From The Economist
Every once and a while I like to talk about interesting articles in my favorite magazine. Here is the Economist summing up the mood of Indian voters before the recent election:
The mood of Kamalpur’s residents is revealing. As they are mostly Muslims, Congress hopes for their votes. Yet the party’s main message interests nobody. No one speaks in favour of public welfare, subsidised rice and wheat or efforts to provide make-work jobs, policies supposed to give Congress the support of the rural poor. “A programme is good if it reaches here, but it doesn’t come,” says one man, sparking a lively chat about crooked politicians. A good road to the city helps more.
By contrast, the BJP is fired up. Middle-caste Hindus whose lives are fast improving dominate nearby villages. Those who have grumbled eternally about bad rains can now moan instead about traffic jams into Delhi. Signs of their new wealth are abundant. Walk down narrow alleys and men crowd around to film you using their tablets and phones. “It is very fine here,” says one. “We are connected.”
These voters back the BJP and predict rapid economic gains after the election. They are impatient for a better life, having tasted the optimism that faster expansion brought in the 2000s. Frustrated since then by slower growth (stuck at 5%) and high prices, they want Congress crushed.
A watershed in three parts
This election is likely to be seminal. A campaign strategist for a big party talks of “citizen consumers” who are intolerant of substandard politicians and readier than ever to dump them. These more demanding voters are emerging thanks to three intertwined trends: a youth bulge, urbanisation and rising incomes. In time, they should help to improve the political system.
The rise of the young is dramatic. Around half of India’s 1.2 billion people are under 26, with no memories from before the first liberalising reforms of 1991 but aware that development still lags. These “born frees” are the vanguard of a huge number who will come of age in the next two decades.
Consider Congress crushed. Morgan Warstler must be smiling somewhere. Just to be clear, I don’t know enough about Indian politics to comment on who “should have won”, although I’m certainly aware of the controversy surrounding Mr. Modi. (As an analogy, my views on Abenomics are unrelated to my views on Mr. Abe. And doesn’t the Indian election look an awful lot like the 2012 Japanese election? A controversial nationalist wins an overwhelming victory promising market reforms in a country where growth is slow and elections usually produce weak coalition governments.)
I’m more interested in the mood of the voters. India has more people that the US, Canada, Japan, Australia and Europe combined. Poverty is the big problem. And if we can believe The Economist, they just voted for growth over redistribution. That fact (not the election of BJP) makes me more optimistic.
You hear lots of conservatives say that they are more worried about poverty than “inequality,” partly in response to the recent focus on the huge gains that have gone to the top .01%. (Here’s an example from Martin Feldstein.) I do think that inequality is a valid issue, and support some redistribution on utilitarian grounds, but I share the conservative dismay over the recent obsessive focus on billionaires. It seems disproportionate in a world where the most serious problems are poverty and too little capital, not too many wealthy people. Once again the Economist, this time discussing North Korea:
“Dear Leader”, which includes three personal poems, is a testament to Mr Jang’s literary flair. He chooses poetry to express painful episodes, whether the hunger of a young girl or the public execution of a farmer in his home town. He paints a bleak portrait of his village, to which he briefly returns to discover a swarm of wasted bodies “waiting for death”, a childhood friend eating rice by the grain and tap water for sale. Desolation creeps even into better-off Pyongyang: a mother, close to death, and her daughter stand in a marketplace; a sign hangs from the girl’s neck: “I sell my daughter for 100 won ($0.11)”.
I’ve been reading the Economist for 40 years, and it’s greatly influenced my worldview. It’s made me see the entire world as “us.” It’s convinced me that progress is 90% growth and 10% redistribution. Of course 10% is still quite important in absolute terms. But even that issue is quite complex. Suppose Bill Gates’ entire fortune was transferred to the US Treasury. How would that impact US equality? How about global equality? Those two questions might have very different answers. Again, focus on consumption, not wealth.
Here the Economist explains how Germany is starting to undo the very reforms that made its labor market so successful:
During her previous grand coalition Mrs Merkel made one big domestic reform. In Europe’s fastest-ageing country, she raised the retirement age from 65 to 67. Sadly, there is less method in the seeming madness of the present coalition’s opening salvo of policies””what Germans are calling Reförmchen, or “reformlets”. One of these again affects pensions, but in the opposite direction, lowering the retirement age for certain workers to 63, and perhaps even to 61 if years in unemployment are counted. Economists and employers are screaming foul. So are 50 of the 311 parliamentarians from Mrs Merkel’s own centre-right camp, who fear the economy will suffer.
Another Reförmchen is to introduce a national minimum wage for the first time, of €8.50 ($11.72). This will affect about 14% of workers nationwide and 20% in the less productive former East Germany, according to a study by three economists at universities in Magdeburg, Berlin and Dresden. When Britain introduced a minimum wage in 1999, it affected only 5% of workers. Germany’s wage floor would barely increase incomes of poor workers, because they would lose welfare top-ups, the study says. But it could mean that as many as 900,000 lose their jobs. And it could stop young people (over 18 but under 21) getting good training and permanent jobs at all.
. . .
The government has also intervened messily in the property market, where rents are rising fast in some cities. It will cap increases in rent when re-letting flats to at most 10% of the rental average in the relevant district. The rules are still vague. But that hasn’t stopped landlords from panicking and raising rents as high as they can in anticipation. Investors who were planning to build new housing are thinking again.
That’s what happens when you give the conservative party a big victory. And it reminds us not to expect too much from Mr. Modi.
The Economist is also one of the few magazines that understands the important role that deposit insurance plays in creating moral hazard and excess risk-taking:
EVER since Lehman Brothers went bankrupt in 2008 a common assumption has been that the crisis happened because the state surrendered control of finance to the market. The answer, it follows, must be more rules. The latest target is American housing, the source of the dodgy loans that brought down Lehman. Plans are afoot to set up a permanent public backstop to mortgage markets (see article), with the government insuring 90% of losses in a crisis. Which might be comforting, except for two things. First, it is hard to see how entrenching state support will prevent excessive risk-taking. And, second, whatever was wrong with the American housing market, it was not lack of government: far from a free market, it was one of the most regulated industries in the world, funded by taxpayer subsidies and with lending decisions taken by the state.
. . .
The numbers would amaze Bagehot. In America a citizen can now deposit up to $250,000 in any bank blindly, because that sum is insured by a government scheme: what incentive is there to check that the bank is any good? Most countries still encourage firms and individuals to borrow by allowing them to deduct interest payments against tax. The mortgage-interest subsidy in America is worth over $100 billion.
Even Bagehot’s own financial long-stop has been perverted into a subsidy. Since investors know governments will usually bail out big financial firms, they let them borrow at lower rates than other businesses. America’s mortgage giants, Fannie Mae and Freddie Mac, used a $120 billion funding subsidy to line shareholders’ pockets for decades. The overall subsidy for banks is worth up to $110 billion in Britain and Japan, and $300 billion in the euro area, according to the IMF. At a total of $630 billion in the rich world, the distortion is bigger than Sweden’s GDP””and more than the net profits of the 1,000 biggest banks.
. . .
How can the zombie-like shuffle of the state into finance be stopped? Deposit insurance should be gradually trimmed until it protects no more than a year’s pay, around $50,000 in America. That is plenty to keep the payments system intact. Bank bosses might start advertising their capital ratios, as happened before deposit insurance was introduced. Giving firms tax relief on financing costs is sensible, but loading it all onto debt rather than equity is not. And still more can be done to punish investors, not taxpayers, for failure.
The Economist has a long history, and willingness to learn from its mistakes. Here it corrects a mistake made in 1857:
As well as being global, the crash of 1857 marked another first: the recognition that financial safety nets can create excessive risk-taking. The discount houses had acted in a risky way, holding few liquid assets and small capital buffers in part because they knew they could always borrow from the Bank of England. Unhappy with this, the Bank changed its policies in 1858. Discount houses could no longer borrow on a whim. They would have to self-insure, keeping their own cash reserves, rather than relying on the central bank as a backstop. That step made the 1857 crisis an all-too-rare example of the state attempting to dial back its support. It also shows how unpopular cutting subsidies can be.
The Bank of England was seen to be “obsessed” by the way discount houses relied on it, and to have rushed into its reforms. The Economist thought its tougher lending policy unprincipled: we argued that decisions should be made on a case-by-case basis, rather than applying blanket bans. Others thought the central bank lacked credibility, as it would never allow a big discount house to fail. They were wrong. In 1866 Overend & Gurney, by then a huge lender, needed emergency cash. The Bank of England refused to rescue it, wiping out its shareholders. Britain then enjoyed 50 years of financial calm, a fact that some historians reckon was due to the prudence of a banking sector stripped of moral hazard.
And here is one reason I am a market monetarist:
Argentines themselves must also change. The Kirchners’ redistributive policies have helped the poor, but goodies such as energy subsidies have been doled out to people who do not really need them. Persuading the population to embrace the concept of necessary pain will be difficult. That is partly because the experience of the 1990s discredited liberal reforms in the eyes of many Argentines. But it is also because reform requires them to confront their own unprecedented decline. No other country came so close to joining the rich world, only to slip back. Understanding why is the first step to a better future.
The neoliberal reforms worked fine until 1998, when monetary policy became much tighter. No wonder it’s so hard for Argentine voters to develop an “understanding” of what went wrong. The group that delivered the free market reforms is the same group that delivered the hard money policies that drove Argentina into deflation and depression.
The entire article on Argentina’s long, sad decline is worth reading. The accompanying photo reminded me of The Purple Land, a novel you don’t hear much about anymore.
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19. May 2014 at 12:36
“The numbers would amaze Bagehot. In America a citizen can now deposit up to $250,000 in any bank blindly, because that sum is insured by a government scheme: what incentive is there to check that the bank is any good?”
This is a non-sequitur. How on earth can consumer-depositors be expected to be able to “check that the bank is any good”, when professional regulators, with much more training, access to inside information, and weeks or months of time, can barely do that?
19. May 2014 at 14:41
“That’s what happens when you give the conservative party a big victory.”
I don’t understand your point here. Weren’t the initial reforms considered conservative? Why would giving the conservative party a big victory make for a reversal of those reforms?
19. May 2014 at 15:40
This might be termed a “wide-ranging” post.
On india, I hope for the best—and btw 5 percent growth is not bad—but institutional real estate investors tell me it it the state governments that call the shots there.
But even at 5 percent growth, living standards should double in 14 years…not so bad. India also has a central bank fixating on inflation, not growth, so there is room to worry…
Which brings up the puzzler for me—when Sumner blogs about India and China he rarely mentions central banking, but I think growth-oriented central banking has played vital role in both nations.
19. May 2014 at 16:24
Growth is 100% production and exchange (including charity) and 0% extortion and theft.
You can’t grow a pie by slicing it up.
19. May 2014 at 18:53
M.C. The regulators know the banks are making subprime mortgage loans, they simply don’t do anything about it. In fact the regulators are encouraging the banks to be reckless.
The depositors should ask the banks if they make any mortgage loans with less than 20% down. If they do, put in $50,000 of your own money and take the rest of your wealth to a less risky bank, or buy government bonds. Back before FDIC depositors paid a lot of attention to the risks that banks took. We need to get back to that way of doing things.
Ben, You forgot about India’s rapid population growth. 5% is horrible for a country with India’s potential. They should grow at 10%.
Wufwugy, The original reforms were done by the left wing party.
19. May 2014 at 20:04
MC,
I believe there was a time in the 19th century when CFO’s of banks were personally liable for losses and would post ads in financial newspapers confirming that they were insured.
There are many other methods that would emerge. I have also heard that this was a reason why banks would build very nice buildings, because the sunk cost was a signal that failure would be costly to the bank’s owners.
In our context, private insurers would be able to provide deposit insurance, so that banks would simply signal that they were insured by a consortium of healthy insurers, re-insurers, and/or bank clearinghouse groups, and the signal would be no more taxing on depositors as checking for an FDIC sticker on the window is now. But, the insurers would have a more diverse, dynamic, and self-interested (from the insurer’s point of view) set of regulatory demands compared to the regulations banks receive from public regulators.
20. May 2014 at 02:06
But, the insurers would have a more diverse, dynamic, and self-interested (from the insurer’s point of view) set of regulatory demands compared to the regulations banks receive from public regulators.–Kevin Erdmann.
We can hope.
However, the situation with AIG suggests they wanted to collect the premiums, and then run away when called on to provide the insurance. No one’s wife was sold into white slavery, or went to prison. In a civilized society, how does one handle private insurers who flop?
Vexing problem. I am not sure the private-sector has the gravitas and of course does not have the printer of last resort to back up a banking system.
It may be that simple rote rules are best. A bank with FDIC insurance must have capital at 25 percent of loans, and that capital is burned through first in a failure. Some say 100 percent (Cochrane).
Or, banks must pay taxes on the flightiness of their deposits. The flightier the deposits, the more the taxes. Maybe they pay fees, goes into industry pot, used to bail out bad banks.
Sometimes free markets fail. Pollution, maybe health care. Banking is another is a twilight zone.
20. May 2014 at 02:14
“That’s what happens when you give the conservative party a big victory.”
Correction, that’s what happens when you give the FDP *zero* seats in the Bundestag. The CDU had a great result individually, but the way the votes shook out (with a lot of the CDU support coming from the FDP), they had to form another grand coalition with the SDP. In terms of political power, while the CDU numbers went up, the coalition was the same as previous. A CDU/FDP coalition would have had a very different result.
20. May 2014 at 02:17
2009 the FDP had a great result, but it has since collapsed. CDU/CSU was up in 2013 largely by taking votes from the FDP, but it forced them into another grand coalition instead of the CDU/FDP coalition they had from 2009 to 2013. (A grand coalition from 2005 to 2009.)
20. May 2014 at 03:45
Kevin, Good points.
Ben, I think a free market in banking would work. But with FDIC you don’t have a free market, and thus unfortunately you need to rely on regulators, as you say.
John, If the CDU had wanted the FDP to cross the 5% threshold, they would have been able to do so. The problem is that they didn’t want the FDP in their government.
20. May 2014 at 04:27
“The group that delivered the free market reforms is the same group that delivered the hard money policies that drove Argentina into deflation and depression.”
It’s sad how often that is the case. Free market advocates destroy the economy with tight money, then the populace blames the free market, then the free market is destroyed.
On the free banking thing – we should implement something like the Chicago Plan. 100% reserves at the Fed on transaction accounts for banks that are members of the Fed and FDIC. Small savings accounts and unlimited size CD’s at those institutions should be backed 100% by Treasuries. Then if people want to lend money out at risk they are welcome to do so by purchasing stocks and bonds of lending institutions.
Another benefit, the Fed’s balance sheet would be so large that it would likely permanently own most of it.
20. May 2014 at 04:29
In my comment, “it” in the last sentence refers to the national debt.
20. May 2014 at 06:50
I like your analogy with Shinzo Abe. Will Modi replace his central banker? Maybe not right away. Morgan won’t like what Cassidy writes on the subject.
http://www.newyorker.com/online/blogs/johncassidy/2014/05/modi-role-model-margaret-thatcher-or-lee-kuan-yew.html
“A 2013 World Bank study pointed out that Singh’s government and its appointees further liberalized the rules for foreign investment, opening banks, and starting infrastructure projects, to name three areas. But there was a common perception that initiatives weren’t being translated into action, and this, together with a slowdown in the economy that was partly engineered by a central bank worried about rising inflation, did in Rahul Gandhi, the Congress-party candidate.
In short, Modi’s timing was lucky. In the coming months, his good fortune is likely to continue: with inflation now under control, the central bank doesn’t need to tighten monetary policy any further, and economic growth is likely to pick up. That will give Modi a bit of leeway to put together a reform program and sell it to the electorate. Relative to his predecessors, he is likely to emphasize manufacturing and infrastructure projects””two key aspects of the “Asian tiger” model””such as his proposal for a high-speed rail network. In addition, he will probably talk about expanding the ASEAN-India free-trade area and liberalizing India’s employment laws, which nearly all sides agree need some reform. In historical terms, though, that would all add up to more of the same medicine that India has been taking for twenty-odd years, rather than a radical break in a Thatcherite direction.”
20. May 2014 at 07:35
As Milton Friedman put it, the key is not electing the right people, it’s getting the wrong people do the right thing. Politicians reflect the electorate.
That’s why corruption is so hard to change — if voters don’t make corruption a priority in their voting preferences, then politicians and their friends will feed at the trough and everyone will be a lot poorer.
And that’s why the “representative tribalism” of early democracy is often so problematic for poor countries: when the choice is between your guy and their guy, you have to vote for your guy even though he’s a crook because their crook will be much worse for you.
20. May 2014 at 08:33
‘The regulators know the banks are making subprime mortgage loans, they simply don’t do anything about it. In fact the regulators are encouraging the banks to be reckless.’
Worse, the regulators DEMANDED that the banks act recklessly. Prior to the 1990s only about 1 in 200 loans was ‘subprime’. I.e., when the banks made up their own minds to whom to lend.
20. May 2014 at 08:37
Scott, have you seen this (HT Mark Thoma)?
http://mpra.ub.uni-muenchen.de/55773/1/MPRA_paper_55773.pdf
Benjamin,
You’re right that some subtle issues would need to be handled right for that to work out, and they probably wouldn’t be. I don’t expect to see any of this actually come to pass.
There used to be bank clearinghouse unions that would stand behind groups of banks, manage bank failures, and issue scrip when there were liquidity crises. I think something like that is probably a decent system – where the private insurer is basically backed by other banks. It would probably be important, in that case, for banks to have unlimited access to currency so that they weren’t vulnerable to liquidity shocks.
20. May 2014 at 08:43
‘I believe there was a time in the 19th century when CFO’s of banks were personally liable for losses and would post ads in financial newspapers confirming that they were insured.’
Almost anyone working in a bank had to put up a bond. Shareholders had double liability; a bankruptcy referee could go after other assets of the investors to make depositors whole.
‘Glass-Steagall’ destroyed that system.
‘…the situation with AIG suggests they wanted to collect the premiums, and then run away when called on to provide the insurance. ‘
AIG was always sound. Its founder, ‘Hank’ Greenberg, insisted on it. But when Eliot Spitzer went on his jihad against Greenberg, that changed. Greenberg got his revenge, by writing well;
http://www.amazon.com/The-AIG-Story-Maurice-Greenberg/dp/1118345878
Absent Spitzer’s political meddling, AIG never would have needed a govt. bailout.
20. May 2014 at 08:47
‘I think something like that is probably a decent system – where the private insurer is basically backed by other banks.’
It’s called Canada. As Calomiris and Haber detail very well in their recent book, ‘Fragile By Design’;
http://www.amazon.com/Fragile-Design-Political-Princeton-Economic/dp/0691155240/ref=sr_1_1?s=books&ie=UTF8&qid=1400604375&sr=1-1&keywords=fragile+by+design
20. May 2014 at 10:05
“The neoliberal reforms worked find until 1998, when monetary policy became much tighter. No wonder it’s so hard for Argentine voters to develop an “understanding” of what went wrong. The group that delivered the free market reforms is the same group that delivered the hard money policies that drove Argentina into deflation and depression.”
Monetary policy was based on convertibility plan, the 1:1 peso to dollar exchange to encourage foreign investment. But that was the problem, they tricked foreign capital into taking large positions in companies with no regard for whether they could make the industries more competitive. It was all an accounting trick that siphoned money.
And under this, how could money be “tight” or “loose”? I’m perplexed at what you’re saying right now.
20. May 2014 at 10:15
Negation, Not a bad idea.
Peter, Good comment. India is almost an ideal country for a high speed rail network. Very densely populated and most cities are reasonable distances apart (assuming a 300kph network.) But can India build it? I have my doubts.
TallDave and Patrick, Good points.
Colin, They were pegged to the US$. When the dollar got really strong (1998-2002) it overvalued the peso, causing deflation and depression.
20. May 2014 at 10:17
Kevin, I’m not a fan of the Farmer model.
20. May 2014 at 11:11
Dudley raises interesting idea:
http://www.ft.com/intl/cms/s/0/8ec020d0-e036-11e3-b341-00144feabdc0.html?siteedition=intl#axzz327Vxm5qS
What if Fed basically said: We are only going to conduct MP through MBS. At maturity we will not be buying ANY new Treasuries. EVER. AGAIN.
Now Scott, I’d guess your answer is: nada, the transmission mechanism doesn’t matter.
My answer, because I’ve an naive simpleton who is certain Cantillion effects are real,
http://uneasymoney.com/2012/12/06/those-dreaded-cantillon-effects/
is that the cost of government borrowing will go up.
It also, me thinks, makes it easier for the Fed to continue QE politically, because to the masses, naive simpletons that they are, will believe this puts upward pressure on Construction wages, and downward pressure on Public Employee wages.
Now Scott, say that the Fed, said “we’d like to see the USG get its deficit under control, and we’d like Congress to make it easier for us to buy say S&P”
As I understand it, Farmer wants this because it does wonders for Keynes animal spirits.
I swear, the absolute COOLEST thing Scott, Econlog could do is set you and Farmer up in like 3 1 hour podcasts. Where for 1 you interview him. 2 he interviews you. and 3. you guys see if you don’t birth a Krugman killing synthesis.
i frankly don’t think you two actually disagree, but I can’t figure out how to prove it.
20. May 2014 at 11:52
“Colin, They were pegged to the US$. When the dollar got really strong (1998-2002) it overvalued the peso, causing deflation and depression.”
But the neo-liberalisation happened on an account of this policy. You can’t separate the good things of the 90s from this tragic tight-money event.
20. May 2014 at 14:05
TallDave –
Corruption is easy to change. Just align the incentives. It’s all principal-agent stuff.
Scott –
Not sure why Argentina makes you a market monetarist, as opposed to, say, a simple libertarian. Again, Argentina is easy to fix. Align the incentives.
20. May 2014 at 18:09
Colin, You said:
“But the neo-liberalisation happened on an account of this policy. You can’t separate the good things of the 90s from this tragic tight-money event.”
Of course you can separate them–Chile did.
Steven, You are saying that corruption is easy to get rid of–just assume non-corrupt politicians who will align the incentives. But in that case we’d have no problem with corruption!
I’ll never be a simple libertarian–I’m too old. 🙂
20. May 2014 at 20:45
Unfortunately, “growth against redistribution” is much too shallow and misleading to judge an election in India? And surely, reading an account of Indian elections in a magazine that has an ideological prior in favour of just this kind of dichotomy should give you pause?
As it happens, in 2004, the reverse happenned. The BJP was trounced and Congress won (the Left parties also won a lot of seats). This was indeed interpreted as a mandate for more redistribution and indeed many welfare schemes were undertaken. But growth also was very high, reaching close to 10% before the global crash. Though one could doubt how much of that was sustainable.
So there is no such dichotomy of “growth vs redistribution”. Inflation in India has been very high for many years, especially food inflation. If you look at polls (http://www.lokniti.org/pdf/all-india-findings.pdf), the 4 major issues were inflation, development, corruption and employment.
(granted that, as you’ve argued in the past, people only have the foggiest notion of what inflation is, but still, it is prima facie plausable)
One should be careful of making broad conclusions about a country such as India just because it seems to agree with the ideological priors. As an old saying by Joan Robinson goes: “Whatever you can rightly say about India, the opposite is also true”.
20. May 2014 at 23:17
India is a country in need of a serious supply side booster. Monetary policy can’t do anything for it. I think that Modi is mostly a good admin kind of guy, not an unleash the animal spirits kind of uber capitalist. But India needs good, competent, nationalist (as opposed to casteist) government. It’s been waiting a long time for something like this. Even someone who manages to move the files and issues faster than previous will be a good alternative to the current sclerosis.
21. May 2014 at 04:32
Brad DeLong:
http://equitablegrowth.org/2014/05/21/federal-reserve-nominal-gdp-growth-undershoot-episode-vii-undershooting-wednesday-focus-may-21-2014
21. May 2014 at 05:27
Scott –
There are three objective functions in economics: conservatism, liberalism, and egalitarianism (a la the French Revolution or Hayek, for that matter).
Importantly, these are not considerations, they are objective functions. Policies which you would consider failures are successes to others, hard as this may be to believe. By its nature, government must deal with all of these, and in that is different from, say, running a business, where the objective function is essentially liberal (ie, profits-based performance pay).
If you have more than one objective function, then the agent will lose control over the principal. If I tell you to maximize growth and maximize redistribution, then I have granted you, as my politician, an extraordinary amount of leeway in determining which policy to follow. You can do either and tell me that you were following directions.
In such a case, your personal interest as principal is likely to dominate. If we define corruption as a principal-agent problem in which the principal is using his powers as agent to his benefit as principal (a cop asking for a bribe), then the failure to align the incentives of the agent with a single (or well-defined) objective function will result in a tendency for the interests of the principal to dominate that of the agent.
I lived in Hungary for 15 years, and I saw this transition clearly as the country moved from an egalitarian to a liberal system. Everyone was corrupt under socialism; that disappeared under capitalism (in businesses). Why? Because incentives were aligned under the latter system. Pay was Pareto optimal for both the employer and employee, and thus the employee (principal) assumed the mask of agent (working on behalf of the company).
There’s much more, and you’ll appreciate I’m not using a traditional framework of analysis.
But for now, the question is very simple. Are you willing to pay politicians for performance by your own standards of success (eg, GDP growth) commensurate to the value they produce? If you are, then corruption is easy to get rid of. If not, you’re like all the other economists out there.
21. May 2014 at 05:47
Anand, Good observations. My only quibble is with your characterization of The Economist. They have done many many editorials over the years in favor of redistribution. So it’s certainly not a rigid right wing publication.
I recall the 2004 election, but it’s possible that voters have shifted their views, in the light of Congress’s poor performance.
Prakash, Good comment. One way of putting that point is that the biggest difference between India and China may not be in free markets, but rather the ability of government to do certain things efficiently (like high speed rail and other infrastructure.)
Steven, I think you misunderstood my point. I agree that the system impacts the amount of corruption, but corruption makes it difficult to change the system. You mention a case where the system was in some sense artificial, imposed from the outside. Then after 1989 change came from the outside. But India is nothing like Hungary, as the system in some sense reflects the internal forces, which include corruption. I’m not saying it can’t change at all, indeed I expect India to become less corrupt over time. But the change isn’t simple, it’s very hard. Simple change would be if North Korea collapsed and the South took over. But there are fewer and fewer artificial cases like that, there are far more Afghanistans than North Koreas.
21. May 2014 at 06:36
Scott –
Well, countries are at different levels of development, and the challenges are necessarily different (due in large part to being in different parts of the DMUWI line). I agree.
As I see it, implementation of incentive programs would be driven by the IMF. A good many countries end up in the care of the IMF at some point. At that point, it would be trivial to institute a clause that recipient politicians would be paid, in return for the IMF’s financial support, as a function of GDP growth and debt reduction. Piece of cake in Italy or Greece, say. (Might be hard cake.) From the IMF or Troika’s point of view, the thing worth buying in Greece is good governance. And it’s not that hard to buy.
So, propose me for Director of Governance Metrics and Performance at the IMF, let me hire two guys, and I’ll deliver Greece in two years, Hungary in one, if get the chance.
I would add that the concept of performance-based pay is deeply offensive to many economists. (My uncle is one, and see what it got him: http://www.economist.com/blogs/easternapproaches/2010/11/hungarys_economy I told George his approach was not going to work–because it doesn’t align incentives.)
Economists believe that politicians should “do their duty”, have “political will”, and be “statesmen”. For them, when a businessman is elected politician, Adam Smith goes out the door. It’s strange, but true–because economists, as a group, really do believe in policy. They think it’s a noble pursuit. (So do I, actually.) It’s offensive to them to see politics reduced to a business proposition, pay for production. It makes ruling seem, well, somehow pedestrian and grubby. It is a question of mindset and mood affiliation, as Tyler Cowen would say.
But if you can overcome the mindset of economists, solving corruption is not that hard, at least in many places around the world.
But do a first principles analysis, and you’ll come back to my proposition pretty quickly.
21. May 2014 at 07:10
What’s a “DMUWI line” ?
21. May 2014 at 07:18
Declining marginal utility of wealth and income.
I maintain that it is the underlying model for egalitarian policies.
I would argue that it is also the chief engine of social progress. As The Economist would put it: “No middle class, no democracy.” DMUWI is the theoretical basis for that claim, I would contend.
21. May 2014 at 07:25
The ‘line’ bit argues that there’s a huge difference between the low end and the high end of the curve.
Thus, the social power difference between someone making $10,000 and another making $1,000 per year than someone making $1 million and another making $100,000.
Here’s a truly devastating example of what I mean:
“Desolation creeps even into better-off Pyongyang: a mother, close to death, and her daughter stand in a marketplace; a sign hangs from the girl’s neck: “I sell my daughter for 100 won ($ 0.11)”.”
http://themanvault.com/a-former-government-poet-reveals-how-kim-jong-il-used-propaganda-to-cement-his-power/
Thus, when Scott says that we cannot compare India to Argentina, I agree. I see the major difference being on where on the DMUWI line these two countries are.
21. May 2014 at 07:26
Thus, the social power difference between someone making $10,000 and another making $1,000 per year is greater than someone making $1 million and another making $100,000.
Argh.
21. May 2014 at 09:58
Steven,
Let’s get dow to brass tacks, man…. GI/CYB rocks right?
https://medium.com/labor-related/1d068ac5a205
Forget social power. it is meaningless.
All that matters is in what system do the bottom 1/3 get to consume most?
Lord knows they need to eat more than they can kill themselves…
So the OPTIMAL thing they can do is stay out of the way of the guys doing the killing, maybe run in and wipe their brow, drag the dead from the field, you get the idea.
Pareto means one thing and one thing only: Let the top 20% spend all day everyday producing.
21. May 2014 at 11:43
The group that delivered the free market reforms is the same group that delivered the hard money policies
It’s really frustrating that so few seem to be constitutionally capable of accepting free market reforms and sensible monetary policy.
21. May 2014 at 11:47
TallDave – Corruption is easy to change. Just align the incentives.
Democracy dictates that the incentives will always align with whatever the voters prefer. Getting votes to evolve a strong preference against corruption is tremendously difficult.
21. May 2014 at 12:21
Social power is emphatically not meaningless. We have local elections here in NJ and PA, and there are districts near Trenton where the party bosses tell people how to vote, and that’s how they vote.
Corruption is rife where there is no accountability. If voters chose according to tribal loyalty (a party can be a tribe) rather than their own, long term interest–as Scott would define it–then politicians can do pretty much whatever they want. I need only point to the simply astounding difference between the performance of charter and public schools in NYC. The residents of Harlem could have voted for change many years ago. They didn’t.
Morgan, I think you’re speaking about situations in the US. When I speak of people living on $1,000 / year, that’s $3 / day.
I remember when I arrived in Budapest in 1990; you could pick up girls just by flashing a US passport at them. (Not anymore.) Russian women doctors would be hookers down at the Danube hotels. Architects drove taxis. People on the edge will do things that even middle income people would never do.
At issue is the matter of risk. If you are right at the edge of existence, your employer has enormous power over you. So does political leadership. You pretty much have to toe the line.
If Bill Gates goes to a woman programmer at Microsoft and says, “Have sex with me or you’re fired,” (hard to imagine, somehow), then she could i) get another good paying job; ii) live off of savings for a while, or iii) report him to the press and authorities. She has options, and as a result, is unlikely to field such a request, even though Bill Gates probably has 1 million times her net worth. She has social power compared to Bill Gates, and that’s because her marginal utility of wealth and income is relatively low; this gives her independence.
If a Philippino maid faces the same situation with an employer in Saudi Arabia, her choices are starkly limited. She doesn’t even have her passport, doesn’t speak the language, has minimal defensible legal standing, may not have airfare home, has potentially no alternate employment, and has no one to report it all to–that’s a really big social power gap. The maid’s marginal utility of wealth and income is high; she has to be very careful about taking risks in alienating her employer.
That’s the point I’m trying to make to Scott about DMUWI.
Thus,
– DWUMI is the underlying basis of egalitarianism
– DWUMI explains the decline of social conservatism and patriarchy in advancing societies–exactly the point I’m making above
– DWUMI is a scale to measure social progress
– DWUMI can be quantified (both statically and dynamically)
– thus, DWUMI can be used to adjudicate ideological disputes among classical liberals (is that the same as a market monetarist?), social conservatives and egalitarians, at least up to a point.
21. May 2014 at 12:30
I agree, Dave.
Conservative voters don’t want the incentives aligned because politicians are assumed to accept their agency role, ie, take responsibility for society. Most economists are in this category.
Egalitarians don’t want to align incentives because it would make politicians rich, and that’s not egalitarian. The rest of the economists sympathize with this group.
Classical liberals (market monetarists) don’t want to align incentives because they don’t see that there’s a problem. They assume politicians are there to do increase GDP. In principle, one should be able to persuade the classical liberals–all 15% of them in the voting body.
So you’re left with the IMF for implementation, as I note above.
I would again emphasize, however, that a lack of willingness to solve a problem is not the same as a lack of methodology to do so.
21. May 2014 at 13:05
Steven,
I do believe this is relevant to the conversation
http://www.overcomingbias.com/2013/11/the-coalition-politics-hypothesis.html
21. May 2014 at 15:14
Steve, you are giving me an acid flashback.
Even Russian doctor hookers in Danube hotels are GOING TO BE OK. Eventually.
The path of history is set. The end is predetermined.
Eventually you live on a soylent drip jacked into a VR rig, and do your best to stay out of meat space. It’s not that meat space sucks, it will be even prettier and cleaner than today, lots of fun in green grass fields… but VR space will be EVEN BETTER.
The moral question is HOW LONG DOES IT TAKE US to get to digital nirvana?
if it takes an extra 50 years, then you have done great harm to billions of Philippino maids in “people years” – hysterical term.
What speeds up our history, technology’s history, is that system that best rewards entrepreneurs. Not capital. Not labor. Entrepreneurs.
Worrying about the incentives to politicians is like worrying about whale blubber. Most of them, don’t ave time to imagines themselves the Cathedral, they just desperately want to get re-elected.
Over the next 20 years, government , ALL GOVERNMENTS ON EARTH, will be totally rebuilt as code.
Code will be written, deployed and tested before laws are passed, even before a study is done at a think-tank. Think tanks will just write code, trying to prove theirs’ is optimal.
We’ll A/B split test to reduce the transaction costs of wealth transfers to .001 of a cent on each dollar transferred.
We’ll have a TRUE TALLY of everything consumed, enjoyed, learned, offered, not chosen by every welfare recipient in every state: there will NO arguing over whether each of them is better off than last year.
Smartphones will be a civil right, and all data transferred from .gov domain will be free. Lots of other domains will be free, ad sponsored as well.
It’s getting weirder for me to listen to people talking about literally ANY ANECDOTE that doesn’t describe something happening in the modern digital end of scarcity.
21. May 2014 at 15:32
Very timely Steve:
http://townhall.com/columnists/johnstossel/2014/05/21/good-news-n1840751/page/full
Stossel calls it: “Entrepreneurial Civil Disobedience”
In your framing of things, I get no sense that you are focused like a laser on making things even easier for the wagon pullers.
It makes me nervous.
21. May 2014 at 17:31
Daniel –
You’re suggesting there’s a game theoretic dimension to ideology. I think that’s right.
So, a liberal will specialize in merit, because he believes his highest payoff is by being allocated his own value. He will want an individually negotiated deal. 10-15% of the population falls into this group.
Unlike liberalism, in which the individual is the unit of analysis, in conservatism, the group is the unit of analysis. The rights, obligations and risks are determined by agency and the allocations of the aforementioned is a key issue. More adroit conservatives may seek to manipulate the allocation mechanism. We might use the phrase “social climber”, call someone “political” or think of a courtier in the court of Louis XV. (Liberals hate this sort of behavior.) About half the population falls considers itself conservative. As a group, they are willing to accept the responsibilities and rewards associated with a particular agency (“All third year lawyers make $80,000.”)
I have long pondered where to put egalitarians. In a capitalist society, they are weak social conservatives. That is, they are not against property rights, they merely want the property of the conservatives and liberals. They will use the tactics of the powerless, that is, of children. This involves endless jawboning and lobbying, and a good deal of whining. They will only mention benefits, or alternatively costs (“tax expenditures”), but never the both together, since they are to benefit, and liberals and conservatives are to bear the cost. A decent dose of lying is not out of order, just as a child might. 30-35% of the population falls into this category.
There would seem to be, therefore, strong game theoretic reasons behind these ideologies, and I would guess that such behaviors are ancient and the result of evolution. I would guess you could find them in primate groups if you cared to check. These are long-standing ideologies with no permanent victory for any group.
These ideologies thus form objective functions, each with its own kind of legitimacy. Liberal and conservative correspond to principal and agent in this construct. Now, principal-agent problems occur within the individual. Duty and desire, it’s an inherent conflict. For example, Scott claimed to believe in ‘aggregate utility’. Scott’s neither a social conservative nor egalitarian, but he is caught between an aggregate and individual view. The Tea Party patriot embodies this conflict, too. They claim to be for freedom (individual over society), but also patriotism (social obligations over individual rights). In any event, socially and fiscally conservative impulses often co-exist within the individual. In any social group, this is a necessary tension. Without agency, there can be no coordinated action, no team or army. Without liberalism, there cannot be individual survival. And those at the bottom of the pyramid will use those tools available to them: guilt, complaining, reminding of obligations, and if possible, a well-engineered vote.
21. May 2014 at 17:32
Scott,
I would agree with your characterization of the Economist. It is a good magazine and definitely not a rigid right-wing rag. My impression was just that, as you said in your post, it was roughly 90% growth and 10% redistribution. Maybe, this ratio is correct (it might well be).
As to Prakash’s points: Most (80%) of the slow-moving projects in India are because of actions at the state level, not the central level. One should separate out the hype around Modi from the reality.
http://ftalphaville.ft.com/2014/05/14/1851162/what-if-modis-a-tease/
http://www.ft.com/intl/cms/s/0/c2f8cef2-d036-11e3-af2b-00144feabdc0.html
21. May 2014 at 17:38
Morgan –
I’m not taking sides (although I’m somewhat anti-egalitarian, I suppose). I’m presenting a framework of analysis, as regards the Three Ideologies.
As for incentive plans, that’s just problem-diagnosis-solution. There’s probably no one more optimistic than me about the prospects for better governance. But let’ solve the problem as it exists, not as we’d like it to be.
21. May 2014 at 17:38
And easy on that acid, guy.
22. May 2014 at 01:30
Steven,
Acid is wonderful. Don’t diss it ’till you’ve tried it.
I think Morgan would do well to drop some acid. Maybe it would stop him from going on his hobby horses so much.
22. May 2014 at 04:27
I’ll put it on my to do list.
I think Morgan has done some creditable work on GI (I thought his site was trying to sell me a credit card).
I agree with his overall point: policy should encourage work, not discourage hiring. And keeping people working in any capacity is better than having them idle, as a general rule.
22. May 2014 at 05:01
Steven, Don’t you think that the IMF and other institutions have been trying to force countries to clean up? They have, but it’s really, really hard to change a society when corruption occurs at all levels.
Northern Italy has a majority of the population (2 to 1) but even though they theoretically control Italy, they have not been able to force southern Italy to change. The IMF has even less ability to force change.
You said:
“Economists believe that politicians should “do their duty”, have “political will”, and be “statesmen”. For them, when a businessman is elected politician, Adam Smith goes out the door.”
Adam Smith also believed politicians should do their duty. So I have no idea what you mean by “Adam Smith goes out the door.” And don’t you want politicians to “do their duty” and install your anti-corruption regime? And finally, have you forgotten about public choice economics?
Anand, Yes that’s right, and as I indicated in the post I was not commenting on Modi, just the mood of the electorate. I have no idea how successful he will be, if at all.
22. May 2014 at 09:58
http://en.wikipedia.org/wiki/2013%E2%80%9314_Thai_political_crisis
Great example of what I was talking about, Thailand keeps electing popular crooks and the military keeps deposing them. They’re so paranoid by now that the just-abandoned constitution explicitly demands any political party that attempts to gain administrative powers unconstitutionally must be dissolved.
Systemic corruption is usually popular in poor countries. That’s a big reason why the middle income trap exists.
22. May 2014 at 11:07
My uncle was at the IMF for 26 years. I don’t know that the IMF has ever, ever even discussed performance pay for politicians. But if there’s a Director for Governance and Compensation, I’ll stand corrected. When I’ve mentioned these things to my uncle, he treats me as though I were mad. Ditto for Menzie Chinn over at Econbrowser. I just don’t think performance-based pay for politicians exists, but if you know of a country where the IMF has instituted it, please let me know.
BTW, they do have incentive pay in Singapore. And the city-state provides comparable levels of govt support to US levels for half the share of GDP. And it’s squeaky clean (although SG was a cesspool of corruption back in the early 1960s.) And the Singaporeans will be twice as rich as the Germans on a per capita basis by 2020.
Corruption–or more precisely, dysfunctional corruption*–is easy to treat, at least in middle income countries. Give me twelve months, a country with no negotiating position in need of external support, and I’ll give you decent governance. I know. I know the fascists in Hungary pretty well (it’s a family-run operation). There’s not one of them who wouldn’t sell their soul (or fascist principles) for a $300k bonus approved by the IMF. There’s not one of them who wouldn’t work across the aisle to secure that bonus. It’s one thing to be dysfunctional and bash the opposition when it’s someone else’s money at stake. It’s rather different when it’s your own.
*************
* The cost of corruption is not the direct cost. A 2-5% payoff is merely a transaction cost, cheaper than a deal’s investment banking fee. The issue of corruption is either mis-investment or non-investment. It’s not the payoff that’s damaging; it’s the bridge to nowhere which is the true economic loss.
Therefore, the primary issue is not the bribery, but the underlying investment. If the underlying investment is sound, even if there is a bribe, then the economy will still prosper.
22. May 2014 at 11:10
As for “doing their duty”:
No, I do not ever want to count on politicians doing their duty. I want them to act in their own self-interest, and I want to align theirs with mine. I want them to be my employee, not my ruler. And in that, I differ from most economists out there.
22. May 2014 at 11:35
Re: Thailand
Do you have to bribe someone at the Bangkok McDonalds to get a burger? At 7-11 to buy some Band-Aids? At the Amari Hotel in Koh Samui to get room service or a bed turned down?
No.
So it’s not a problem of the private sector in Thailand, only government.
Why?
22. May 2014 at 15:14
Scott,
“If the CDU had wanted the FDP to cross the 5% threshold, they would have been able to do so. The problem is that they didn’t want the FDP in their government.”
No, the problem is that the FDP barely missed 5% because the new AfD (Alternative für Deutschland), a new center-right Eurosceptic party, won 4.7% of the vote and *also* barely missed 5%, and would also be a home for some traditional FDP voters. That’s two center-right parties that both won just under 5%, and then got no representation, which is what tilted the ensuing coalition to the left.
It will be interesting to see what happens in the European elections. It may be the case that the AfD will send the FDP on the way to extinction.
23. May 2014 at 00:36
Analysis of the German results showed that the AfD voters were most likely to have previously voted FDP. With two center right parties (the AfD may be anti euro, saying that Germany should pull out so that the Southern countries can get the monetary growth they need, but favor open migration, so they should not be confused with the radical anti euro parties) each drawing over 4.5% and getting no seats, that skewed the German results.
23. May 2014 at 01:17
“That’s what happens when you give the conservative party a big victory.”
I think this is wrong. Don’t forget that although Merkel’s scored very well, over 40%, the leftwing parties won a majority in the German parliament. This gives Merkel’s coalition party the social democrats a a lot of leverage, although they scored only 26%.
23. May 2014 at 05:40
Steven, You still don’t get it. No one is going to “give you a country” because they don’t want your solutions. And they don’t want them because they are corrupt. Everyone knows the Singapore system is better, but they don’t want a good system, they want a corrupt system that benefits THEM.
And you are wrong about Thailand, corruption is a much bigger problem in the Thai private sector than in the Swedish private sector. The culture is different. In the real world it is very difficult to monitor and enforce contracts. That’s why culture matters, and that’s why the private sector in Thailand is more corrupt than in Sweden.
(BTW, I like Thailand more than most other countries, but that’s despite their corruption, not because of it.)
Jan and John, You are both wrong about Germany. In the past it’s widely known that the conservatives helped the FDP, to make sure they crossed the 5% threshold. This time Merkel was frustrated with the FDP and decided not to help them. And she was campaigning for a minimum wage even before the election.
If she wasn’t happy with the results she could have called another election and threw some support to the FDP. This is a choice of Merkel, nothing is being forced on her.
24. May 2014 at 04:49
Scott,
In the past, yes. But post election analysis showed that most of the AfD vote came from former FDP supporters,
In any case, the point remains that it’s not “what happens when you give the conservative party a big victory,” but “what happens when two smaller center-right parties get 4.7% and 4.8% of the vote and are just barely shut out.” Whether Merkel and the CDU/CSU wanted that to happen or not is immaterial.
The lack of (European) liberal policies in the government is due to not having seats for a liberal party. The same grand coalition would have happened if the CDU/CSU had a “big victory,” tied with the SDU, or finished somewhat under them.
24. May 2014 at 04:49
(Obviously Merkel would not have been chancellor in the last case, but a grand coalition would still have been the result.)
26. May 2014 at 04:40
Arnold Kling on his blog:
“I just finished reading The Once and Future King: The Rise of Crown Government in America, by F.H. Buckley. The main take-away is that once you have a chief executive chosen by popular election, you are in trouble. The “extreme” measure of the legislature removing the head of state happens much more readily in parliamentary systems, Buckley argues. He says we are just about the only country without a parliamentary system that isn’t pretty far along on the autocracy spectrum.
Buckley says that our founders did not want a popularly elected President. They wanted a President chosen by the House of Representatives. But they were afraid to take that idea to the people, so they instead proposed that the selection would go the House in the case of an electoral college deadlock-which they thought would be the norm once George Washington left office. Oops!
Buckley says that the problem with popular election of Prime Ministers, and especially of Presidents, is that they become much more powerful than legislatures…….”
26. May 2014 at 06:50
By the way Scott, happy memorial day
26. May 2014 at 07:37
“Steven, You still don’t get it. No one is going to “give you a country” because they don’t want your solutions. And they don’t want them because they are corrupt.”
I don’t need the countries. I need the IMF. Are you saying, Scott, that the economists and leadership at the IMF are corrupt? It’s not been my experience. They may be a bit narrow-minded and certainly romantic in how they think about governance, but I have not ever heard of material corruption in the institution.
So, if the IMF is signed on, how do I implement a performance base program in, say, Hungary? Simple, I make it part of any financial support conditionality.
In the case of Hungary, the clause would read something like the following:
“To insure growth and fiscal resources to provide funds for the repayment of IMF loans, until such time as debts to the IMF are fully discharged, the Parliament of Hungary shall approve a law with the following terms:
Each member of Parliament shall receive an annual bonus equal to
i) the GDP growth of the country, measured in Euros at average exchange rates, less
ii) the increase (decrease) in government borrowings, measured in Euros at average exchange rates,
ii) this sum, multiplied by 2.5%
iii) and divided by the number of Parliamentarians
Payment shall be subject to approval and audit of government accounts by the IMF, including delivery of creditable accounts related to GDP performance and government borrowing.”
For 3% GDP growth with no increase in government borrowings, the bonus would equal $250,000 per member of parliament on a base pay of $40,000 per year. And keep in mind that the cost of living in Budapest is about the same as in Baltimore.
27. May 2014 at 06:28
And now look at the German European election results. AfD got 7%, FDP got 3%, instead of both getting just under 5%. (Though a German court threw out the 5% minimum for European elections, resulting in a lot of fringe parties getting one member.)
Repeat those numbers in the federal election (but with the 5% minimum, if that will still apply, as I don’t know), and, well, perhaps there’s still a grand coalition, but perhaps there would be a CDU/CSU – AfD coalition. And I think it’s difficult to say that the CDU/CSU was boosting the AfD.
My bottom line is that the 2013 German federal election story was the FDP collapse, which was a lot (though not all) the AfD taking former FDP voters. (The FDP also had a temporary high in the previous election, having at that time capitalized on being outside of an unpopular Grand Coalition.)
27. May 2014 at 11:09
So, if the IMF is signed on, how do I implement a performance base program in, say, Hungary? Simple, I make it part of any financial support conditionality.
But that only works if voters respond to those incentives by saying “hey, let’s stop voting for corruption!” Unfortunately, that rarely seems to happen no matter how strong the external incentives are.
And that shouldn’t surprise anyone. I mean, think about it: corruption already embodies huge economic disincentives. That’s why corrupt countries are generally poor countries. The IMF considerations are relatively picayune by comparison to what these societies are already leaving on the table by condoning corruption.
The IMF is simply not powerful enough to fundamentally transform a society’s culture.
27. May 2014 at 16:39
John, I agree that AfD votes came from the FDP, but that doesn’t address my point. The CDP could have helped the FDP get over the 5% threshold. In that past they’ve done that. This time they decided not to. It was a CDP decision.
Travis, I also like the Parliamentary system better. Preferably not with the 5% threshold.
TallDave, But the military doesn’t depose them because they are corrupt, rather it’s because they favor the poor.
I agree with you on the IMF and corruption.
Steven, The IMF has tried to make aid conditional on policy reform, and failed. The countries would rather not take the aid, than give up on corruption.
28. May 2014 at 03:53
The IMF, to the best of my knowledge, has never tried a performance-based program. You show me different.
Again, let’s be clear on what we’re doing here and the assumptions underlying. We are aligning the principal with the agent. Policy reform affects the agent only–that’s why they fail! (And by the way, countries have taken boatloads from the IMF in terms of conditionality. By no means is it fair to say that IMF conditionality has consistently failed.) Thus, if the IMF makes aid to Greece conditional on, say, privatization, it is asking the politicians to decide this on the basis their agency role, that is, because they are expected to act in the long term interests of the country (they have to muster some “political will”), even though it may run against their own political interests. The principal is not addressed at all. So, let’s stop confusing programs geared at the agent, and programs geared at the principal. These are different. The IMF, to the best of my knowledge, has never created or implemented reforms aimed at the principal.
Further, let’s be clear: I’m not all that interested in corruption. I’m interested in balanced economic growth. I’m not primarily concerned about the bribe, but the bridge to nowhere or the business that never gets off the ground because of corruption. (When I have a little more time, I’ll take you through a case study in Hungary.) Indeed, the bribe is often the only economically efficient part of the package!
But, look, how hard is this? The IMF has to insert a couple of paragraphs into aid to, say, Italy. In the worse case, it has no effect, and then no one is worse off. In the better case, Italian politicians figure out how to deliver 3% growth without increasing debt.
So if you’re so terribly concerned about how corrupt guys will resist making more money, well, relax. Right now, you’re arguing that, say, Greek politicians will see the potential for a $250k annual bonus in an aid package and say to the IMF, “You know guys, privatization, labor market liberalization, financial reform–well, that’s all OK. But that bonus thing, well, that’s just a non-starter.”
I can assure you, such a clause would be known throughout the Hungarian parliament within, say, 15 minutes. And the politicians will say to the IMF, “Gee, you know, we’re public servants, and you know, we don’t work for the pay, but, you know, this bailout package is critical for the future of the country, and while we don’t agree with it–much as we don’t agree with other conditionality–well, it’s critical for the country and we really don’t have a negotiating position, so I guess we’re forced to accept it.”
So, let’s try the program out three or four times and see how it works. There’s virtually no downside risk and plenty of upside potential.
28. May 2014 at 04:09
As for you, Mr. TallDave –
Keep in mind that I work in a three ideology system which has three objective functions–egalitarian, liberal and conservative. (It is this which makes governing different from running a business, which has only a liberal objective function.) At least two of these will always conflict, thus, the voter is giving no clear objective function to politicians. This is turn creates a non-market failure in governance, ie, if an agent is given two conflicting objective functions, then the principal will lose control over the agent and the agent’s priorities (corruption and opportunism) will come to dominate. (Same case study as above, btw.)
Now, I am lifting out just one of the three objective functions, liberalism–I am elevating balanced economic growth as the chief goal of government–and paying politicians to achieve just this one objective function. Thus, we begin to address corruption by creating a single, well-defined objective function which aligns the interests of the principal (in this case, the IMF) with the agent (the politician). By doing so, we’ll will obtain better control over the agent, and this will reduce corruption as a by-product (not as a central goal) of the incentive program.
And if you think there’s a textbook which will tell you this, no, there’s not.
28. May 2014 at 11:09
TallDave, But the military doesn’t depose them because they are corrupt, rather it’s because they favor the poor.
Heh, well I might have argued Thai military officials depose civilian governments because they aren’t getting paid off well enough, or perceive threats to their interests, or just out of habit, but there’s enough corruption for a bushel of fig leaves.
The Thai military probably doesn’t hate the poor, but probably fair to say they have a healthy distrust. After all, Siam had a siginificant Communist movement, at least until people noticed the Khmer Rouge had murdered literally a quarter of the Cambodian population.
28. May 2014 at 11:22
Steven,
Nonresponsive. Why do the voters care what you pay politicians?
28. May 2014 at 18:49
Steven, I have no objection to trying your approach, I just don’t think it will work. But if anyone asks me I’ll say “Sure, give it a try.”
29. May 2014 at 04:03
Dave –
Most voters–even libertarian voters–resist the notion of paying politicians for performance. There are a couple of reasons for this. First, if the government has three objective functions, then there is some visceral fear that other functions–communal issues like defense and egalitarian issues like Medicare–will be neglected. And that’s probably true. But I’m a classical liberal, so from my perspective, the chief objective of government is sustainable growth. That is the foundation of everything else, in my opinion, and I am not going to be shy on pushing that value as the most important objective of governing.
In addition, there is the question of “social power”. Morgan, somewhere above, says that social power has no reality or value (paraphrasing). And yet it does. Is a politician my leader or my employee? There’s a huge difference in social power between those two attitudes. If they are my leader, then I defer, they tell me what to do, and they enjoy limited accountability. I am a subject. That attitude is the font of all corruption.
On the other hand, if the politician is my employee, then I am in charge, I am responsible and accountable for the course of events. I am the leader. That’s something that a lot of people–including economists–find unsettling, and maybe downright scary. Incentives are not just financial schemes; they embody a completely different relationship between governed and governing.
And of course there are the usual issues associated with ‘inequality’. If a US Congressman is hauling down $2 million in annual bonuses (what they deserve on paper) because the US is growing at 3% and cutting debt at 2% per year, well, then those bastards are just getting rich at the public’s expense–so the thinking goes.
So it’s a hard sell. On the other hand, I personally believe that it is the most important governance tool we have, and has the potential to make life better for literally billions of people.
29. May 2014 at 04:20
Scott –
Thank you. Two years ago, NGDP targeting was considered obscure. You made it mainstream. Ideas can influence policy over time.
Mindset is an important economics term. For the longest time, I didn’t understand what it meant. It means that any decision occurs in two stages. At the first stage, the decider has to determine whether to deal with an issue at all. If so, then he has to assess the issue and come to a decision.
Mindset deals with the first stage. Do you want to entertain a notion or not? It is worth investing effort to be able to have an opinion at all?
Well, now we have some movement on mindset. You haven’t said ‘no’, and you’re the first economist to do so! That’s big progress from my perspective.