What Coase Actually Believed

It’s remarkable how often people are remembered for believing or doing things that they in fact opposed. Professor David Ball recently passed along this gem from the famous economist Ronald Coase.

The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave.

Source: The Firm, the Market and the Law, University of Chicago Press, Chicago, 1988. p.174.

Flea markets

One of the local sports round Perpignan, where we’ve just bought a house, is going to village flea-markets on Sundays. They don’t go in for car boots: trestle stalls are rented cheaply by the organising villages, so the atmosphere is pleasant, even for a reluctant shopper like me. This is Latour-bas-Elne. On a given Sunday, there are half-a-dozen such dos.

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How do flea markets by amateurs match up against the idealised markets of Walras and Arrow? Continue Reading…

The most important book of 2015

I have wrung my hands in the past, in this space and elsewhere, about the collapse of a workable market for digital goods.  I find it hard to get people as excited about this as I am–if I still had enough hair for anyone to notice it would be on fire–but I have some help from Scott Timberg now  so I am going to try again.  Short version: buy this book, Culture Crash, and read it. Now. I believe it is the Piketty of 2015, and the first book I’ve stayed up to read straight through at one sitting–sometimes literally in tears, both of pain and of rage– in years.  It is not just about culture, but about whatever really big issue you lie awake worrying about.

Long post (no, not a substitute for the book; read it), get a cup of coffee  .

Continue Reading…

Sarah Chayes on kleptocracy as a security issue

Now that the teaching quarter is over, I can get to my piled-up “must-read” list.

Sarah Chayes’s Thieves of State is high on that list. My students doing their master’s project on income maintenance in Afghanistan found it invaluable.

Fortunately, today I was treated to the low-cost substitute for reading a whole book: Chayes gave a talk at UCLA. She wasn’t as funny as she was on The Daily Show, but the analysis was pretty damned compelling.

I’ve always made fun of “corruption” as an academic topic because of its excessive focus on relatively minor cash payoffs, to  the exclusion of other forms of rent-seeking. That’s not an objection that anyone could raise to Chaye’s presentation. Even the talk was too complex to be well-summarized in a blog post, but these seemed to be the key points:

1. The idea of corruption as a malfunction in governance due to poor institutional design misses the point with respect to full-on kleptocracy, which is an increasingly widespread form of government (Afghanistan, Iraq, Russia, Ukraine, Pakistan, Nigeria). In a real kleptocracy, stealing isn’t something that happens in the course of governing; rather, governing is a means of stealing, and what look like bugs in the system are in fact features from the viewpoint of the people running it.

2. Insurgency, whether it takes a religious form or not, is often motivated primarily by corruption.

3. Petty extortion always involves insult as well as financial injury, and sometimes involves physical injury. That makes people mad; sometimes mad enough to want to kill a cop. When someone from ISIS or Boko Haram (or, I would have added, Sendero Luminoso) hands such a person a gun and tells him that cop-killing is not only justifiable but is a religious or patriotic duty, he may well take up the suggestion.

4. In a real government, taxes are paid by ordinary people and businesses to the central government, and then sent back down to officials and contractors who do the work and to citizens and businesses in the form of services and benefits. In a kleptocracy, lower-level officials exact bribes and extortion payments from citizens and businesses, and pass the money up the chain.

5. Sometimes there’s a single fount of corruption. Sometimes there are cooperating kleptocratic networks. Sometimes those networks compete rather than cooperating, in which case politics becomes a blood sport.

6. Lots of Westerners shrug and say, “Well, that’s the way business is done over there; it’s in the culture.” But no one Chayes has talked to living under kleptocracy has that viewpoint; they’re all outraged.

7. The free flow of international capital, currency convertibility, and the sale of state assets to private parties have increased the opportunities for, and benefits of, massive corruption. A Soviet official could have a dacha, but not much of a Swiss bank account, since the ruble wasn’t actually worth anything. A Russian kleptocrat can have a bank account in London and a $20 million apartment in New York.

8. Ignoring corruption and governance in order to deal with “security issues” – or, worse, making corrupt payments to kleptocrats to keep them on our side (in Iraq or Afghanistan, for example) gets the causal arrows wrong. Corruption and government are security issues, perhaps the paramount ones.

9. Since the money winds up in the West, Western institutions, including governments, have both culpability for allowing the theft to continue and some capacity to tamp it down.

10. A serious attack on kleptocracy would involved the same sort of careful network diagrams that characterize counter-terrorist work. And it would use visa denial and in rem seizure of assets in the U.S. as systematic techniques.

11. Kleptocracy can happen here.

The talk included lots of interesting historical material (including an analysis of Luther’s 95 Theses as an anti-corruption tract) and several terrific illustrative events. Here’s my favorite. Several months before Boko Haram kidnapped 300 girls, the head of the Nigerian Central Bank – brought in to bail out the banking system in the 2009 financial crisis – discovered that $20 billion had gone missing from the state’s oil revenues. When he announced that he was going to examine banking records to figure out who had stolen the money and where had landed, the President of Nigeria fired him.

Chayes then asked how many in the audience knew about the kidnappings (all of us) and how many about the theft of $20B an the firing of the central banker (three out of about 75, at a law school talk advertised as being about corruption). [No, I wasn't among the three.]

The punchline, from Chayes’s viewpoint: when the President of the United States offered the President of Nigeria sympathy, and aid against Boko Haram, in the wake of the kidnapping, no one asked about the $20 billion, or about who had stolen the money that was supposed to pay for the bullets that the Nigerian soldiers fighting Boko Haram didn’t have. Terrorism is punished, or at least is the source of serious outrage; systemic corruption is shrugged at.

Sounds like a problem we ought to do something about. And – for the first time – I now think that there is something to be done about it, over and above my usual prescription of raising the salaries of cops and other civil servants so they can afford to be honest.

Fidelity investments wrote their own little investment card. Guess what is missing?

Fidelity Investments today tweeted “6 steps to pay off #debt while saving money at the same time.”


These are pretty good rules, nicely presented. Indeed they remind me of something I first posted here at Samefacts:


That index card is probably my most famous contribution to American financial journalism. It was featured all over the place, and has been copied, plagiarized, modified, even translated into Romanian.

Somehow, Fidelity omitted a few items. Consider these two… Continue Reading…

The President was right (though politically clumsy) to go after those luscious 529 college accounts

At the State of the Union, President Obama proposed limiting the tax advantages of 529 college savings accounts. If you’re an affluent college parent, you probably already know this. If you’re not a parent and/or you are not affluent, you probably said “Huh? What is a 529 account?” Which rather exemplifies the problem.

I have 529s for both of my daughters. I recommend these to all my friends with children. These accounts allow you to accumulate tax-free investment gains to help finance your kids’ college. These also provide a good mechanism for relatives to chip in on birthdays and holidays. Given time to accumulate interest, a few hundred dollars a year from Grandma can easily accumulate to cover a whole semester at a state college. 529s provide a convenient nudge to help you save more, too, though the net impact of such tax-advantaged savings vehicles appears to be quite limited.

The president’s proposal produced an entirely-predictable uproar among affluent families and within the industry of financial and college-savings advisors.  Leading Democrats such as Nancy Pelosi and Charles Schumer immediately ran from the proposal.  Political heat was so intense that President Obama was forced to beat a hasty retreat and to abandon the proposal….

Continue Reading…

Mitt Romney Says the Thing That Is

I notice that progressive bloggers and Tweeters are pointing and laughing at poor little Mitt Romney for his sudden outburst of populism. But it seems to me that, as pleasant as laughter is, what’s really called for is a smile of grim satisfaction. He has told the truth – albeit probably insincerely – and there’s every reason to hope that he and his party will come to regret it.

It is among the core Blue-Team beliefs  that the current level of income inequality is unjust, inefficient, and socially destructive, and that public policy should attempt to reduce the degree of inequality.

The Red team – up until today – has believed, or at least said, that market-driven inequality reflects natural differences in economic contribution and is therefore just, while taking from “producers” and “job creators” and giving to the “47%” is unjust, and that the great inequality of outcome maintains incentives and thus contributes to efficiency. They love to criticize redistributive policies as “class warfare” and emphasize the importance of making the pie bigger rather than carving it up more equally, along with (formal) equality of opportunity rather than equality of result.

So when Mitt Romney describes rising levels of disparity – the rich getting richer while the number of poor people increases – as “income inequality getting worse,” he is making a major rhetorical concession to the good-guy side.

Of course he doesn’t really believe it, but hypocrisy is the tribute vice pays to virtue. Once the GOP concedes the claim that, from where we stand now, more equality would be an improvement, I don’t think it’s hard for the Democrats to win the argument about whose policies would do better at moving money from the rich to the middle class and the poor.

New nonsense from Heritage

Does anyone at the Washington Post read their Op-Eds before they go up? Like, a quick check for coherence and plausibility?  Today we have the Heritage Foundation’s chief economist (really) getting everything about the Laffer Curve wrong.

OK, let’s go over it again, time to rewhack the zombie.  The LC is a graph of government revenue against income tax rate.  Not GDP, not the sum of human happiness, not moral standing of a nation in the world, not any of those things: government revenue. The curve, like Ohio, is zero at the ends and high in the middle, duh; if the government takes all of everyone’s income, no-one will bother to earn any income and therefore not  pay any taxes; if it doesn’t take any, it doesn’t get any.  Again, duh.  Where the maximum is, and how steeply it slopes down where, are debatable with data, but a hat-shaped curve that is zero at the ends is assuredly the correct description of this relationship. Yes, Virginia, there is a Laffer Curve. No-one ever said there isn’t; how could there not be?

The LC, sketched without units on a napkin, is trotted out by people who want to make taxes lower: “see, the government could actually get more money if tax rates were lower!” (Notice that the tax rate axis always changes  from average income tax rates to top rates (what only a very few very rich people pay, and the only rates the Heritage Foundation’s funders care about) in this conversation.) To use it that way, you have to believe the high point is to the left of where we are now, not just that the curve exists, and this argument never, ever, comes with any data bearing on that. But you also have to be a liberal who wants government revenues to be higher!

Even on the Heritage payroll, Moore can’t recite the traditional Laffer refrain with a straight face, but after backsliding dangerously, he falls into complete heresy:

But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve….It’s a happy byproduct that [economic] growth will help generate higher revenue than the government’s “static” estimates always undercount.

Happy? Stephen, Stephen, revenue is what the government uses to pay its jack-booted thugs to take away your freedoms. Where is Grover Norquist, when we need him to ferret out these red Commies at Heritage, and explain to de Mint that the party line is ” less revenue for government, not more”! Why is Moore not on the street this very morning, with a tin cup and a badge of shame?

Moore’s argument wanders through a bunch of post hoc ergo propter hoc anecdotes that prove exactly nothing, and he  is happy to wrap up by reporting that middle-class incomes going up 30% from 1980 to 2005  is (i) upward mobility (ii) caused by tax cuts. Well, the middle quintile’s share of after-tax income went from 16 to 15% during that time; he lowest quintile’s from 6 to 5.  The top 1% were quite upwardly mobile, as they scarfed up pretty much the whole increase in national wealth over that period, and their share of after-tax income went from 9 to 15%.  Except at the Heritage Foundation, that’s not upward mobility, that’s the rich getting ahead while everyone else stands still or falls behind,  exactly what you would expect when you collect less taxes from the very richest people and otherwise ply them with favors like carried interest deals.

Yes, there is a Laffer Curve. No, it tells us nothing about what tax rates should be. Yes, the Washington Post Op-Ed page needs warning signs.

 

 

Economist fail

No, not “an economist”, the magazine.  In a long discussion of winners and losers from low oil prices, we find what has to be the stupidest assertion in a mainstream publication this month, maybe even ever, who knows:

But the overall economic effect of cheaper oil is clearly positive.

Really. This is hard to even talk about without insulting the intelligence of our readers, but it’s in The Economist, for Pete’s sake. How does that work? Does The Economist think ‘overall economic effects’ just end in a few decades, before the, um, economic effects of climate change really kick in? Has a radical Christian sect with a line on the rapture schedule taken them over?  Or has the law of demand been repealed when we weren’t looking, so lower prices cause people to use less instead of more?

Sheesh.