Behavioral Public Choice - A Literature Review

Bryan Caplan recently posted about a fantastic West Virginia Law Review article that provides a lengthy discussion of the intersection of public choice (the application of economics to politics) and behavioral economics (the application of psychology to economics). 

Here's a segment of the introduction sans footnotes:

Behavioral public choice is both an extension of and a reaction to behavioral economics and its counterpart in legal scholarship, behavioral law and economics. Psychologists and behavioral economists have documented imperfections in human reasoning, including mental limitations and cognitive and emotional biases. Their research challenges the rational actor model of conventional economics, especially the idea that individuals acting in a free market can make optimal decisions without the government's assistance. Behavioral economists and legal scholars in the behavioral law and economics movement have used this research to justify paternalistic government interventions, including cigarette taxes and consumer protection laws, that are intended to save people from their own irrational choices. 

Because of their focus on market participants and paternalism, most behavioral economists and behavioral law and economics scholars ignore the possibility that irrationality also increases the risk of government failure. Behavioral public choice addresses that oversight by extending the findings of behavioral economics to
the political realm.  

A key insight of behavioral public choice is that people have less incentive to behave rationally in their capacity as political actors than in their capacity as market actors. 

Another law and economics article entitled "Nudging in an Evolving Marketplace: How Markets Improve Their Own Choice Architecture" tackles a similar topic. Here's the abstract:

Behavioral economics claims to have identified certain systematic biases in human decision-making with the implied assumption — sometimes leading to an explicit policy proposal — that these biases can only be corrected through centralized planning. While the appropriateness of policy corrections to perceived biases remains an open debate, far less attention has focused on the role markets already play in “nudging” consumers toward more mutually beneficial outcomes. We describe a process by which markets evolve over time to satisfy consumer preferences — or risk failure and removal from the marketplace. By organizing our understanding of markets in this dynamic, evolutionary sense, we expose a basic logic that dominates market transactions as they occur in practice; that is, the mechanisms that ultimately survive market competition tend to compensate for, limit, or otherwise reduce the incidence of bias. We explore empirical evidence for this argument in the market for consumer financial products.

This brings to mind a few previous posts of mine on market dynamics and monopoly. You can read them here, here, and here.

Productivity and Stagnation from an Engineer's Perspective

Tyler Cowen's famous book "The Great Stagnation" has been the subject of a lot of conversation in the econ blogosphere. Cowen and others point to stagnant total factor productivity and income growth among large segments of the population as evidence that something is very wrong with the economy these days.

Those on the other side of the debate point to the inability of TFP and income statistics to account for changes in the quality of goods over time and the dramatic benefits we all get from things like the internet.

This post tackles the issue from an engineering perspective. The author has a whole slew of charts and graphs on everything from information technology and solar power to steam generators and jets. It's definitely worth a look!

Legislator Ideology and the 2014 Farm Bill

I'm currently working on a paper that examines the impacts of PAC spending and other influences on the passage of the 2014 Farm Bill. One variable that is nearly always important in other studies of  legislator votes is the legislators' ideology. I found some interesting data on ideology from GovTrack that I plan to use in the paper and thought I'd share some results of a fairly simple preliminary regression. GovTrack also has a leadership index for legislators which I'll leave for a later post.

Here are the ideology and leadership indices for the House and Senate for 2011-2016:

As you can see, the ideology score seems to do a good job of separating the two major parties. Looking at the 2014 scores specifically, it's even clearer. For example Senators Jim Inhofe, John Cornyn, and Pat Roberts all score near 1 on the ideology index (far right on the chart above); Senators Elizabeth Warren, Barbara Boxer, and Bernie Sanders score near 0 (far left on the chart); and Senators Joe Manchin, Lisa Murkowski, and Mark Pryor all score near the middle.

I took the data for the 2013-2014 legislative period and split it into 5 groups: far-left wing, left wing, center, right wing, and far-right wing which allows for non-linearity in the effect of ideology on the probability a legislator voted for the 2014 Farm Bill. I plan to use a few different versions of this breakdown in the paper.

In the model I controlled for the legislators' party, sex, whether they were Senators or Representatives, and whether or not they served on the Ag Committees in their respective houses.

As you can see below, 68% of Senators and about 60% of Representatives voted in favor of the bill (i.e. voted "yea") and only 8 of the 65 members of both Ag Committees voted against it.

Looking at the correlation between a "yea" vote and the raw ideology index from GovTrack shows a weak but statistically significant positive correlation. The interpretation of this is that more right wing legislators were more likely to vote in favor of the bill.

Breaking down the ideology index into the 5 groups explained above and cross-tabulating with "yea" votes supports this to some extent. The charts below are: far-left wing ideology (top left on the chart), left wing ideology (top right), centrist ideology (middle), right wing ideology (bottom left), and far-right wing ideology (bottom right).

(click the image to enlarge)

The only ideological group with fewer than half "yea" votes for the final 2014 Farm Bill was the far-left ideology group. This is especially interesting considering that 75%-80% of the budget or spending from the Farm Bill has been committed to SNAP or "food stamps" in the past. However, there was an $8 billion cut in SNAP spending, which likely explains the far-left's dislike of the bill.*

So estimating a probit model with controls for party, house, sex, and Ag Committee membership gives us the following marginal effects:

Senators and members of the Ag Committee were, as expected, more likely to vote in favor of the 2014 Farm Bill. Compared to far-right wing legislators (the reference group), far-left wing legislators were 29% less likely to vote "yea" on the bill and right-wing legislators were 19.6% more likely to vote for the bill. There was no statistically significant difference in the probability of voting "yea" for left wing and centrist legislators relative to far-right wing legislators.

Looking again at the cross-tabs above, I think the regression analysis shows that there was, at least in the case of the most recent Farm Bill, a coalition of primarily right-wing and centrist legislators banding together with some far-right wing and left-wing legislators to pass the bill. While I have other variables to add to the model, I suspect that these relationships will hold up pretty well given the importance of ideology in other studies of legislative voting behavior. As always, I'm interested in readers' thoughts, suggestions, and questions.

*11:45 PM 4-24-2016 - I had previously stated that SNAP spending increased. Thanks to Keith Coble for the correction.

Environmental Common Law vs Administrative Regulation

I recently listened to an old EconTalk podcast featuring Clemson economist Bruce Yandle. Yandle is famous for the "Bootleggers and Baptists" theory of regulation. In this episode, he discusses an alternative to the current form of federal environmental regulation. Specifically, he talks about the pre-1970s era when state-level common law settled disputes between parties in regard to environmental quality.

Yandle begins by discussing the tragedy of the commons or the commons problem. For those who don't know, the tragedy of the commons refers to the problem we face with public access to scarce resources. He talks about the stages of evolution of property rights and introduces his juxtaposition of common law approaches to environmental policy to administrative regulation with some historical examples. I'll leave those for the interested listener (the podcast is about 1 hour in length, the extra run time at the end is devoted to a comment by the host).

Here are several of Yandle's points that make his case for the common law approach vis-a-vis the current regulatory approach:

- The state- and city-level common law standard prevalent before the 1970s applied to the parties to the dispute, no one else, though a particular case might be cited in the decision of another. The basic principle was that you didn't have a right to pollute your neighbor's property without their permission.

- Many businesses seeking to discharge waste went to downstream landowners and offered to pay to offset the water quality deterioration rather than purchase the land outright (though this was common as well). This makes a Coasian point: there must be someone who is harmed by the discharge for an externality to exist. Getting rid of all pollution is not likely to be cost-effective. The downstream property holder had a right to water quality based on his or her ownership of the land.

- Common law generally works on a  case-by-case cost-benefit standard whereas regulations don't. The license to discharge or the technological standard required to mitigate pollution applies to all, Yandle says that this implies that the damage done by the pollution isn't legally relevant, only the rules laid out by the regulator.

- Though differential access to legal services is potentially an issue, district attorneys (or tort law, in my amateur, non-lawyer opinion) could be used to solve this problem.

- Did the common law standard work well? Previous research indicates that progress in water and air quality before 1970 was roughly indistinguishable from progress after.

- Yandle is positive about the prospect of using the EPA as an environmental research organization and expert witness in environmental common law cases.

- I can't resist one example. Anglers' associations in England and the English part of Canada have successfully brought suit against polluters and improved water quality under the existing common law standard. This is possible because a landowner also owns the wildlife on his or her property. Yandle says that this is not so in the US; that wildlife are considered public property here. Anglers' associations in the UK have been so successful in common law courts and are now so powerful that all they have to do is make a phone call to a business inadvertently killing fish in a stream or river and the problem is fixed quickly and quietly. Overall, Yandle makes a persuasive case in favor of environmental common law.

Potpourri

House Ag Committee chair Conaway comments on the state of the ag economy.

Don Boudreaux corrects Paul Krugman on the definition of a public good.

Bryan Caplan blogs about an interesting article by Niclas Berggen on the pro-govt bias of behavioral economists. Berggen's results:

Our main findings are that 20.7% of all articles in behavioral economics in the ten journals contain a policy recommendation and that 95.5% of these do not contain any analysis at all of the rationality or cognitive ability of policymakers. In fact, only two of the 67 articles in behavioral economics with a policy recommendation contain an assumption or analysis of policymakers of the same kind as that applied to economic decision-makers. In the remaining 65 articles, policy recommendations are proffered anyway.

Taxes as Social Engineering

Cornell economist Robert Frank recently appeared on probably the best economics podcast on the web, EconTalk. Frank was there to discuss his recent book on the role of luck in successful folks' lives. The conversation was interesting and Frank certainly has a unique perspective. He makes some clever observations but I wasn't convinced of his conclusions. I encourage Farmer Hayek readers to listen to the podcast and check out the comments here and here for some good counterpoints to Frank's positions if you're interested.

Instead of taking Frank's comments head on, I want to discuss what seems like a background assumption he makes. Frank's overall point is that since luck (specifically good luck) plays an under-appreciated role in our success, we should favor higher taxes on the wealthy. This would provide additional funds to beleaguered governments which he asserts are low on funds for infrastructure. More importantly, though, it would ensure that the wealthy would spend less money on things that don't make "anybody any happier."

Frank provides almost nothing in terms of evidence of his claims other than his own personal experiences (see the comments linked above), but even assuming he's correct about the particular facts he lays out, there's a more fundamental problem. It might very well be that declining quality of public infrastructure has more to do with simple mismanagement of resources, rather than a lack of tax revenue. Hayek's work implies that government planners are less effective at directing resources than decentralized owners of "several property" because the former simply can't gather the necessary information to plan efficiently. (see here, page 85) Much of the information necessary for an orderly economy is tacit and ever-changing such that any amount of computing power is insufficient to create the sort of plan Frank seems to believe we need.

To be clear, it's not that markets are perfect, simply that they are more likely to be better than centralized decision makers at allocating scarce resources. The knowledge required to do so is dispersed and tacit, As Hayek puts it:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

I can't resist a couple of final points. Though Frank disputes it, it's pretty clear that taxes on the wealthy do affect their choice of location (here and here). Frank uses a Rawlsian ethic that is quite common in business ethics courses. However, it's not altogether obvious that Rawls' ideas can be used to justify the policies Frank favors.

Equal Pay Day

I wasn't going to write about this but a (female) colleague suggested I do so.

Equal Pay Day is supposed to be the day "that symbolizes how far into the year women must work to earn what men earned in the previous year." This is hilariously crude statistical analysis. In fact, men and women in the same occupations with similar experience and education actually make almost exactly the same salaries. In some fields, women earn more. The supposed "wage gap" is mostly a function of the choices men and women make in the labor force and has very little to do with discrimination.

Here's a helpful video:

EPA-Funded Shenanigans

The EPA has had some image issues lately on the agriculture front. Back in December the Government Accountability Office (GAO) "concluded that the EPA violated express limits on the use of appropriations for indirect or grassroots lobbying, and that in doing so, the agency violated the Antideficiency Act." A regulatory agency using federal funds for "grassroots lobbying" is pretty despicable in my mind but it provides more evidence that the public interest theory of regulation has some serious problems.

The EPA was back in the news recently thanks to a similar oversight. Apparently "an EPA grant to the Northwest Indian Fisheries Commission [was] used to support an anti-farmer advocacy campaign in Washington state.  The campaign included billboards and a website that support increased regulation of agriculture in Washington state."

My initial reaction was that this was likely to be just a simple oversight and that the EPA probably wasn't culpable. Maybe the grant was intended to fund education and the groups receiving money just went a little too far. The problem is that

It appears a large portion of the EPA financial assistance went to pay a public relations and lobbying firm, Strategies 360, to conduct an advocacy campaign called ‘What’s Upstream?’ in partnership with environmental activists, including Puget Soundkeeper Alliance and Western Environmental Law Center.

That could still be a simple oversight, but shouldn't the EPA be looking at regular grant reports to see where their money is going? I can't see how money going to a "public relations and lobbying firm" has anything to do with education.

I hope the folks at the EPA get their house in order. In my opinion, they're running the risk of drawing the ire of people who aren't necessarily interested in agriculture or cutting government spending but simply have a problem with fraud and abuse in federally-funded programs.

What do you think? Is all this overblown or is the EPA pushing an agenda?

Richard Vedder on the Transformation of Economics

Richard Vedder, who is well-known for his work on the minimum wage, wrote a short op-ed in the Wall Street Journal about a month ago that I thought was pretty interesting. Vedder makes 5 observations about changes to economics over his career. Below I'll share three of them but the whole piece is worth reading.

Vedder starts off discussing ideological creep in the profession:

Economics as ideology in camouflage. Economists who achieve fame for genuine intellectual insights, like Paul Krugman, sometimes then morph into ideologues—predominantly although not exclusively on the left. The leftish domination of American academia is partly explained by economics. Federal student-loan programs, state appropriations, special tax preferences and federal research-overhead funds have underwritten academic prosperity, even at so-called private schools. The leftish agenda today is one of big government; academics are rent-seekers who generally don’t bite the hand that feeds them. The problem is even worse in other “social sciences.”

On a related note, he describes the rise of policy think tanks:

The rise of the nonuniversity research centers. A reaction to the liberal ideological orientation and inefficiencies of colleges has spawned this phenomenon. When I was attending college around 1960, the Brookings Institution, National Bureau of Economic Research and the Hoover Institution were among relatively few major independent think tanks. Today there are many, especially ones funded on the right to provide intellectual diversity, including nationally or regionally oriented centers such as the American Enterprise Institute, Cato Institute, Heritage Foundation, Heartland Institute and the Independent Institute, as well as dozens of state-policy think tanks. Universities have lost market share in social-science research.

Vedder then turns to his own work on labor economics:

A major cause of America’s economic malaise: the government’s war on work. My own research with Lowell Gallaway has stressed the importance of labor costs in explaining output and employment fluctuations. If the price of something rises, people buy less of it—including labor. Thus governmental interferences such as minimum-wage laws lower the quantity of labor demanded, while high taxes on labor reduces labor supply, as do public payments to people for not working.