Author Archive | Tyler Cowen

Starve the Beast:

When I was in college during the Reagan years the accepted wisdom on the limited government side of the aisle was that the only way to limit government spending was to first reduce government revenues.  The logic was that the dynamics of interest-group politics were such that spending would rise indefinitely until it hit some ceiling but that raising taxes above some level would be politically unacceptable (see, e.g., Mondale for President).  That ceiling, it seemed, was the amount of revenue taken in plus some limited amount of government debt.  The assumption was that there was some limit that reality imposed on government debt, either politically or economically.  Eventually, so went the reasoning, something would have to give–either Washington would have to cut spending or raise taxes.  And at that point, spending would have to yield.  Milton Friedman was particularly associated with this position.

A few years ago I heard Bill Niskanen speak when his book, Reflections of a Political Economist came out.  Niskanen argued that “starve the beast” doesn’t work–that tax cuts bring about more, rather than less, spending.  The logic is that people demand more of something if the cost is subsidized.  If the cost of government is subsidized by pushing off the costs to later generations, then people will demand more government.  Niskanen provides empirical evidence to support the hypothesis.

Over time, the empirical evidence has largely turned me from the Friedman position to the Niskanen position.  Steve Chapman has an excellent summary of the theory and empirical findings in The Examiner today.  the column is here.  Michael New’s article from the Cato Journal that Chapman cites is here. [...]

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David Wessel’s *In Fed We Trust*:

The subtitle is Ben Bernanke’s War on the Great Panic.  Here is one good excerpt:

For Ben and Anna Bernanke, excitement was jointly doing the New York Times Crossword puzzle nearly every day — although they skipped the easier beginning-of-the-week puzzles.  “That’s the one thing we do together,” Bernanke joked.  “It’s shows our sexy social life.  We’re pretty good.  We can do the Sunday puzzle in about forty minutes.”

This is so far the most entertaining and most readable book on the financial crisis. The portraits of Bernanke, Paulson, and Geithner are especially memorable. Most of all this book brings those key personalities to life. It’s also a useful chronicle of the sequence of events which led to the Fed taking on so many new powers. Recommended.

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What is the legal status of the AIG takeover?

I’ve been wondering and maybe you have been too. Here is one opinion:

I imagine that the legal answer to that question depends on a nice distinction between practice and plain language. Under the plain language of the statute, interpreted imaginatively, the Fed can extend credit, upon the right showing, to any company or individual, and so why not insist on conditions on the loan? Heck, why couldn’t EPA, in the name of fishable swimmable rivers (that’s Clean Water Act language), ban all pesticides, including dishwasher detergent, or nationalize water users like the steel industry? Maybe it can! Which might be good news for environmental activists.

I thank David Zaring for the pointer to this very interesting analysis (there is a related version of this post up at www.marginalrevolution.com). Do you know more? [...]

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The Evolution of the Common Law, Revisited

Here is a new paper on the topic, by Anthony Niblett, Richard Posner, and Andrei Shleifer:

The efficiency of common law rules is central to achieving efficient resource allocation in a market economy. While many theories suggest reasons why judge-made law should tend toward efficient rules, the question whether the common law actually does converge in commercial areas has remained empirically untested. We create a dataset of 465 state-court appellate decisions involving the application of the Economic Loss Rule in construction disputes and track the evolution of law in this area from 1970 to 2005. We find that over this period the law did not converge to any stable resting point and evolved differently in different states. We find that legal evolution is influenced by plaintiffs’ claims, the relative economic power of the parties, and nonbinding federal precedent.

That version costs $5 unless you are at a university or live in a poor country, I cannot yet find an ungated copy of the paper. [...]

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I’ll second that motion:

Like Orin, I’m supporting McCain for the Republican nomination. I disagree with him strongly about campaign finance reform and a few other issues. But he’s taken the right stands, roughly speaking, on many other important matters, like national security, Iraq, torture, immigration, and fiscal responsibility. On federalism grounds, he’s also opposed (and twice voted against) the Federal Marriage Amendment, a costly stand for a Republican presidential contender. I also think he’s the one candidate in both parties who has sufficient credibility on security and military issues to end or modify Don’t Ask, Don’t Tell, and I detected somewhat lukewarm and perfunctory support for it in his answers on the question during the debates. Nobody’s perfect, but his heart and mind seem closest to my own on most of the issues that matter most to me in this election. [...]

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Is gay marriage conservative?

That’s the question being addressed by speakers at a symposium I’m organizing. It’s a first-of-its-kind event, devoted entirely to what has become an intramural debate among conservatives about the issue. The symposium will be held at the South Texas College of Law in Houston on February 15. Besides me, the speakers include:

Professor Gerard Bradley (Notre Dame)

Professor Jesse Choper (Berkeley)

Professor Teresa Collett (St. Thomas)

David Frum (AEI)

Charles Murray (AEI)

Professor Robert Nagel (Colorado)

Jonathan Rauch (Brookings)

Professor John Yoo (Berkeley)

Needless to say, it’s an impressive group of academics and non-academics, many with strong ties to the conservative intellectual movement and/or expertise on the issue of gay marriage. Abstracts of the presentations can be found here.

If you’d like to attend, you can register for the symposium here. Registration is free and lunch is included. [...]

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Why are so many politicians lawyers?

Johan Richter writes the following query to me:

As the primary elections are coming up is is interesting to note that so many of the contenders are lawyers, something that is also true of the members of Congress, where I believe half are lawyers. Why are so many US politicians lawyers? It seems odd considering that A) Legal training seems unnecessary for performing the main job of a politician, regardless of whether one takes that to be courting public opinion or governing the country. And there is hardly any deficit of lawyers in Washington to ask for advice if legal knowledge turns out to be needed. B) Being a lawyer isn’t very prestigious as far as I know. Being a military, doctor, police officer, businessman or perhaps even a academic would surely be regarded by many voters as more respectable professions than being a lawyer. C) Other countries don’t have nearly the same over-representation of lawyers in their parliaments as the US does.

I thought Google would yield a paper on this question but I can’t find it. My guess is that lawyers are good at fundraising and good at developing personal contacts. This helps explain why fewer politicians are lawyers in many other countries; money is more important in American politics. A lawyer also has greater chance to exhibit the qualities that would signal success in politics, such as the ability to persuade and the ability to speak well on one’s feet. Not to mention that many lawyers have ambition.

My wife Natasha, who is a lawyer, adds that law generates an outflux of people to many other fields, not just politics. There is also a path-dependence effect, by which a previous presence of politicians in law breeds the same for the future. What else do you all know [...]

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The Center Cannot Hold:

That is the title of a new book by Elyn R. Saks, law professor at USC, and it seems now a psychology and psychiatry professor there as well.

I was very taken by the gripping narrative of this book. The subtitle is My Journey Through Madness. Here is one short review. Here is an excerpt.

Oliver Sacks liked it too. He called it “The most lucid and hopeful memoir of living with schizophrenia I have ever read.” [...]

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Why should anyone get a free copy of my book?

Over at MarginalRevolution.com I offered free books — my new Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist — to fifteen people who gave me good reasons for getting the book for free. They also had to vouch that these were reasons they truly believed in. You can read the reasons here, it is a fascinating series of arguments. One of my favorites is this:

I’m a graduate student in economics, and my funding is the sole source of income for my family (wife and daughter). My wife doesn’t believe in the permanent income hypothesis, so I’m liquidity constrained. I’m searching for thesis ideas, and I think your book could be a great source.

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Do lawyers get better medical and dental treatment?

In my new book Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist, I discuss the claim that lawyers get better treatment from their doctors and dentists, at least compared to the average person. Fear of litigation is one possible mechanism, but not the only one. Addendum: Just to be clear, let’s adjust for income, which is likely to be above average.

I would love to know what you all think; comments, of course, are open. [...]

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Discover Your Inner Economist:

The subtitle of my new book is “Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.” You can order it here.

Eugene asked me to write a few posts on the book; I thought I would start by citing an Economist.com characterization:

An earlier generation of these books, like Steven Landsburg’s The Armchair Economist and David Friedman’s Hidden Order, tackle the economic puzzles of everyday life by applying good old-fashioned price theory to novel situations. Many of the new spate of pop-econ page-turners reflect the maturation of economics as an increasingly empirical science. Freakonomics is the exemplar of this shift. But Cowen’s new book, which may seem superficially similar to old-style pop-econ, in fact integrates a great many of the insights of Levitt-style work, as well as insights from behavioral and experimental economics… Cowen’s synthesis of these new insights adds up to a level of psychological realism heretofore unseen in the pop-econ genre. If Cowen succeeds in offering excellent cute-o-nomic advice, and I think he often does, it’s because economics as a whole is now generating a more empirically adequate picture of the world. For those of us weird enough to love economics, that’s better than cute: that’s beautiful.

I would go further: we won’t make much more progress on the macro issues without first understanding the micro-complexities of everyday human life. Why are nominal wages sticky at the macro level? In the United States at least, it’s not mainly about long-term contracts or government regulation (those do play a role, however). It’s more about morale, the need for workers to feel in control of their situation, and perceptions of fairness. If you want to understand what is happening in the BLS statistics, you’re not wasting your time if you are hanging around [...]

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How to get your personalized podcast

I’m offering personalized podcasts for people who pre-order my new book Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist, due out August 2. Here is the Amazon link. Here is the Barnes&Noble link.

The podcast is personalized because it is sent directly to you and because you get to choose the question I address. I will find this fun and a great challenge.

Podcasts are usually thought of as a mass medium but I would like to see if the idea of personalized podcasts can take off. If you pre-order the book between now and 8 p.m. Thursday (EST), let me know at tylersbook@gmail.com, of course send along your question, and I’ll prepare the podcast and email it to you. You really can pick any question you want. Here are the full details of the offer.

Here’s a recent article — from New York magazine — about me and the new book. [...]

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What is happening to the pay of law partners?

This new and important paper (scroll to p.29) has lots of useful information:

…the average profits per partner in the top 50, top 100, and top 200 U.S. law firms in 2004, respectively, were $1.26, $1.01 and $0.83 million. These averages are the averages of the average profit per partner for each firm. The medians of the averages are lower, at $1.08, $0.86 and $0.67 million. These profits accrued to, respectively, 11,034, 17,861, and 26,755 partners. Average profits per partner exceed $2 million for 9 firms; they are at least $0.5 million for 93 of the top 100 firms, and 152 of the top 200 firms…Based on these distributions, we estimate that 14,351 of the 17,861 partners in the Am Law 100 earned more than $0.48 million in 2004…It also is worth pointing out that the 26,000 plus equity partners at Am Law 200 firms earn a total of roughly $22 billion (at $0.83 million per partner). This is the same order of magnitude as the total pay to non-financial top executives, investment banking MDs, hedge fund investors, and PE and VC
investors.

It is no surprise to hear that partner pay is going up in real terms:

…lawyers have experienced a large real increase in pay over the last 10 and 20 years. In 1984, the average profit per partner at the top 50 firms was $0.309 million or
$0.498 million in $2004. By 1994, the average profit per partner had increased to $0.531 million or $0.636 in $2004. And by 2004, the average profit per partner at the top 50 firms had increased to $1.260 million.

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Saturday song lyrics

I’ve never blogged song lyrics before, but these, sent to me by Jeffrey Grimmer, reminded me of Richard Epstein:

The song is called “Effect & Cause” and it’s from the White Stripes’ new album Icky Thump:

Well, in every complicated situation, You’re the human relation, Makin’ sense of it all, Take a whole lot a concentration

Well, you can’t take the effect, And make it the cause, I didn’t rob a bank, Because you made up a law, When you people robbin’ Peter, Don’t you blame Paul, Can’t take the effect, And make it the cause

I ain’t the reason that you gave me no reason to return your call, You built a house of cards and got shocked when you saw them fall, Well are you sayin’ I’m innocent?, In fact the reverse, But if you’re headin’ to the grave, You don’t blame the hearse, You’re like a little girl yellin’ at her brother, ‘Cause you lost his ball [...]

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