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Because I didn’t want to register with the UK government site on which Leigh Caldwell posted his ideas for behavioral analysis in the structure and deployment of services, I’ll comment here.

The rationale for Leigh’s wild and irresponsible proposals*:

While some behavioural interventions are being explored through the Cabinet Office’s Behavioural Insight Team (with some success) these tend to be relatively simple adjustments to framing of specific choices available to citizens. A deeper re-examination of the economic assumptions used in public service contracting and forecasting could lead to real improvements in outcomes and efficiency.

Some specific sectors that Leigh targets:

  • Health care, where behavioral modelling of the consumption of health services may lead to more efficient deployment and use of resources.
  • Education, where behavioral analysis could help bring incentives and signalling in line with cost savings in order to reduce spending while maintaining quality.
  • Welfare and social security, where structuring incentives could help raise people out of poverty by building productivity, and encouraging formation of savings. Thus, reducing dependence on the state in the long run.

Now, I’m only a smidgen a behavior economist (having read varied works from the Santa Fe institute), but I’ve always been at least cautiously optimistic about the prospect of what Richard Thaler refers to as “libertarian paternalism“. Leigh is a crazy lefty*, but I trust that he believes in choice, and understands that choice is often not the problem in and of itself. Choice sets often are given various cognitive biases. Thus, choice architecture can preserve the ability of the individual to make a choice, but incentivize choices that are in the best interest of the decision maker.

I’m not too familiar with the first two categories Leigh lists, but I am broadly familiar with the third (which is the most “popular”). There are several ways in which the government could better structure incentives to produce superior long-run results, but I want to focus on one real-world example. The Oportunidades program, an the anti-poverty program in Mexico. The program is centered around providing cash transfers that are linked to incentive goals:

Oportunidades is the principal anti-poverty program of the Mexican government. (The original name of the program was Progresa; the name was changed in 2002.) Oportunidades focuses on helping poor families in rural and urban communities invest in human capital—improving the education, health, and nutrition of their children—leading to the long-term improvement of their economic future and the consequent reduction of poverty in Mexico. By providing cash transfers to households (linked to regular school attendance and health clinic visits), the program also fulfills the aim of alleviating current poverty.

The Oportunidades program has by many measures been very successful in reducing extreme poverty in Mexico. In the long run, these types of behavioral-influenced programs can lead to considerable long-run gain in productivity, health, and personal finance.

I think that the British government would do well to invest in research of this type. While I doubt that behavioral economics will revolutionize the field of economics as a whole (at least until highly useful simulations are commonplace, right now we have variants of sugarscape and the game of life/prisoner’s dilemma), behavioral analysis can be extremely useful at the margin.

As an aside, I am curious whether this web interaction between the government and private citizens/businesses is a Conservative thing, or just something the British government does?

*Just kidding. I consider Leigh a good friend.

Mark Thoma worries about gridlock in the house as a result of the upcoming elections. He has three big concerns that he’s looking at in the short-run that could prove to stall recovery. I want to address what I believe about all three.

The first is that we will be gripped by the austerity movement that has captured Europe and that, as a result, we will withdraw stimulus too soon. Republicans have been promoting policies to reduce the deficit for some time now, spending cuts in particular are on the agenda. Many among the Republican leadership would have canceled the remaining stimulus already, including extensions to unemployment insurance, if they were in control.

Now, according to Nate Silver (@fivethirtyeight), Republicans have a fairly good shot of gaining 52 seats in the House, for a house composition of 231R-204D. This may be enough to stall any new spending, based on the populist rhetoric of the tea-party base…but I don’t think it is enough to move any actual significant budgetary legislation. One reason is that Republicans don’t actually care about budget deficits. Further, the austerity plans that are being implemented in Europe aren’t exactly the most immediate. I don’t think that austerity in Europe is going to cripple any economies, much less their own. The Bank of England in particular has intimated that it would likely offset any contractionary impact of Britain’s budgetary plans. So the question is still very much up in the air as to whether austerity is the death knell for recovery — I, personally, don’t think it is; but that is contingent upon a willing central bank.*

The second concern is related to the first. I expect that we will have a slow, agonizing recovery, particularly for employment. I do not expect a double dip, but it’s not out of the question by any means, and we need to be ready in case it happens. Unfortunately, the election is likely to bring gridlock and it’s doubtful that Congress will be able to act in response to a second downturn. An increase government expenditures in response to a slowdown is certainly off the table. It’s hard to imagine Republicans who have argued — wrongly in my view — that the stimulus did not help the economy getting behind increased spending.

According to recent movements in the markets, there is actually reason to be optimistic. Even so, employment may not come down to traditional “full employment” levels (a situation that I find highly likely). However, after (or if?) we return to the previous trend rate of NGDP**, those are probably more issues of structure (search/match, skill profiles, etc.) that the government may be able to help mitigate, but will likely to be alleviated slowly, simply by the nature of these problems. What does robust growth and stagnating employment look like for the future of economic policy? Protectionism, which highly en vogue among tea partiers and the “labor-left” alike. That is something that I’m worried about.

But my biggest concern is what will happen if new problems emerge in the financial sector. The resolution authority in the Dodd-Frank legislation is supposed to prevent the need for another financial bailout, but I am not at all confident that this will be sufficient to solve widespread problems and threats of failure in the banking system. There’s a good chance that the resolution authority won’t get the job done and that a bailout will be the only way to resolve severe problems. However, if problems do arise and another financial bailout is needed, forget it. Opposition to the banking bailout makes it nearly impossible for Congress to undertake another bailout of the financial system.

This is a problem where Thoma and I seem to disagree about causality. Would the Fed allow NGDP to fall at the fastest rate since 1938 once again, as they did in late 2008? It’s possible, but I don’t think it is likely…and as you may know, I think it was increasingly tight money which led to big financial problems — not the other way around, which I believe is the causality that Thoma is looking at.

Why don’t I welcome gridlock in economic policy that is almost certain in our future? Well, because there are important questions about the response to the recession that need to be answered, that will most likely remain for the foreseeable future under gridlock. The structure of bailouts, the role of Fannie/Freddy in the future of housing policy (and the future of housing policy in general), the supposed “world trade imbalances”, the future health care policy, and to a lesser extent UI, minimum wage and the very structure of taxes in the US. These are all very important questions that affect millions of people, and are very hard to answer under a regime of unanimous opposition that would likely prevail under a gridlocked government.

However, I don’t think the recovery will be endangered by gridlocked government, since the Fed has signaled it intends to take the lead…something it should have done two years ago.

P.S. Should probably note that the Yglesias link above disagrees with the notion that things cannot get done under divided government.

*Ability isn’t really a question in my mind.
**Assuming level-targeting.

Kevin Drum highlights a piece in an interview by Ezra Klein regarding “car czar” Steve Rattner. The quote is about Rattner’s experience dealing with Congress, which is predictably frustrating…most likely actively infuriating. However, I’m disappointed in Drum’s reaction:

I recommend we replace them all with a randomly selected bunch of sixth graders. They might not get any more done, but at least they’d be better behaved.

This kind of thing is not something that is unique to Congress. I gather from Drum’s comments (and cursory knowledge of his political inclinations) that he regards the bailout of the automakers as The Right Thing to DoTM. I, perhaps rather predictably, have a differing opinion regarding that issue, but that isn’t what I want to highlight — although it is inextricably linked to the issue. What is happening between Rattner and Congress is degrees of possibility conflicting with degrees of freedom…and the predictable result is that the actor with a high degree of freedom becomes incredibly frustrated with the walls created by network interconnectedness when confronting his or her actual degrees of possibility.

This is a timeless story that is at the heart of tribulations of entrepreneurship (and particularly visible in the entertainment industry). You don’t need to invoke the inadequacies of Congress to view this spectacle…just go down to the Human Resources department at your company (or really any other department), and listen to the complaints. I’m willing to bet that they will sound suspiciously similar to Rattner’s.

Such is the nature of the dynamics of network interaction. Replace Congress with whomever you deem fit, and ten-to-one odds says that within a rather short period, you will end up with the same sort of frustratingly difficult situation.

I want to raise awareness that even given strong will, and good ideas; large, densely-interconnected networks routinely fall into complexity catastrophe. It is a friction which is literally the basis of what Shumpeter famously termed creative destruction. While it is easy to score rhetorical points by highlighting the proximate cause, it’s really the network that is to blame.

P.S. Modeled Behavior just reached the 1,000th post mark! Congrats to both Karl and Adam for building such a great blog! I’m happy to be a (albeit small) part of the team!

As you can probably imagine, I was tickled pink today to learn that the progenitor of one of the most enduring communist dictatorships of our time has finally recanted, acknowledging that Cuba’s economy, largely owned and directed by the state (in absence of price mechanisms), is a failure:

HAVANA – Fidel Castro told a visiting American journalist that Cuba’s communist economic model doesn’t work, a rare comment on domestic affairs from a man who has conspicuously steered clear of local issues since stepping down four years ago.

Unfortunately, all I got out of the story is the nagging thought of how insane is Dan Mitchell? Why? Well, because Mitchell boils all of communism’s problems down to excessive government:

This chart, comparing inflation-adjusted per-capita GDP in Chile and Cuba, is a good illustration of the human cost of excessive government.

He goes on to show a chart of per-capita GDP growth between Chile and Cuba. As if Chile has been the model of restraint over the past few decades. Sure, Chile liberated it’s markets, but Pinochet was a disaster to every individual’s rights — something I’m assuming CATO still stands up for. Liberalization of markets is but one facet of how to analyze a society’s performance…and the question is certainly not about “small” vs “large” government, it’s about the smooth functioning of markets. Since markets exist within the confines of public institutions, it is worth a look at how to structure institutions as to best serve the goal of both economic growth and greater societal need (which are not necessarily mutually exclusive).

It is my inclination to view smaller government as the right level of government interaction with markets…but that’s a case-by-case thing. There are a few of places in the economy where I think heavy government intervention is warranted (like the application of law), and other places where I think it is not (like hair cuts). Just saying small government doesn’t do the job here. Yes, the communism that has plagued Cuba is a disaster, but that has nothing to do with the size of the Cuban government. The institutions which the Cuban government has set up are at odds with both human and economic development — they don’t work. Sure, the government should be scaled back in many ways — but that is still a question of how institutions should be structured, and not some anonymous specter of “big government”.

The Danish government is among the “largest” in the developed world, based on taxation as a fraction of GDP…and Denmark is also one of the most free-market countries on earth by multiple measures…and they continue to head in a more neo-liberal direction (i.e. cutting UI benefits in half).

The bottom line: Cuba’s problem is/has been communism as an institutional arrangment, not so much with the size of the government, per se.

Update: I softened my language in the bottom line, h/t to @jbarro.

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