Politics

Now to something completely different: Political Economy.

Besley’s “Principled Agents?” is an attempt to unify a number of different principal agent models concerning the political decision maker, government, and voters. He discusses competing views of government and government failures, he analysis the effects of accountability, he analyses the impact of the political agency on public finance. And he does all this in a way that, I would argue, even an undergraduate would be able to follow and enjoy. He succeeds very well in this attempt to unify the general frame of his analyses.

Another distinctive feature of “Principled Agents?” is that it presents its analyses not only in a unified frame but it also takes a less extreme approach to the analysis of government than either the Samuelsonian welfare economics or the overly pessimistic public choice approach of Buchanan. Not all government officials are purely benevolent, not all government officials follow only their own interest.

What stopped me in my tracks, however, was his Final Comments. In the Final Comments Besley hints at interesting extensions. Among other things, he implicitly questions the institution of elections, at least for some level and part of government.

Once, the city states of Athens, Venice, and Florence have used lotteries instead of elections to select their councils. Do elections really select the best person for the job? Do we need to select “a best” person for such a position, with the selection always being tainted by imperfection? Should we not rather re-think the duties of the bureaucrat and the politician? Do we want a political elite, distinct from the general population, or do we want to maintain a unity of purpose, an egalitarian access, the widest possible access to public office? All questions that, I believe, are worthwhile to think about.

Here is another popular science book that is related to my official professional interests: demographic change and age specific behavior in economic and political contexts.
George Magnus did a nice job in collection data from various sources and present them in a way that non-scientist can see what is going on. Unfortunately this is about the only positive thing I can say about this book.

Most of its content really boils down to the results of some opinion polls that are linked to population projections and aim at picturing a dire future. I have to admit that Magnus does not aim at creating a dooms day panic, nevertheless he mostly wants to raise concern, to make you worry. Little room is dedicated to where actual chances of demographic change may be hidden.

I am a bit concerned about the links of current behavior of certain demographic groups and the resulting projections due to their different growth dynamics. First, the assumption of stable behavior of certain groups, i.e. stable preferences and stable opportunity sets within these groups, is too simplistic. And second, a simple multiplication of current types of behavior with projected (given the stability of behavior) population frequencies neglects any evolutionary dynamic that may alter the behavior. The quality of these projections is rather questionable. On the up-side, Magnus acknowledges these possible shortcomings on the very last pages of his book. Though by then, the reader may already be convinced of the imminent demise of his favorite way of living.

I think my first “contact” with Deirdre McCloskey was when I got seriously interested in scientific writing and in particular in how to improve my writing. I read her Economical Writing at about the same time as Strunk & White’s The Element of Style. That must have been during the middle or shortly before finishing my PhD. Yes, that late. The Rhetoric of Economics followed very soon. Here I got a first glimpse at her battle against the evil p-value and the misuse of statistics. I have to admit even though I agree with her main critique I do not follow all her advice — I think that is one of the big problems she sees in empirical economists. They agree but still do otherwise. I also had the good luck to meet Gerd Gigerenzer, a psychologist and fellow warrior against the misuse of statistics, and discuss this particular topic with him during a sociable evening after a long day full of presentations at a remote conference venue of the Max Planck Society. Yes, there is something wrong with our (that is the economist’s) way of relying on, reporting, and interpreting statistics and specifically statistical significance.

How the Standard Error Costs Us Jobs, Justice, and Lives is not only the subtitle of Ziliak and McCloskey’s manifesto The Cult of Statistical Significance it is quite indicative of their (strong) rhetoric.

The book can be roughly divided in two parts that are devoted to different “themes”. The first is an updated and extended rehash of their earlier articles on the current practice of relying on statistical significance in various fields. If you have not read their articles so far read this and be shocked. You will see the author’s outrage in every paragraph. The second part and theme is a historical account that tries to shed light on how we ended up where we are. This part is rather filled with bitterness and repugnance for R. A. Fisher and compassion for the neglected Mr. [url=http://en.wikipedia.org/wiki/Student’s_t-distribution]Student,[/url] William Sealy Gosset.

Ziliak and McCloskey’s rhetoric is unique, yet it is not always to their benefit. Though, they certainly make their point and at least in private you have to agree with them. All in all, the book is entertaining and instructive. Even so, I would not assign this book to a class for reading I would rather recommend the 2004 special issue of the Journal of Socio-Economics on this topic. On the other hand, every empirical scientist and every policy maker relying on scientific research (shouldn’t they all?) should be aware that, first, size matters and that precision of measurement should not be the only decision criteria.

The current public interest in behavioral economics is inspired by a number of popular science books on the topic. Or the other way round, I don’t know. Nudge is one of these books. It is coauthored by one of the pioneers of the field, Dick Thaler, professor and director of the Center for Decision Research at the University of Chicago. His coauthor Cass Sunstein, a legal scholar taught at Chicago, too, before he moved to Harvard Law School.

Both authors plead for a philosophy of governmental minimalism. Yet, they recognize that humans make mistakes, take shortcuts in their decision making and are easily directed to certain actions by simple and seemingly innocent changes in the decision environment. The latter is exactly what they argue for: To nudge people in the right direction. Offer people freedom of choice, reasonable defaults if necessary, and structured information to avoid overwhelming the decision maker. Since all this nudging is supposed to improve the well being of the decision maker and the welfare of society they call their policy of gently guided freedom of choice libertarian paternalism.

I do not want to start another discussion about the benefits and perils of such paternalism. Thaler and Sunstein address some of the opposing arguments at the end of their book. This is not where they make their strongest points.

The main text, however, gives a very nice overview of some of the observed regularities in decision making and the resulting applications of behavioral economics during the last decade. Some more controversial topics are discussed in the last third of the book. Here they cover two themes where many people will have strong prior opinions. First, they argue that the government should allow anyone to waive his right to sue for negligence. As a consequence health insurance fees would decrease and better coverage would result. Second, they argue government should privatize marriage and instead introduce civil partnerships. Marriage is mainly a religious concept. The religious rules concerning marriage may sometimes lead to a retrenchment of personal freedom, e.g. in the choice of (approved) partners. Therefore, the state should not link additional privileges or responsibilities to this institution. Instead, the state should recognize a more modern concept of family, a caretaker–dependent relationship. Current privileges, social and economic subsidies for married couples should be transfered to this new entity.

I cannot say that I am not sympathetic to these proposals. I just do not see the nudge…

A few years ago I already wrote about the German health insurance system and a possible and necessary reform. Still today we have two very different health insurance systems in Germany. The first is a compulsory public health insurance where premiums are determined by income and by the insurance benefits and health of the insured. The second is a private health insurance system where your premiums are determined by the insurance benefits and health of the insured. Consequently, the first is a social redistribution scheme where the coverage of health care is determined by the state and the second is a private health insurance where coverage is directly determined by the insured. The problem is, only public servants and high-income earners are allowed to opt out of the public scheme and insure themselves privately. As a result the average premium in the private system is lower than the contribution of the same individuals to the public scheme would be, and health benefits are better for those privately insured. Most who are allowed opt out.

It is my opinion that a health insurance system should not redistribute income, we have a tax system for that. A health insurance should pool the risk and cost of getting ill. Nothing more and nothing less.

Therefore, I welcome the current FDP’s legislative initiative to reform the German health system. They demand that everyone should be entitled to privately insure herself and the obligation of insurers to sign a contract with everyone for a basic coverage without any discrimination.

Of course, such a private system should not copy the mistakes made elsewhere. Therefore, everyone should have to get basic coverage independent of his or her employment status. Rates may differ from insurer to insurer but not for contracts from the same insurer regardless of age, sex or health of the insured. Additional coverage can then bought at whatever conditions the insurers are willing to offer to an individual. The important thing is, basic coverage should always be cheaper than basic + some additional coverage. If an individual is too poor to afford paying for the basic coverage she should get the necessary social benefits financed through the tax system. Through the tax system and not the health insurance system! Medical services like inoculations that provide positive external effects to society may very well be subsidized by the government, too, to reduce the individual premiums.

There are benefits for all involved. There is no discrimination in service between privately and publicly insured. The medical practitioners can provide the best service to their knowledge and according to the needs of their patients and are not constrained by their remaining budget allocated to them by the public health insurance association. I do not expect that this privately organized health insurance system will be considerably cheaper. I do expect, however, that it will be fairer and more orientated to the needs of the insured.

Es wurde Zeit, dass ich mir auch einmal den Klassiker von Milton Friedman „Capitalism and Freedom“ ansehe. Sein Personal Statement „Free to Chose“, gemeinsam geschrieben mit seiner Frau, steht noch aus.

Es ist erstaunlich, wie aktuell einige der in dem Buch diskutierten Punkte noch heute, über 40 Jahre später, sind. Interessant auch, dass seine Ideen heutzutage in einigen Kreisen so populär sind, dass man an ihrer politischen Umsetzung arbeitet, sie zumindst aber ernsthaft diskutiert.

Ein wenig irritierte mich, wie lange ich mit dem Buch gebraucht habe. Für 200 Seiten sollte ich normalerweise weniger als die Hälfte der Zeit benötigen. Es liegt jedoch nicht an schlechtem Schreibstil. Friedman wusste durchaus gut zu argumentieren und hatte einen recht angenehmen Schreibstil. Das Problem war die ungewöhnliche Dichte des Textes. Das Buch ist keine leichte Kost.