Public Choice and the Public Good

Paul Starr over at The New Republic is reviewing Unheavenly Chorus, Oligarchy and the MoveOn Effect. All three are relevant to this blog, especially the first book, which convincingly shows how a relatively small minority of wealthy people can still have the political clout to trump the interests of the majority. As Starr writes:

Turning to its central theme of unequal voice in America today, The Unheavenly Chorus sets out a detailed account of differences in individual political participation. Voting is relatively egalitarian, at least compared with political contributions. Americans in the top fifth in socioeconomic status (a combined measure of income and education) are “roughly twice as likely to go to the polls as those in the bottom quintile” but about eight times more likely to make a political donation. The more affluent also vote with greater regularity from one election to the next: when turnout is low, it tends to drop the most among the disadvantaged. As a result, inequalities in voting participation are related to the overall level of turnout.

Some research suggests that nonvoters do not differ in their views from voters, but The Unheavenly Chorus assembles broader evidence on participation showing that the politically inactive differ systematically from the active public. They are more likely to be in economic need and to favor universal health insurance and other social benefits. Studies of the responsiveness of government to different socioeconomic groups confirm that enacted policies reflect the views of the more affluent. In research cited by Schlozman and her co-authors, Martin Gilens of Princeton University analyzed nearly two thousand questions in public-opinion surveys about proposed national policies from 1981 to 2002. On issues where opinion varied by income, he found that the policies finally adopted were strongly related to the preferences of upper-income people, and not at all to what the poor or even middle-income Americans wanted.

The data on organized interests tell a similar story about unequal power, though with many complicating details. The authors of The Unheavenly Chorus draw on a variety of sources, but mainly they rely on an analysis that they conducted of twelve thousand organizations listed in the Washington Representatives directory. Contrary to a widespread misunderstanding, only a small proportion of groups represented in Washington (12 percent) are associations made up of individuals. The majority are corporations, governmental bodies, and associations of institutions. By sheer numbers, “representation of business is dominant.” In contrast, most workers who are neither professionals nor managers have no group in Washington representing their occupational interests, unless they are unionized—and only 7 percent of private-sector workers are now unionized. In no form of organized advocacy do organizations representing the poor register “more than a trace.” The socioeconomic tilt of the pressure-group system is hardly a mystery, especially when it comes to costly services such as lobbying. As Schlozman and her co-authors write, “Because pressure politics relies so heavily on the services of paid professionals, it is a domain that facilitates the conversion of market resources into political advocacy.”

But surely, you might think, many organizations help to rectify that situation by tapping into the less active portions of the public. Alas, The Unheavenly Chorus finds that the efforts of political groups to recruit new members and donors reinforce the socioeconomic bias in political voice. Groups searching for support act as “rational prospectors”—they hunt where the ducks are—seeking out the more affluent and educated because those are the most likely to respond. Solicited political activity turns out to be even more unequally distributed than actions that individuals say they take spontaneously on their own.

While Starr sees the situation as particularly bad in his reviews, he mentions, cautiously, that organizations like MoveOn.org have the potential of increasing basic citizenship and reversing some of the recent political and economic gains made by the rich. Admittedly, Starr sees the effect as relatively small, given the extent of the problem.

He's not alone. The central thesis of Hacker and Pierson's Winner-Take-All Politics is that government is an area for organized combat between competing interest groups. Any basic theory of public choice would show that once one specific group becomes disproportionately represented, it only follows that government has the incentives to award them disproportionately. And this is exactly what happened in the last thirty years in America. The only thing guaranteeing the current political framework is the relative strength of competing organized groups.

But what about voters? Starr doesn't pain a pretty picture about the effectiveness of the American populous, and neither do Hacker and Pierson. There is a twofold problem with American representative democracy. The first is that the most demanding aspect of civic engagement, voting, isn't actually the main show. The real competition is over the creation of policy, which is a long, slow process that very few "regular citizens" ever get involved in. It's probably why we make such a big deal about people like Lilly Ledbetter; they just don't come around all that often.

The other, probably more insidious, problem is the persistent lack of awareness and motivation among voters. Few analysts of American politics can find even a single period of American history where the majority of potential voters were well informed and active. This deep pessimism led economists like James Buchanan to conclude, all the way back in the 1960s, to conclude that governments are largely a source of market failure instead of solutions. Many economists would point out that the incentives for people to vote are very small, and it's a surprise that people vote as much as they do.

Because the institutional pressures are so intense, we shouldn't be surprised that voters fail up to the basic standards of American democracy. Nonetheless, the plain ignorance of American voters is very disappointing. As Hacker and Pierson write,

Optimists about American democracy too often presume that all this is relatively straightforward. The truth is much more unsettling—so unsettling that even in serious political discourse it is usually considered bad manners to point it out. The truth is that most citizens pay very little attention to politics, and it shows. To call their knowledge of even the most elementary facts about the political system shaky would be generous. To take just a few examples, less than a third of Americans know that a member of the House serves for two years or that a senator serves for six. In 2000, six years after Newt Gingrich became House Speaker, only 55 percent knew the Republicans were the majority party in the House—a success rate only a little superior to a random guess. Just two years after he presided over Bill Clinton’s impeachment trial in the Senate, only 11 percent of those surveyed could identify William Rehnquist as chief justice of the United States.

Crucial and basic matters of political process are equally opaque to most voters. In early 2010, as Republicans brought Washington to a halt as effectively as the unexpected winter snowstorms, most Americans had no idea that not a single Republican senator had voted for health-care reform (two-thirds either put the number at between five and twenty or said they didn’t know), and less than a third could correctly identify the number of votes needed to overcome a filibuster (sixty). Well over half of Americans either said fifty-one votes were sufficient, or confessed they had no idea.

About policy, most voters know even less, and are prone to staggering mistakes. Roughly half of Americans think that foreign aid is one of the two top expenditures in the federal budget (in reality, it consumes about 1 percent of the budget). In 1980, in the midst of the Cold War, 38 percent of Americans surveyed believed that the Soviet Union was a member of NATO—the anti-Soviet defense alliance. Two years after the huge 2001 tax cuts, half of Americans were unable to recall that there had been tax cuts at all.11 Most of the famous “swing voters,” whom journalists tend to idealize as standing above the fray, carefully sorting among the strengths and weaknesses of each party’s offerings, are actually the least engaged, least well-informed citizens, reaching a final decision (if at all) on the flimsiest grounds.

Even though increased citizenship would be nice, there is little reason to believe that any of this would change. It's never happened before, and there's almost no reason to believe that something is going to change it soon. Maybe organizations like MoveOn can have an effect, but it will be a long time before that happens.

While this is a pretty depressing assessment of American democracy, it is not very new. In fact, this was a problem faced by the Founding Fathers as well. Although Thomas Jefferson's statements about "a natural aristocracy" might sound a little odd to modern readers, the underlying concept is exactly the same as the problem facing American democracy today. As Jefferson writes in a 1813 letter to John Adams,

For I agree with you that there is a natural aristocracy among men. The grounds of this are virtue and talents. Formerly bodily powers gave place among the aristoi. But since the invention of gunpowder has armed the weak as well as the strong with missile death, bodily strength, like beauty, good humor, politeness and other accomplishments, has become but an auxiliary ground of distinction. There is also an artificial aristocracy founded on wealth and birth, without either virtue or talents; for with these it would belong to the first class. The natural aristocracy I consider as the most precious gift of nature for the instruction, the trusts, and government of society. And indeed it would have been inconsistent in creation to have formed man for the social state, and not to have provided virtue and wisdom enough to manage the concerns of the society. May we not even say that that form of government is the best which provides the most effectually for a pure selection of these natural aristoi into the offices of government?

Jefferson's argument would ring true to any economist. In order to overcome broadly weak incentives for voter activism, hire a few specialists. Let the division of labor sort the problem out naturally. Oddly enough, this brings organizations like MoveOn back into the spotlight. Maybe efforts at increasing public activism are ineffective, but the potential for representative work, lobbying on behalf of the middle class, is there.

To understand this potential, you need only to look at the number of representative groups in Washington that only act on behalf of organizations, something like 88 percent of them. Clearly, some people have learned that it pays to have have external representation in the halls of Congress. But just because the balance is skewed right now, it does not mean that this is a natural state of affairs or the way it always has to be. What if the makeup was different? What if the majority of the groups represented the interests of coalitions of average Americans? Labor fulfilled this role once. And while it might be nice to have a revived labor movement in the US, it doesn't mean that labor is the only possible kind of representative group.

In Unequal Democracy, Larry Bartels points out that the farmers insurance groups of the late 19th century were an important lobbying group on behalf of farmers. The insurers wanted the farmers to do well, since it kept them from having to pay out insurance, which ended up benefiting both sides. Why can't other consumer lobbying firms, representing the interests of people instead of legal entities, be set up? Why can't MoveOn collect membership dues, contingent upon specific lobbying results?

Yes, the road is hard. And yes, the scales are titled against the middle class. But the current state of affairs is relatively young, and similar challenges have been overcome in the past. When the time comes for change, there's little doubt that professional interest groups will pay a key role in this change. They played a major role in every major piece of progressive legislation that was passed in the last four years. And if a more egalitarian society is to be sustained, they'll be playing a much larger role in the future.

The Fed Moves in, Queue the Inevitable Inflation Politics

The Fed's unprecedented monetary policy is the top economic news of the week. I'll let the New York Times do the busy work.

The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.

This is the first time that the Fed has tied the duration of an aid program to its economic objectives. And, in announcing the change, the central bank made clear that its primary reason was not a deterioration in its economic outlook, but a determination to respond more forcefully — in effect, an acknowledgment that its incremental approach until now had been flawed.

Tyler Cowen was one of the first to point out that this is Scott Sumner's revolution. We all are just privileged to live in it.  As he writes,

The Fed’s policy move today might not have happened — probably would not have happened — if not for the heroic blogging efforts of Scott Sumner. Numerous other bloggers, including the market monetarists and some Keynesians and neo Keynesians have been important too, plus Michael Woodford and some others, but Scott is really the guy who got the ball rolling and persuaded us all that there is something here and wouldn’t let us forget about it.

Although this blog cheers the new direction taken by the Fed, we're not here to discuss monetary policy in a lot of detail. I'm just not that good at it. Dr. Sumner's blog is a much better place for that. On the other hand, the Fed's actions have brought back the politics of inflation, sometime that's very close to my heart. The bullhorns were loud and clear over at CNBC.

Central bankers are “counterfeit money printers” and Federal Reserve Chairman Ben Bernanke should resign for messing up the U.S. economy so badly, Marc Faber, author of the Gloom, Doom and Boom, told CNBC on Friday.

He said Bernanke was one of the main proponents of an ultra-expansionist economic monetary policy that was to blame for the latest financial crisis.

“If I had messed up as badly as Bernanke I would for sure resign. The mandate of the Fed to boost asset prices and thereby create wealth is ludicrous — it doesn’t work that way. It’s a temporary boost followed by a crash,” Faber said.

So what's going on? As usual, the first place to look in these sorts of debates is motivated reasoning. Marc Faber, of course, is a hedge fund manager. And he, like many other wealthy people, has very good reason to fear inflation. It will quickly and sharply eat into his assets. Once you see this, all of his other proclamations of doom and gloom can basically be ignored. Faber stands to lose a lot of money if monetary policy gets especially loose. End of story.

And while many economists lament the silly public debate over this issue, there is almost no controversy among economists about the effects of moderate inflation on employment. expansionary monetary policy benefits poor people at the expense of rich people, especially those who derive their income from wealth, i.e. people like Marc Faber. As Coibion, Gorodnichenko, Kueng and Silvia explain in an IMF working paper,

Contractionary monetary policy shocks appear to have significant long-run effects on inequality, leading to higher levels of income, labor earnings, consumption and total expenditures inequality across households, in direct contrast to the directionality advocated by Ron Paul and Austrian economists. Furthermore, while monetary policy shocks cannot account for the trend increase in income inequality since the early 1980s, they appear to have nonetheless played a significant role in cyclical fluctuations in inequality and some of the longer-run movements around the trends. This is particularly true for consumption inequality, which is likely the most relevant metric from a policy point of view, and expenditure inequality after changes in the target inflation rate.

In other words, inflation is a tax on wealth-holders used to encourage more spending. This relationship and its mechanism have been known for quite some time, essentially since the creation of the Philips curve. In that sense, Ron Paul is right; he just conveniently forgets to mention who benefits and who loses. Moderate inflation, similar to the kind that the Fed is currently implicitly pursuing, will create demand and jobs, the things that America's workers actually need. The only real question among economists is how much you can reasonably sop the rich to do something like this. There has to be limits, which is why you don't want inflationary pressure when unemployment is already around ~5 percent.

This is discussed a lot in Larry Bartels' Unequal Democracy (and in this related in the post on this blog). Republican presidents have traditionally presided over monetary regimes that are contractionary, while Democrats have pursued something slightly more expansionary. Obviously, the relationship isn't completely perfect, since it's a small data state dominated by Reagan and Carter. Nonetheless, the relationship is there, and it becomes most apparent once we look at GDP growth by p 

Chart taken from the Lisco Report. The original can be found here.

That's why Republicans are good at ensuring decent growth in the incomes of rich people and more importantly, creating the incentives to build and hang on to wealth, as Bartels' data clearly points out. 

There's really no doubt about it. For anyone that considers 8 percent unemployment an big deal, today's action by the Fed is great news.