Moral Hazard: A Tempest-Tossed Idea

by Shaila Dewan

New York Times
February 25, 2012

The reports outraged America: In the wake of Hurricane Katrina, people who fled the ravaged Gulf Coast were spending disaster relief, paid for by taxpayers, on tattoos, $800 handbags and trips to topless bars.

It turned out that few, if any, Katrina evacuees actually did any such thing. A vast majority used debit cards issued by FEMA to buy necessities like food and clothing. But the damage was done: FEMA swore that it would never hand out money like that again.

Behind this brouhaha was an idea that Americans seem particularly preoccupied with. It is called “moral hazard” — an obscure insurance term that has taken on new currency in our troubled economy. We’ve heard a lot about moral hazard lately, first in connection with the bailouts for big banks, and now with efforts to help homeowners who got in over their heads.

Moral hazard sounds like the name of a video game set in a bordello, but in economic terms it refers to the undue risks that people are apt to take if they don’t have to bear the consequences. In other words, if the money is free, why not spend it on a designer purse? If you know that you’ll be bailed out, why not roll the dice on some tricky mortgage investments — or splurge on a home that you can’t really afford?

Moral hazard became part of the national conversation in the financial crisis of 2008, when ordinary Americans wondered why they should rescue banks that helped drive the economy off a cliff. Now those same banks point to moral hazard to explain why they can’t do more to help people with mortgages. And it’s not just banks — the Tea Party movement was inspired by outrage over a government plan to, as Rick Santelli put it in a famous rant on CNBC, “subsidize the losers’ mortgages.”

The cherished American ideal of self-reliance has a flip side: discomfort with the idea of bailouts and safety nets. The notion that even a small portion of such aid might find its way to the undeserving can be enough to scuttle support, or restrict help so drastically that few can use it. The specter of moral hazard haunts a basic tension in American life: to what extent are people responsible for their own problems? The more trouble you’re in, moral hazard suggests, the less we should help.

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Το κόστος της γραφειοκρατίας ακυρώνει τις μειώσεις μισθών

Καθημερινή
25 Φεβρουαρίου 2012

Στο κενό κινδυνεύουν να πέσουν οι προσπάθειες των επιχειρήσεων με εξαγωγική δραστηριότητα, καθώς οι δαπανηρές και χρονοβόρες διαδικασίες κατά την εξαγωγή των προϊόντων καλά κρατούν. Αν και κάποιες υπηρεσίες από τα τελωνεία παρέχονται ηλεκτρονικά, αυτό αφενός δεν ισχύει σε όλα τα τελωνεία της χώρας και αφετέρου απομένουν πολλά βήματα ακόμη για τον πλήρη εκσυγχρονισμό του συστήματος. Επιπλέον, αν και από τον Δεκέμβριο του 2010 ο υπουργός Ανάπτυξης έχει εξαγγείλει την απλούστευση των διαδικασιών για τις εξαγωγές, μέσω της δημιουργίας του πληροφοριακού συστήματος Single Window, το οποίο θα λειτουργεί κατά τα πρότυπα της Υπηρεσίας Μιας Στάσης, αυτό ακόμη δεν έχει καν θεσμοθετηθεί. Ακόμη, βεβαίως, και όταν συμβεί αυτό θα απαιτηθεί σημαντικό χρονικό διάστημα μέχρι να ολοκληρωθεί ο ανοιχτός διεθνής διαγωνισμός για την κατασκευή της συγκεκριμένης πλατφόρμας.

Με άλλα λόγια, τα όποια οφέλη της εσωτερικής υποτίμησης εξανεμίζονται, καθώς το κράτος καθυστερεί ακόμη την υλοποίηση συγκεκριμένων υποχρεώσεών του οι οποίες θα διευκόλυναν την επιχειρηματική δραστηριότητα, αλλά και την εθνική οικονομία. Μοιάζει για μια ακόμη φορά σαν να προσπαθείς να γεμίσεις με γάλα μια τρύπια καρδάρα: οι επιχειρήσεις συμπιέζουν κόστος και κέρδη, μειώνοντας μισθούς και συμπιέζοντας τα περιθώρια κέρδους τους έτσι ώστε τα προϊόντα τους να γίνουν ανταγωνιστικά, αλλά την ίδια ώρα επιβαρύνονται λόγω των γραφειοκρατικών διαδικασιών.

Τι σημαίνει για τις ελληνικές επιχειρήσεις το διασυνοριακό εμπόριο σε χρόνο και χρήμα; Οι συντάκτες της έκθεσης Doing Business της Παγκόσμιας Τράπεζας ήρθαν στην Ελλάδα και κατέγραψαν το ακόλουθο παράδειγμα: εταιρεία περιορισμένης ευθύνης σε περιαστικό χώρο της Αθήνας, μεσαίου μεγέθους με 60 άτομα προσωπικό θέλει να εξάγει ξηρό φορτίο σε κοντέινερ 20 ποδών διά θαλάσσης. Το περιεχόμενο του φορτίου δεν είναι επικίνδυνο, ούτε ευαίσθητο, δεν χρειάζεται δηλαδή να βρίσκεται σε ψυγείο, ούτε να συνοδεύεται από κάποια ειδικά πιστοποιητικά π.χ. φυτοϋγειονομικού ελέγχου. Για την εξαγωγή ενός μόνο κοντέινερ απαιτούνται 20 ημέρες (εκ των οποίων οι 14 για την προετοιμασία 5 εγγράφων, 2 για τον εκτελωνισμό και τον έλεγχο, 2 για τη διαχείριση φορτίων σε λιμάνια και τερματικούς σταθμούς και 2 για την εσωτερική διαμετακόμιση και διαχείριση) και το κόστος ανέρχεται σε 1.153 δολάρια (860,44 ευρώ). Δεν είναι τυχαίο που η Ελλάδα σε αυτό τον τομέα, κατατάσσεται στην 84η θέση μεταξύ 134 χωρών.

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Περισσότερα ζευγάρια περνούν βέρες στο δημαρχείο

Καθημερινή
25 Φεβρουαρίου 2012

Στροφή στον πολιτικό γάμο πραγματοποιούν τα τελευταία χρόνια οι Ελληνες, σαν αποτέλεσμα κυρίως της οικονομικής κρίσης και της λιτότητας. Οπως δείχνουν τα πρώτα στοιχεία που συνελέγησαν από μεγάλους δήμους της Αττικής, αλλά και άλλα που είδαν το φως της δημοσιότητας από την επαρχία, οι πολιτικοί γάμοι αυξάνονται τα τελευταία χρόνια σε αριθμό, την ώρα μάλιστα που ο συνολικός αριθμός των γάμων μειώνεται. Ετσι, οι πολιτικοί γάμοι σε πολλούς δήμους υπερτερούν ήδη των θρησκευτικών.

Στα μέσα της δεκαετίας του ’90 τα ζευγάρια που επέλεγαν τον πολιτικό γάμο ήταν πολύ λίγα. Για να φορέσουν βέρες στο δημαρχείο προσέφευγαν κυρίως ζευγάρια που επείγονταν για διάφορους λόγους, άνθρωποι με διαφορετική θρησκευτική πίστη, ή που για λόγους συνείδησης και ιδεολογίας (άθεοι κ.λπ.) δεν επιθυμούσαν να παντρευτούν ενώπιον ιερέα. Η εικόνα αυτή έχει αλλάξει τα τελευταία χρόνια, όπου πλέον οι πολιτικοί γάμοι γίνονται κατά εκατοντάδες και διεκδικούν το προβάδισμα σε σχέση με τους θρησκευτικούς. Στον Δήμο Αθηναίων υπερδιπλασιάστηκαν σε σχέση με το 2003 - 2004, όταν γίνονταν περίπου 300 και τα τελευταία δύο χρόνια ξεπερνούν τους 600. «Στον Πειραιά ο αριθμός των πολιτικών γάμων έχει ανέβει και σταθεροποιήθηκε σε υψηλά νούμερα σε σχέση με παλαιότερα», λέει στην «Κ» ο κ. Παναγιώτης Κουβάτσος, πρόεδρος του δημοτικού συμβουλίου. Στον Δήμο Ηλιούπολης οι πολιτικοί γάμοι ήδη αποτελούν την πλειονότητα των τελεσθέντων τα δύο τελευταία έτη. Τους 600 ετησίως έχουν φτάσει οι πολιτικοί γάμοι και στον Δήμο Περιστερίου, υπερτερώντας των θρησκευτικών. Σημαντική αύξηση έχουν και στον Δήμο Νέας Ιωνίας.

Δεν πρόκειται μόνο για φαινόμενο της πρωτεύουσας. Και στην επαρχία, εκεί που πιο δύσκολα ξεπερνιούνται ήθη και παραδόσεις, οι πολιτικοί γάμοι αυξάνονται δυναμικά. Στον νομό Σερρών διπλασιάστηκαν και ξεπέρασαν τους θρησκευτικούς πέρυσι. Το ίδιο και στους δήμους της Βόρειας Εύβοιας.

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Shaping risk preferences across time

by Alison Booth, Lina Cardona Sosa and Patrick Nolen

Vox
February 20, 2012

Some blame women’s under-representation in high-level jobs on differences between the sexes in risk aversion and competition. But are these differences in behaviour hardwired or learned? This column describes a study that tackles this thorny question with a controlled experiment in single-sex and mixed classrooms in a British university. Women are found to become far less nervous about uncertainty over time with the men out of the room.

The majority of experimental studies investigating gender differences in risky choices find that women are less willing to take risks than men. This research is summarised in Eckel and Grossman (2008) and Croson and Gneezy (2009). However, these experimental studies investigating gender differences in risky choices typically do so only at a single point in time.

Why might there be gender differences?

Only recently have economists begun to explore why women and men might have different risk preferences. Broadly speaking, those differences may be due to either nurture, nature, or some combination of the two. For instance, boys are pushed to take risks when participating in risky or competitive sports while girls are often encouraged to remain cautious. Thus, the riskier choices made by males could be due to the nurturing received from parents or peers. Likewise, the disinclination of women to take risks could be the result of parental or peer pressure not to do so.

In recent research (Booth and Nolen 2012), we present a recent experimental study exploring why girls and boys might have different risk preferences. Using adolescent subjects from two distinct environments or ‘cultures’, we examine the effect on risk preferences of two types of environmental influences – randomly assigned experimental peer-groups and educational environment (single-sex or coeducational). The experimental subjects were UK students in years 10 and 11 who were attending either single-sex or coeducational state-funded high schools. We find that the gender composition of the experimental group, as well as the gender mix of the school the student attended, affected decisions on whether or not to enter a real-stakes lottery. But our experiment was conducted at one point in time, and did not track changes over time.

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Young Mothers Describe Marriage’s Fading Allure

New York Times
February 18, 2012

Marriage has lost its luster in Lorain, Ohio.

Sixty-three percent of all births to women under 30 in Lorain County occur outside marriage, according to Child Trends, a research center in Washington. That figure has risen by more than two-thirds over the past two decades, and now surpasses the national figure of 53 percent.

The change has transformed life in Lorain, a ragged industrial town on Lake Erie. Churches perform fewer weddings. Applications for marriage licenses are down by a third. Just a tenth of the students at the local community college are married, but its campus has a bustling day care center.

The New York Times interviewed several dozen people in Lorain about marriage here. What follows are their stories.

Young parents spoke of an economy that was fundamentally different from in their parents’ time, and that required more than a high school education for fathers to be stable breadwinners. They talked of how little they trusted each other to be reliable mates, and of how the government safety net encourages poor parents to stay single.

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For Women Under 30, Most Births Occur Outside Marriage

New York Times
February 17, 2012

It used to be called illegitimacy. Now it is the new normal. After steadily rising for five decades, the share of children born to unmarried women has crossed a threshold: more than half of births to American women under 30 occur outside marriage.

Once largely limited to poor women and minorities, motherhood without marriage has settled deeply into middle America. The fastest growth in the last two decades has occurred among white women in their 20s who have some college education but no four-year degree, according to Child Trends, a Washington research group that analyzed government data.

Among mothers of all ages, a majority — 59 percent in 2009 — are married when they have children. But the surge of births outside marriage among younger women — nearly two-thirds of children in the United States are born to mothers under 30 — is both a symbol of the transforming family and a hint of coming generational change.

One group still largely resists the trend: college graduates, who overwhelmingly marry before having children. That is turning family structure into a new class divide, with the economic and social rewards of marriage increasingly reserved for people with the most education.

“Marriage has become a luxury good,” said Frank Furstenberg, a sociologist at the University of Pennsylvania.

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Life after death

Economist
February 18, 2012

For all the National Health Service’s hard work to boost organ donation, around 1,000 people die each year for lack of a transplant. The active waiting list numbers more than 7,600, and 10,000 may be a fairer reflection of need. As hypertension, obesity and the miracles of modern medicine proliferate, that gap is likely to increase—unless donation rates rise dramatically. Deceased donors are twice as numerous in Spain as in Britain, per million people (see chart). Even the EU average is higher. (Britain does better when living donors are included, but dead ones are more useful because they can part with a wider range of organs.) Why the difference?

For many the answer lies in Britain’s “opt-in” regime of informed consent. A potential donor has to signal his intent by enrolling on an official Organ Donor Register. Though 90% of Britons say they approve of donation, only 30% have signed up. Spain, and most EU members, have instead embraced some form of presumed consent, in which everyone is assumed to be a donor unless he expressly “opts out”. This week the British Medical Association (BMA), which represents doctors, urged switching systems. The devolved Welsh legislature intends to pass a law this year doing just that.

Not everyone is convinced this would increase donations. Among the sceptics is John Fabre of King’s College, London. Spain has an opt-out system and leads the league with around 32 deceased donors per million; so does Greece, and it lurks near the bottom with four. Americans, like Britons, have an opt-in system, but also one of the highest donation rates in the world. Culture and capacity may matter more than legal regimes. Spain succeeds by managing the medical requirements of organ donation superbly and selling it emotionally to the public.

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The Danger of Too Much Efficiency

by Barry Schwartz

New York Times
February 16, 2012

Critics of Mitt Romney’s activities at Bain Capital have been described, somewhat hysterically, as critics of capitalism. They’re not. But they are attacking something. And understanding that something can have enormous implications for the shape of our economic institutions and activities going forward.

What Bain Capital, and firms like it, do is try to increase the efficiency of the companies they buy. They try to get more with less — to eliminate waste. They are not interested either in creating jobs or destroying them. Nor are they interested in improving the lives of consumers by making products and services better and cheaper. They are interested in profit — for themselves and their shareholders. Sometimes a Bain success will lead to more jobs and better products. Sometimes it will not.

It may seem heartless to worship efficiency at any cost, including lost jobs and decimated communities, but it is important to understand that increased efficiency is the only way a society’s standard of living will improve. If your company raises your pay without becoming more efficient, it will have to raise its prices in order to pay you. This is true of all companies. And if all companies raise their prices to allow for higher wages, you will end up just running in place, with your higher wages exactly matched by the higher prices of the things you buy. It is only if your company and others find a way to pay you more without charging more that your living standard goes up. So if we want to make material progress, we must become more efficient. In addition, as markets have become ever more globalized, increased efficiency of American companies has become a condition for their very survival.

So firms compete to become more efficient, and we as consumers, along with Bain and its like, benefit from this competition.

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The EU's Emissions Trading System Isn't Working

Spiegel
February 15, 2012

Emissions trading, the European Union hoped, would limit the release of harmful greenhouse gases. But it isn't working. The price for emissions certificates has plunged, a development that is actually making coal more attractive than renewable energy.

In the perfect world of economic liberals, every commodity has its price. Limited supply makes goods more expensive and vice versa. That's how markets work -- at least in theory.

In practice, things often look different, and this is especially true when it comes to emissions trading, a business subject to a very different mechanism: laws dictated by the European Union.

Economists have generally praised the trading scheme as a nearly ideal instrument for reducing harmful carbon dioxide emissions. In this system, businesses purchase pollution permits, with prices determined according to supply and demand, in an efficient and self-regulating process. Companies that invest in environmentally friendly technology need to buy fewer certificates, or may even have some left over to sell.

But for the last half year, prices for CO2 certificates have dropped almost continuously, decreasing by about half, to around €8 ($10.60) per metric ton. Not even the closure of eight German nuclear power plants in 2011, and the resulting increase in demand for coal power, has done much to lastingly reverse the trend.

Michael Kröhnert, an emissions trader in Berlin, refers to the plunging prices as a slaughter. And he fully expects it to continue. "The spiral is spinning downward," he says.

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Direct democracy as a safeguard to limit public spending

by Patricia Funk and Christina Gathmann

Vox
February 10, 2012

As debt crises hit on both sides of the Atlantic, a safe haven for many investors has been Switzerland. This column looks at Swiss public spending over the last century and argues that one reason for its low debt may be its greater use of direct democracy, where people vote on individual policies, as opposed to representative democracy, where people elect others to make decisions on their behalf.

The current debt crisis in Europe and North America raises the question of how to impose spending discipline on governments and politicians. A country with historically low government spending is Switzerland, which many argue is related to the high use of direct democracy. Direct democracy is also prevalent in other countries such as the United States, where more than two thirds of the population lives in a state or city with a popular initiative. Comparing data on postwar spending in states with more or less direct democracy, the empirical evidence points to a strong negative correlation between a region’s spending level and the existence of direct democracy in both the United States and Switzerland (Feld and Matsusaka 2003, Matsusaka 2004).

What is the mechanism behind this negative correlation? Do citizens, if equipped with direct democratic participation rights, cause government spending to decline? Or, are citizens in areas with strong direct democracy just fiscally more conservative than voters in other areas – and therefore have lower public spending?

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The Marriage Problem: Why Many Are Choosing Cohabitation Instead

by Alice G. Walton

Atlantic
February 7, 2012

There are plenty of health benefits to marriage that those just living with a partner don't have, but we're afraid of the possibility of collapse.

Marriage is a big commitment, there's no doubt about it. It's natural to be a little nervous before jumping in. But the trends and recent studies suggest that more people today seem not only anxious about the prospect of marriage, they are shunning it. Of the various ways in which one can forge a family (marriage, cohabitation, or having a child without being married), cohabitation has become the most common.

One reason for this increased interest in cohabitation over marriage may not be the fear of the union itself, so much as a concern for the possibility of its collapse. In other words, it may be the looming prospect of divorce that's driving more people to choose the question "Will you move in with me?" over "Will you marry me?"

At the same time, research continues to show that marriage has measurable benefits, both mental and physical over cohabitation. This is particularly true as one ages. Since it doesn't seem as though the marriage rate will turn around any time soon, we have to wonder how to reconcile the fact that young people are declining to marry while older people are reaping its benefits.

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The Death (and Life) of Marriage in America

by Derek Thompson

Atlantic
February 7, 2012

The story we think we know is that the institution of marriage is crumbling and on the brink of oblivion. The real story is much more complicated.

National Marriage Week USA kicks off today, and for many people, a national booster movement for marriage could not come any sooner. The recession did a number on American matrimony, as you've surely heard. The collapse in marriage rates is cited as one of the most important symptoms -- or is it a cause? -- of economic malaise for the middle class. But the statistics aren't always what they seem, and the reasons behind marriage's so-called decline aren't all negative.

At first blush, the institution of marriage is crumbling. In 1960, 72% of all adults over 18 were married. By 2010, the number fell to 51%. You can fault the increase in divorces that peaked in the 1970s. Or you could just blame the twentysomethings. The share of married adults 18-29 plunged from from 59% in 1960 to 20% in 2010. Twenty percent!

What on earth is going on with these kids? Betsey Stevenson and Justin Wolfers tried to answer that question (among others) in their fantastic 2007 study "Marriage and Divorce: Changes and their Driving Forces."

The simplest summary of their findings is: It's really, really complicated. The full answer for the delay and decline of marriage would touch on birth control technology (which extends courtships by reducing the cost of waiting to get married), liberal divorce laws (which creates "churn" in the labor market by increasing divorces and new marriages), and even washing/drying machines (which both eliminate the need for men to marry lower-earning women to do housework and also free up women to work and study).

One important lesson from Stevenson and Wolfers is that, as much as it feels like things are changing very rapidly, a longer view on marriage trends reveals a more boring picture. If you pull back the lens, not to the 1960s but to the 1860s, the marriage rate and the divorce rate stick stubbornly to long-term trend lines.

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Euro zone strugglers lack innovative knack

by Alan Wheatley

Reuters
February 6, 2012

To get an idea of the economic mountain euro zone strugglers Greece and Portugal have to climb, consider this: per million inhabitants, they each filed fewer than eight applications with the European Patent Office in 2010.

Germany, with the advantages of scale that go with a population eight times bigger, lodged 335 patent applications per million residents. But the Czech Republic, of a similar size to Greece and Portugal, managed 16. Much-smaller Ireland boasted 112, according to calculations based on data on the EPO website.

Figures on research and development are a little better.

Greece spends just 0.6 percent of GDP on R&D, the same as in 1999. Portugal's R&D rose to 1.66 percent of GDP in 2009 from 0.69 percent a decade earlier but still lags the OECD average, which rose over the same period to 2.33 percent from 2.16.

Innovation matters because it is a key driver of competitiveness, allowing firms to win greater market share and feeding through into greater productivity.

Patent filings and R&D expenditure are only a rough proxy for a country's innovative capacity, but Peter Droell, head of policy development and industrial innovation at the European Commission, said there was a strikingly strong correlation between R&D spending in the European Union in the period 2004-2009 and economic growth in 2011.

"Member states which invested in research and innovation have been stronger in the crisis and are exiting faster," Droell said in London last week at the launch of the conclusions of an EU project on financing innovation and growth.

As such, the figures illustrate the longer-term growth challenges confronting Greece and Portugal: whether they succeed in boosting productivity, now just 65 percent and 77 percent respectively of the European Union average, according to Rabobank, will largely determine whether they close the competitiveness gap with Germany and other stronger euro zone members.

That is the root cause of markets' skepticism about the ability of peripheral euro zone countries to grow quickly enough to sustain their huge debt loads.

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Africa can remind the world of the capitalist way

by Dambisa Moyo

Financial Times
February 6, 2012

Take a walk in downtown Lagos and you’ll see bustling shopping malls and streets populated not just by domestic restaurant chains but increasingly by global brands like KFC, which will soon have 20 restaurants in Nigeria, and Walmart, which is expected to soon open two flagship stores. At Lagos airport you’ll see planes owned by more than 20 international airlines, from countries such as China, Qatar and Turkey. You will also see many of Nigeria’s nearly 90m mobile phone subscribers who together sustain four major telecommunications companies.

Capitalism is alive and well in Africa. Some observers will worry about the recent violence arising from the removal of fuel subsidies. The truth is that today’s Nigeria is strong enough to avoid a protracted crisis. This is down to the growing power of the African consumer. A decade or two ago, the rash subsidies decision taken by President Goodluck Jonathan could have brought the country near to a full political meltdown. But in 2012, Nigerian consumers want to buy their groceries and get back to work; they have too much vested in the economy. It’s a pattern mirrored across the continent.

Africa is quietly catching up after a period of isolation from the rest of the world between the late 1990s through to 2008. Policymaking has justifiably been criticised for its multi-decade approach of ring-fencing Africa. This created an “us-versus-them” culture, which hinged on one set of development policies – trade, foreign direct investment, capital market access – for certain countries like China, India, Brazil, but prescribed an aid-centric policy for other (mainly African) countries.

This catalogue of policies prompted the economist Paul Collier to caution that many African countries were “shearing off” from the rest of the world. In part, as a consequence, although Africa is home to nearly 1bn people, the continent’s share of world trade hovers around 2 per cent. Meanwhile, of roughly $1.12tn worth of total global foreign direct investment in 2010, sub-Saharan Africa received a paltry 3 per cent. However, this is about to dramatically change.

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Never Mind the Tax Cheats -- Go After the Tax Code

by Caroline Baum

Bloomberg
February 6, 2012

It was one of the big applause lines in President Barack Obama's State of the Union address: "We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules."

Strict grammar violation notwithstanding -- the singular "everyone," takes "his" or "her," not "their" -- the set of rules the president wants us all to play by were made in Washington.

Millionaires paying an effective 15 percent tax rate because their income is from investments? Blame the tax code. Carried interest, a form of income that accrues to hedge fund and private equity managers, taxed at the more favorable capital gains rate? The tax code's the culprit.

Yes, there are a lot of tax cheats out there who aren't playing by the rules. What Obama objects to -- Warren Buffett playing a lower effective tax rate than his secretary -- is ordained by the grotesque, 72,536-page tax code.

In researching a recent column, I went back to "The Flat Tax," published by economists and Hoover Institution fellows Robert Hall and Alvin Rabushka in 1985. They proposed a revenue-neutral flat tax of 19 percent. All income would be taxed once, and only once, at the same rate and as close to the source as possible. "Whenever different forms of income are taxed at different rates or different taxpayers face different rates," they write, "the public figures out how to take advantage of the differential."

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Seven things I learned about transition from communism

by Andrei Shleifer

Vox
February 5, 2012

Twenty years ago, communist countries began their shift towards capitalism. What do we know now that we didn’t know then? Harvard's Andrei Shleifer, the Russian-born, American-trained economist, provides his answers and their relevance for contemporary policymakers.

Recently, I was asked by the organisers of the IIASA conference to mark the 20th anniversary of the beginning of economic reforms in Eastern Europe and former Soviet Union to comment on the lessons of transition. The assignment presumably refers to the things that I learned – as an economist – that are different from what I believed initially. Such a recollection free from hindsight bias is challenging, but I tried. This list might be useful to future reformers, although there are not so many communist countries left. Some of the issues are however relevant not just for communist countries; the problems of heavily statist economies are similar. So here is my top-seven list.

First, in all countries in Eastern Europe and the former Soviet Union, economic activity shrunk at the beginning of transition, in some very sharply. In many countries, economic decline started earlier, but still continued. In Russia, the steepness and the length of the decline (almost a decade) was a big surprise. Countries with the biggest trade shocks (such as Poland and Czechoslovakia) experienced the mildest declines. To be sure, the true declines were considerably milder than what was officially recorded – unofficial economies expanded, communist countries exaggerated their GDPs, defence cuts, and so on – but this does not take away from the basic fact that declines occurred and were surprising. These declines contradicted at least the simple economic theory that a move to free prices should immediately improve resource allocation. The main lesson of this experience is for reformers not to count on an immediate return to growth. Economic transformation takes time.

Second, the decline was not permanent. Following these declines, recovery and rapid growth occurred nearly everywhere. Over 20 years, living standards in most transition countries have increased substantially for most people, although the official GDP numbers show much milder improvements and are inconsistent with just about any direct measure of the quality of life (again raising questions about communist GDP calculations). As predicted, capitalism worked and living standards improved enormously. One must say, however, that for a time things looked glum. So lesson learned: have faith – capitalism really does work.

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Cato Paper Shows How Guns Thwart Crimes and Save Lives

by Jacob Sullum

Reason
February 3, 2012

In a new Cato Institute paper, Clayton Cramer and David Burnett review the controversy over how often Americans use guns in self-defense each year. Estimates range from about 100,000 to more than 2 million, and the surveys used to generate the numbers are subject to weaknesses that plausibly lead to undercounting or exaggeration. Cramer and Burnett's contribution, an analysis of defensive gun uses reported in the press during an eight-year period, does not resolve this issue. As they emphasize, the vast majority of defensive gun uses seem to be encounters where brandishing a weapon suffices to interrupt or prevent a crime. When no shots are fired and no one is injured or killed, the incident may not even be reported to the police, let alone be deemed newsworthy. Still, Cramer and Burnett's analysis, based on a randomly drawn sample of nearly 5,000 incidents, sheds light on the details of cases that are considered interesting enough to report in a newspaper.

The most common situation, accounting for 1,227 of 4,669 incidents, was a "home invasion," where intruders try to force their way into a home they know to be occupied. Burglaries were also common, accounting for 488 incidents. In 285 cases, the defender had a concealed carry permit, and most of those incidents occurred in public. There were very few cases where a permit holder became involved in an avoidable dispute that turned deadly because he had a gun—a scenario that figures prominently in arguments against nondiscretionary permit laws. Also contrary to the warnings of gun controllers, victims in this sample were rarely disarmed by their attackers; the reverse happened more than 20 times as often. Criminals took away defenders' guns in 11 out of 4,669 incidents, and the defender ended up dead despite being armed in 36 incidents, less than 1 percent of the time. Cramer and Burnett describe many specific cases (mapped by Cato here) in which a gun prevented robbery, rape, serious injury, or death, illustrating their general point that policy makers need to take these benefits into account instead of focusing exclusively on criminal uses.

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Download the Full White Paper (PDF)

Right-to-Work Laws Waste Time for Politicians, Unions

Bloomberg
Editorial
February 2, 2012

For the first time, supporters of right-to-work laws can claim victory in the industrialized Midwest. Indiana Governor Mitch Daniels yesterday signed legislation making it illegal to require nonunion workers to pay union dues.

Right-to-work laws have taken on oversized symbolic importance, outweighing the actual cost to unions or the real benefits to employers. Worse, the combat discourages the two sides from working together to manage cyclical ups and downs or to improve productivity, which increases profits, lifts wages and ultimately results in economic expansion.

Unions loathe right-to-work laws because they can make organizing more difficult and, they insist, lead to lower wages and less generous benefits. Some governors, on the other hand, think a right-to-work law is the best proxy for how business- friendly their state is.

Twenty-three states, mostly in the South and Southwest, now have such laws. Lawmakers in Maine, Michigan, Missouri, New Hampshire, and other states may try to follow, largely out of fear of being left behind in the race to attract companies. Republican U.S. Senator Jim DeMint of South Carolina is pushing for a national right-to-work law.

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