fees to have people deposit their money there. Banks in Portugal are desperate for savers (partially because it was decided that now was the right time to raise their reserve requirements, partially because of capital flight).

5. By going back to the Escudo, the Portuguese Central Bank would be able to inflate back the economy, the state's debt would be suddenly much more manageable as would its large wage and pension bill (the implied debt to current and former workers dwarfs the debt to bond holders). It could do all the austerity it plans to do over the next five years in about five microseconds (no exaggeration here, this is about how long it would take for the New Escudo to devalue, taking down the value of public servant wages and pensions). Then, growth could resume instead of this morass.

6. The danger is that the state would use the opportunity for a bit of state gangsterism and take over some people's property and go all Argentina on us. Logically, these are separate questions: whether to be gangster and whether to remain in Euro. Ideally, capital controls should be avoided (although, really, anybody that still has large savings in Euro in a Portuguese bank account is asking for it). Still, if this is not done now by a reasonable government, it will be done later by an unreasonable one.

Esquerda ou Direita?

A mim, não me assustam os movimentos de extrema-esquerda nem de extrema-direita. Podem ser responsáveis por crimes, e são-no, incluindo homicídios; mas não são perigosos, por si e hoje em dia, para a democracia na Europa.

Os movimentos que me assustam são os movimentos sincréticos que não se percebe bem se são de esquerda ou de direita (como eram os fascismos ou o nazismo). Assusta-me muito mais a Le Pen-filha que se diz à esquerda dos sindicatos do que me assustava o Le Pen-pai. A esquerda-nacionalista (e anti-semita) ou a direita-esquerdista podem ser perigosas.

E a confusão em relação à União Europeía está a começar a tomar contornos que, se Portugal não é a Húngria com um governo nacionalista e contra o neo-liberalismo europeu, podem ser a semente para movimentos semelhantes.

Em Portugal, os partidos de extrema-esquerda começam a namorar o apelo nacionalista. O PCP sempre foi para a cama com o nacionalismo para depois, de manhã, dizer que são só amigos. No BE, é um flirt mais novo, mas perigoso. Os intelectuais de esquerda devem ter cuidado com os seus partidos. O apelo ao nacionalismo funciona e traz votos, mas podem perder o controlo. A combinação de um apelo nacionalista a um apelo socialista pode ser demasiado eficaz.

(O mesmo se aplica um pouco ao contrário quando o Paulo Portas se diz à esquerda do PS, mas o CDS-PP é um partido do regime, um partido burguês. Os partidos burgueses não são perigosos. O Manuel Monteiro encaixariam melhor no molde acima, mas ele e os seus apoiantes não chegam para encher um taxi.)

Left or Right?

I am not scared by either the extreme-left nor the extreme-right. Yes, they can easily be criminal (and they are criminal, including murder). But they are not dangerous, today, for democracy in Europe.

The dangerous movements are those that are difficult to say whether they are left- or right-wing (like fascism and, especially, nazism often defied simple categorization). I am much more scared by the Le Pen daughter who claims to be to the left of the unions than I was about her father who was more clearly of the right. The nationalistic left (or anti-semite left) or the nationalists who take up leftist economic can be very dangerous.

The confusion w.r.t. the EU is starting to get to a point where it can brew a movement like this. In Hungary, there is a strongly nationalistic movement who decries neo-liberalism. In Portugal, the danger will probably appear as leftist movements become increasingly and openly nationalistic. This is still embrionic, but leftists should watch out over their own parties. The nationalistic appeal is effective, but it can get out of control.

Alberto João Jardim

Portugal é a Alemanha da Madeira.

O governo central (do continente) terá de salvar as contas do governo regional que gastou mal e mentiu sobre isso (algumas das mentiras serão certamente criminosas, mas, em Portugal, ninguém se preocupa muito com tais questões procedimentais).

O Alberto João Jardim, é muitas vezes gozado pelas elitas de Lisboa, mas pelo menos o Bloco de Esquerda devia olhar para o senhor com mais atenção. É que ele se comporta em relação ao continente exactamente como os bloquistas dizem que o governo português se deve comportar em relação à União Europeia e à Troika.

Cada vez que vejo ou leio sobre o Alberto João sorrio a pensar que isto é exactamente aquilo que o BE defende:

1. O problema não é ter-se gasto demais, é dos de fora (continente/Troika)
2. Eles não respeitam a soberania regional/nacional
3. Se não me derem mais dinheiro, eu ameço ser independente
4. Ou não vou pagar a dívida
5. Faço tudo pelo povo

Se o Alberto João ainda tem ambições em Lisboa, devia fazer uns telefonemas ao Francisco Louçã e ser candidato pelo Bloco.

Alberto João Jardim

Portugal is Madeira's Germany.

The central government is being asked to bail the regional government out of its mispending, its bungling of the budget, its lies (including at least allegedly crimes, but, it's Portugal so nobody cares about such "procedural" issues).

Alberto João Jardim, Madeira's elected-for-life President, is often laughed at by Lisbon's elite. But, at least the left-wing Bloco de Esquerda (BE) should look at the man more carefully. He behaves with respect to the mainland exactly as they argue that the Portuguese government should behave with respect to the EU.

Everytime I see or read about Alberto João, I cannot help but smile. Here's how Alberto João is BE's model prime-minister:

1. Everything is the outside's fault (mainland/Troika)
2. They don't respect the sovereignty of Madeira/Portugal
3. If you don't give me more money to mispend/invest in the economy, I will threaten to leave the Union (with mainland, EU)
4. Or I won't pay the government debt
5. I do it for the people