Money and Politics

The issue of money and its influence in politics seems like it has an easy but overlooked solution. I propose to fund all national elections publicly, through both the primary and the national election. The national elections in 2004 cost $4 billion, but that cost could go up this year. With the average congressional election costing on the order of $1 million for the winner, the total cost for equally funding two candidates in each primary, plus two candidates in the general election would be $3 million per race, or less than $1.5 billion every two years. With a presidential election costing somewhere around $4 billion itself, it would still cost less than $2 billion per year to fund elections. This is a very cheap policy, considering its ability to mitigate the influence of money in politics.

Funding all national elections would have several great effects. It would free up a large percentage of politicians' time, which could then be used to interact more with constituents rather than donors as well as to learn more about issues. Politicians are often too busy to read bills, and are certainly too busy to understand technical issues. Freeing up a large fraction of their time from fund raising would allow them to devote more energy to these important issues.

Funding national elections would make the number of TV ads run an important part of the public discourse. It may be desirable to have politics in a lowest-common-denominator format like 30 second TV ads, but it also may not. It is certainly good to run as many TV ads as is affordable, since they help candidates win elections. I would also guess that they increase voter turnout, which is certainly noble. On the other hand, TV advertising has some arms-race like qualities, since it increases a candidate's visibility by so much. If my opponent is engaging in many TV ads, I would look less official/less serious by not engaging in my own TV ads. Candidates might not desire so much expensive TV advertising if their opponent wasn't going to have it either.

It would also make competition more equal in elections, since in many cases the incumbent is able to spend much more money than the challenger. This could be the case for many reasons, of which money is only one. Incumbents might actually be better, more professional politicians. Also, the power of an incumbent increases with her time in office as she gains experience and moves into senior committee positions in Congress. However, it could be the case that incumbents win just because they have more money. I would argue that the extent to which a candidate is better funded, independent of her other qualities, is not a good reason for her to get elected.

If national elections were funded, it would make fund-raising ability less of a job requirement for politicians. To the extent that fund-raising and politics require different skill sets, and to the extent that the current system requires a prospective politician to also be a skillful fund raiser, we are losing out on skilled public servants. Politicians should be elected based on their ability as politicians, not as fund raisers. Fund raising is only an important skill for politicians because it is currently how they get elected. If fund raising were no longer important, people who have excellent political skills but poor fund raising skills would be more likely to gain office. Similarly, fewer people would win office just by being good fund raisers or rich. I think that this is an unqualified good thing.

Though it is beside the main point that it would be affordable and preferable to fund campaigns, I feel that it would be good to have public discourse about the necessity of TV advertising. Plenty of information and analysis is available for free online, or during TV programs such as debates and political features. I personally feel that it is detrimental to the public discourse to force elections to depend on sound bites delivered to people who might not be interested. Anyone who has any interest in knowing about politics has many outlets to turn to which are free and simple to find. Without exception, I think that non-TV advertising ways of learning about a candidate and her positions are better in that they are both more informative and cheaper. To the extent that less TV advertising would happen due to public oversight of election spending, I think it would be good.

A cost of $2 billion per year is less than $6 per person, and much less than is spent on many other public projects. Considering the decrying of lobbyists and the influence of money in politics, this seems like a trivially easy step to take.

Is the Mortgage Interest Tax Deduction Worth It?

Tax deductions for mortgages are $80 billion per year. Since this is almost as much as federal transportation spending, and more than any other line item on Wikipedia's budget page except defense and social programs, this is a whole lot of money. It also doesn't count things like having Fanny May, mortgage debt relief, etc, as mentioned in Clive Crook's article. Aside from all of the public expenditure, individuals spend a large portion of their income servicing debt. Reading this article made me very curious. What exactly is the purpose of this huge tax subsidy?

I started looking around, and it made me love being an economist. There were a few sociology papers around, but they were pretty much garbage. Then, I found this paper by Edward Glaeser and Jesse Shapiro. This pretty much answered my questions. It turns out, first of all, that $80 billion understates the cost of the subsidy. In 1999, almost $800 billion was itemized by 40 million people, which I assume gives a cost nearer to $200 billion per year. This is huge money, but creating stable neighborhoods and cohesive communities is a really important thing, so it could be worth it.

While the paper wasn't particularly judgmental (at least not compared to me!), it found that the interest deduction has no effect on homeownership. This happens because of two main features. First, people who actually itemize on their tax return tend overwhelmingly to be wealthy. Half of all itemizers are in the top quintile of earnings, while less than 10% of itemizers are in the entire bottom half. Second, a vast majority of those in the top portions of the income distribution own homes. This is mostly due to the difference between the characteristics of rental dwellings versus single family detached dwellings. Combining these two facts, the overwhelming majority of the subsidy goes to people towards the top of the income distribution who would buy a house anyway. There are very few people who both itemize their tax return and are potential home buyers. Though these stylized facts make a large effect seem implausible, the paper looks anyway. It measures the effect of differing subsidy sizes on home ownership, and finds no relationship (since the magnitude of the subsidy depends on inflation, there is a lot of variation in subsidy).

The paper also addressed another question that I had which is whether homeownership actually improves the community. There is some minimal evidence that it improves communities somewhat. However, the minimal gains (in my view) in no way justify the subsidy to *all* homeowners, rather than those who are marginal homeowners. To the extent that society wants to increase homeownership rather than provide a large transfer to people in the top decile of earners, programs that provide help with down payments or get better mortgages for poorer people would be much more effective.

It's sure been a while...

...since I've written anything. I really mean to do a better job, but I've been busy moving in and whatnot, and also distracted. In any case, I'm currently reading William Manchester's A World Lit Only By Fire. My dad commented that this was a really interesting history, and would disabuse anyone of the idea that religion (Christianity in particular) did more good than harm in the world. However in the course of reading it (I'm done 3/4, and I've begun the slaughter of the reformation), I had a much different take.

Basically, it seems that the cause of all of the slaughter during the reformation was not religion, but the fact that the people of Europe were extraordinarily violent by nature. In my reading, the spread of learning and the plurality of theological ideas that the Renaissance produced simply replaced the default unanimity of the Middle Ages and provided an outlet for a violent society. To argue that this sort of bloody time was a product of a particular religion ignores the thirst of the Roman masses for the inherently secular blood letting in gladiatorial displays and the ruthless campaigns of the post-Roman kings. It also ignores the public taste for spectacles like those that Manchester describes in which starving dogs are released upon a chained bear and proceed to eat the bear alive.

As I read this history, religious intolerance is only the very surface layer of societies where everyone is always looking for an excuse to turn against someone else and fight. (Of course, the "humanists" that Manchester describes are different, but these are people who are essentially intellectuals. As the Medieval nerd to the warring noble's jock, it isn't entirely surprising that humanists were pacifistic and compromising.) This all poses what is, to me, a much more interesting question. Why is it that Europeans of the Middle Ages and Renaissance are so violent while Europeans today are essentially not? Back then, many if not most high level nobles and prelates were murderers, while now if there are any murderers among the upper echelons of society, there are certainly none who admit it. I'm sure there are some important changes that have happened between now and then, but I can't see how religions play more than a superficial role.

I think a guy who has something to say about this is Marx. For this reason, I'm going put him on my reading list. From what I remember from 21H.931, Marx would argue that the new pacifism is related to some change in the nature of economic production between the Renaissance and today. There are obviously many candidates for this change, but I'd guess it's probably mostly something like the increase of trade and new manufacturing technology which decoupled economic productivity from land use. This allows a whole lot more social flexibility than could be accommodated by a single church and a single hierarchy. No doubt the more I speculate, the further afield I will drift, so suffice it to say that I'd be very interested in reading a more thorough analysis of why members of modern Europe are inherently so much less violent than members of Medieval Europe.

No Internet Party!

Last night the Internet went out at our house. It was really a funny thing to see. I was sitting in Kurt's room and talking to him at the time, when Craig Rothman ran by and asked Kurt if his Internet was working. When Kurt found that his Internet was broken too, Rothman went down to the basement to check on the router and whatnot. Within another minute or so, people started coming out of their rooms and "grabbing their pitchforks" to start an angry riot.

All of this had several effects. One effect was that people congregated in each others rooms and acted slightly ashamed that they were only socializing because the Internet was broken. Another was that MIT students were all of a sudden unable to do their work and had nothing to do. I suggested that we take some no-Internet shots, which turned out to be a great idea.

About 10-15 people were in and out of the bar, and we did about 4 shots together. Then somebody had the idea to do a power-half hour (we still are MIT students, after all) and so we did. It was a great time because it was so unexpected. Also, the crowd that gathered downstairs consisted of people who don't normally hang out together, so there was some fresh bonding going on. We should hope the Internet goes out regularly in the future...

Private Equity

I recently read this article in The Economist about private equity. Private Equity is a really interesting thing. I think it represents a big change for the better in the way that capitalism works. In the "free markets" that are discussed in introductory economics courses and form the basis of economics as it is discussed in the public sphere, a very important idea is that companies can fail. Only by the failure of inefficient companies do we achieve the optimal efficiency of free markets that are touted. In fact, lots of reasonably large companies don't fail because of various barriers to entry. Instead, they simply perform at less efficient and successful levels than they might, which costs them (and consumers) money. Private equity, in its ideal form, buys inefficient target firms and makes changes to increase their efficiency. Then, when the target firm's increased efficiency commands a significantly higher stock price, the private equity (PE) firm sells the company for a profit. In this way private equity increases the efficiency of firms beyond the levels that competition would produce.

Because of its interest in increasing firm efficiency, private equity has the potential to work outside of firm culture to fix chronic business problems. An example of this is executive compensation. Since the pay of PE workers is dependent on increasing shareholder value, and since PE firms typically control their target firms completely, PE firms will not be complacent to fund exorbitant executive compensation packages. Private equity can also reshape the relationship between labor and managment in various firms. In the current relationship between labor and management, management and labor square off over wages. Management holds the power to control the jobs of the workers, while the workers hold the power to do the work that management requires. The negotiating principle of management that only by accepting wage cuts can the firm remain competitive and the workers keep their jobs is much more tenuous. In the past decades it has become increasingly clear (think of American auto companies) that workers can also lose their jobs because of poor or middling performance by their managers. PE firms exert forces that promote efficient management: either manage successfully or your job could be in jeopardy. In this way, PE can provide a force that checks management's power and increases economic efficiency.

Though PE has the ability to increase overall efficiency, it also has a potential to cause problems because it creates economic instability. As the article reports, British unions were unhappy that a private equity group cut jobs. Another problem is that many PE firms are unsuccessful. As The Economist reports, the largest hedge funds significantly outperform the S&P 500 while smaller funds underperform significantly. Furthermore, it was found that firms that were bought and sold by PE within a year performed poorly, which suggests that PE firms raided their targets without making lasting changes to the businesses. I attribute these underperformance issues to the fact that private equity is a field which is only now becoming a mainstream economic force. Since companies like the Blackstone Group have had great success, there are waves of "me too" companies which do not actually have the necessary expertise to succeed in private equity. Similarly, there are "me too" deals which happen quickly in order to bolster results. As the private equity market matures, there will likely be fewer inefficient firms and deals.

Of course, achieving economic efficiency and dealing with the instability that it causes are independent problems. The instability resulting from the actions of PE firms should not be avoided. Rather, it should underscore the necessity to provide economic stability to workers by means that are not market based. I personally am sympathetic to the idea of private equity firms because they are groups of "meta-businessmen". Rather than being bogged down in particulars of an industry or conflicts they approach business problems from a fundamental and pure perspective. They fix relatively general business inefficiencies by focusing on business fundamentals. Due to the current and continuing trend of increasing specialization it is important to recognize that no business, no matter it's nature, can avoid the basics of business.

Economics

For this article, I really wanted to write about the bomb scare thing with the Mooninites in Boston. I tried and I tried but I was unable to really come up with anything coherent. Basically I don't really understand the entire subject of how our national security system should work or how people should feel about it. Instead of this, I think I'm going to write about something a little economic. At least I know something about economics...

A really interesting thought that I had relates to the fact that companies are motivated solely by profits. This idea gets kicked around a lot, and I think it makes businesses seem pretty evil. In fact, I think that companies like Starbucks, Timberland, and Costco are demonstrating a trend that will show that companies are not actually good or evil. Instead, they are motivated by profits, which must come from moral consumers. Basically these and other socially conscious companies have realized that people will pay extra for a product if they know that they can sleep easily without worrying about its origins.

Consider buying Starbucks' fair trade coffees, or generally paying more for their coffees as discussed (even if potentially untrue) here. The coffees cost a little more, but you get a guarantee that you aren't supporting a system that exploits coffee farmers. Similarly, consider going to Costco versus Sam's Club. The prices are roughly the same, but Costco pays its employees about 60% more, plus health insurance. By going to Costco, a reasonably well-to-do person can save money by buying in bulk and avoid the moral qualms involved with supporting an exploitative employer. Timberland also pays its employees more, pays them to volunteer in the local community a couple of days per year, etc. and sells itself as a socially responsible brand.

In the strict sense, it doesn't necessarily maximize Starbucks' profits to pay its farmers more for coffee. However the cost of coffee beans is a really small part of the cost of a cup of coffee. By paying higher prices to the farmers, Starbucks can greatly improve their lives. Consumers, in turn, will happily pay a few more cents per cup in order to avoid thinking about starving coffee farmers in developing countries. By letting customers know about their fair trade practices, Starbucks is able to sell customers a more expensive cup of coffee, pay the farmers more, and pocket the difference. Effectively, Starbucks can sell me, a moral creature, a little peace of mind with my morning coffee. Similarly, the other companies that I've mentioned above use their responsible practices as a way of selling clear conscience, along with the actual goods, to customers. Though companies really only care about maximizing their own profits, there is a new opportunity to sell clear conscience to a willing market: the moral customer.

Economically, this argument can be generalized to say that the "new company" needs to deal with an additional trade-off. Starting from the operating regime of a "traditional" company, a "new company" must trade off the benefits of increased social responsibility with its costs. Social responsibility brings higher demand for a good by decreasing its effective cost to the customer. When I go to Sam's Club, I pay $5 for a pair of shorts plus some psychic cost in guilt associated with supporting a socially irresponsible company. At Costco, I could get the same shorts for $5.50, perhaps, but avoid the psychic cost. If the psychic cost of supporting a socially irresponsible company for me is more than $.50, I would shop at Costco. Obviously, just like in any economic analysis, a "new company" must weigh the higher potential prices associated with being socially responsible (probably pretty tough to measure) versus the cost of being socially responsible (some increased wages and benefits). The "new company" then chooses this new production method, which has the characteristic of being more socially responsible while also maximizing profits. Since empirically people will pay for this conscience companies like Wal-Mart who sell goods laden with psychic costs fail to maximize profits while being evil.

Of course, an implicit part of this argument is that I, the consumer, somehow know how much Costco and Sam's Club pay their workers, as well as what a "fair" wage might be. This accurate transfer of information, from Costco to the customer or from a third party to the customer, is something that I want to discuss in a future article about the transfer of information.

Honesty and Uncertainty in Intellectual Expression

One thing that I've been pretty weak on recently is my intellectual honesty. I think it might have to do with the fact that I'm not a physicist anymore. I remember one of the things that I really liked about physics was the way that physicists talked about things. They were very good at distinguishing between things that can be known and things that can't. They were also very good at expressing the degree of certainty with which they made particular statements. I respect this very much, because when a physicist says something you know exactly where he stands. You don't know just what he thinks about a particular topic, but how much of his idea is based in a knowledge of the corpus of physical research and how much is opinion. A great example of this is Richard Feynman's "The Meaning of It All". "The Meaning of It All" is 3 lectures about culture, religion, politics, and a ton of other things that he as a physicist knows nothing about. He writes frankly about these topics, and is quick to admit exactly how sure he is of himself.

I can contrast Richard Feynman's style to Jared Diamond's. Diamond wrote "Guns, Germs, and Steel," which I read in high school and also "Collapse," which I am reading now. In these books, Diamond takes on a monumentally complicated task: to describe the forces that govern the rise and fall of societies. In "Collapse," Diamond uses what he calls the "Comparative Method," which serves as at least a quasi-scientific way of analyzing societies. He basically looks at a lot of historical examples and sorts the elements of each example into different categories which are part of his theory of societal collapses.

Diamond's approach is basically effective, and I couldn't think of a better way to come up with a theory of societal collapse. The thing that strikes me is that Diamond is making very strong claims about an incredibly complex topic. In his writing he seems more sure of himself than Feynman even though he is making less certain statements. Now I don't mean to bash Jared Diamond - he's one of my favorite authors. He's also an incredibly remarkable man: he is a director of the World Wildlife Fund in addition to being a professor with expertise and publications in a wide variety of fields. I only use him as an example to compare to Richard Feynman. Though it is impossible that Diamond can be as sure about his subject matter as Feynman is about his (at least when he writes about physics), this is not obvious from reading their respective works.

I'm a little worried that in my transition from physics to economics, I have gone from expressing uncertainty like Richard Feynman to like Jared Diamond. Of course, I don't mean to claim that I can think nearly as well as either of them - I only mean to express myself with the right degree of uncertainty. Expressing the right amount of uncertainty is getting tricky for me. The field of economics is understood with much less certainty than that of physics, but I personally learn about economic theories in exactly the same way that I learned physical theories. This situation tempts me to express economic and physical ideas with the same certainty. However to speak as if I understand a particular phenomenon because I know the canonical economic theory behind it is at best disingenuous and at worst a lie. Canonical economics as a whole has serious flaws and is unable even to predict the behaviors of people in relatively simple situations.

Expressing uncertainty in economics has importance beyond showing a degree of intellectual honesty and humility since economic theories apply to public and private life. Basic economic theories that have not experimentally supported are recited dogmatically as support for public policies of various types. For example, a simple model of a labor supply and a labor demand curve would predict that setting a minimum wage would increase unemployment. In fact this has not been observed empirically. As I study economic phenomena over the coming months and years that are known with significant uncertainty, I need to make sure that the things that I say express the true level of my uncertainty.