Prof. Larry Bartels on Unequal Democracy

Larry Bartels of Princeton delivered a talk on his new book Unequal Democracy: The Political Economy of the New Gilded Age on Monday. The talk was interesting in that a respected academic came to a data driven but very partisan conclusion: if you're concerned about income inequality, elect Democrats.

You can see his most startling graph on the right. It clearly states that income growth is higher for all groups under Democratic presidencies than under Republican presidencies and that this growth is much more equal. A number of objections immediately jump to mind but from what I've seen so far this conclusion is robust, Prof. Bartels provides a response to some of the criticisms at Dani Rodrik's blog.

Why would voter's continue to vote for Republican presidents against their own economic interests? Prof. Bartels believes that they do vote with their economic interests, but only for the last year. The structure of Republican policies Bartels finds is that they lead to lower growth in earlier years of the presidency as spending and programs are cut. But this leads to higher growth towards the end of the term (and the upcoming election) as the economy rebounds from its bitter medicine. Democrats, however, unleash spending and new programs at the beginning of their term. By the time the end of their term has rolled around, the economy has begun to slow as the effects of the stimulus wear out and inflation kicks in.

Unfortunately for Democrats, according to Bartels (with support from Brookings' William Galston and Thomas Mann and over the objections of someone from Pew) voters only really remember the last year when assessing their economic fortunes. Thus, Democrats lose and Republicans win.

A couple of other interesting facts and figures:

1. Low income voters are more likely to support Democrats. It's high income voters in "red" states that swing them to Republicans.

2. Information matters: the more information self-identified liberal voters consume the more likely they are to correctly identify that it has increased in the United States.

3. Information distorts: the more information self-identified conservative voters consume the more likely they are to incorrectly deny that income inequality has increase in the United States.

4. Information doesn't matter: No matter ideological preference and amount of information consumed and preferences regarding income inequality, about 2/3rds of Americans oppose the inheritance tax.

Yet More Health Care Humor...

An entertaining clip in support of the Health Americans Act:

"Predictably Irrational"

I've been meaning to link to this review
of a couple of books on behavioral economics. "Predictably Irrational," a new book by Dan Ariely at MIT sounds like it has some particularly interesting experiments.

In one study, he asked students to look at the last two digits of their social security numbers and then bid on various items. Their social security numbers had marked effects on their bids.

The students whose Social Security number ended with the lowest figures—00 to 19—were the lowest bidders. For all the items combined, they were willing to offer, on average, sixty-seven dollars. The students in the second-lowest group—20 to 39—were somewhat more free-spending, offering, on average, a hundred and two dollars. The pattern continued up to the highest group—80 to 99—whose members were willing to spend an average of a hundred and ninety-eight dollars, or three times as much as those in the lowest group, for the same items.

This effect, which Ariely calls "anchoring," and which retailers such as Tiffany's have been acquainted with for decades (and probably longer) blows conventional economics out of the water. Clean downward sloping demand curves a la Econ. 101 assume rationality on the part of consumers, that they trade off the benefit of consuming the good against the benefit of the other goods they could consume for the same price. If they aren't cold calculators all the time, companies can rely on tricks such as putting other high numbers in the store to set the customer's "anchor" and engine of the free market economy is reduced to a sputter.

This is, however, more of a problem for a lot of academic economists than anyone else. The big money today isn't made on trying to produce commodities that consumers examine with steely eyes and then make a decision based on price. The game is to find a niche demographic and tailor your product to fit their needs. I didn't buy my Mac based on processing power, I bought it because my wife has one, sleek marketing, and because it doesn't feel (and perform) like a hunk of junk.

The key is differentiation, a good businessman doesn't just compete on price. That means that all those pretty supply and demand curves that we were all taught in Econ. 101 are virtually non-existent (they're also pretty damn hard to examine empirically too.) Perhaps this is why economists don't run the world but rather tell others how to?

Faith Based Economics

From Dani Rodrik:

Kevin Hassett, economics advisor to John McCain, is quoted today as saying:

What really happens is that the economy grows more vigorously when you lower tax rates... It is beyond the reach of economic science to explain precisely why that happens, but it does.

Now you can be excused for thinking that the first of these statements is true, if you have an economically sound reason for it. But if you don't, you shouldn't.

Let's call it no longer supply-side economics. It is faith-based economics.

Health Care Humor

The Committee for Economic Development (CED) held a briefing on the Hill yesterday to promote its healthcare plan. As I have written on the plan previously I will not rehash the details but rather share with you the comic stylings of Dr. Alain Enthoven.

For those of you unfamiliar with Dr. Enthoven, (I certainly was before I started tracking healthcare issues) he is a professor emeritus at Stanford and a very respected figure in health policy. He was integral in formulating CED's health plan and his support is equally integral to promoting it to a wide audience.

Dr. Enthoven got his start in public policy as the leader of Robert McNamara's "Whiz Kids," doing quantitative heavy lifting on nuclear proliferation and the war in
Vietnam. He spent a year pushing his conclusion, based on body counts, that the U.S.
could not win the war through attrition.

Despite his incredible stature (but reputation and physically too, he must be 6'3") he is incredible down to earth. Following the talk yesterday, he stuck around for a serious and engaged conversation with the youthful members of the CED, this blogger and the 23 year old American Prospect superstar Ezra Klein. Given this context, I would like to share a couple of his jokes dryly inserted into a very serious policy discussion. The humor of course, is bitter-sweet, given these problems have some very tragic consequences for the people dealing with them.

A Bad Pun:

Because people switch doctors so frequently because switching jobs means switching health plans and because medical information technology is nowhere where it should be, doctors often aren't aware of their patients' full medical history. This, Dr. Enthoven says with a straight face as his colleagues cringe, is "connectile disfunction." He uses this joke at every presentation and from what I hear, even in meetings with U.S. Senators.

Another Bad Pun:

Economists have a term "job lock" that refers to the case where people are prevented from leaving a position because of some sort of market failure. In the case of healthcare, because their plan isn't portable they are unable to be entrepreneurial
or take another job if the new employer doesn't offer the same plan. As many people get their health plan through their spouse's employer, there is another case to be considered. Dr. Enthoven spoke of a woman who was unable to leave her husband because she needed his healthcare insurance. "It brings new meaning to the term wedlock," he deadpanned.

Brick by Brick

I saw an interesting documentary on the desegregation battle in Yonkers New York tonight. It's easy to get lulled into the sense that the battles for civil rights were something fought and won long ago. Brick by Brick is a fresh reminder that these fights go on to this very day.

This fight started in the 1980s and the city council is dragging its feet on a Supreme Court ordered housing desegregation plan and undermining school integration to this day. But the truly insane thing to watch is how rabidly the anti-integration forces fought. The yelling mobs, a city council willing to bankrupt the city by keeping it in contempt of court over 200 low-income townhomes in a city of 200,000.

Truly a spectacle to behold and a striking reminder that high-minded national policies are very difficult to put into practice without engaged local-level support.

Rise of the Lions

I know I'm not the only one who finds the overwhelming majority of election analysis to be stultifyingly shallow. Beyond the polls, the deepest concept we deal with is "momentum," an amorphous concept that implies that a candidate will keep winning until he/she doesn't in which case the "momentum" has been lost. Basically, momentum can stand in for any number of other explanatory variables but it saves us all from the difficult task of defining them or being wrong when they fail to predict an election.

So, in honor of my first intellectual love (after a fling with psychology and a torrid affair with philosophy) I would like to recount a bit of political theory for my readers.

Vilfredo Pareto (for you economists, yes the efficient one), introduced a theory of political cycles in his 1901 work "An Application of Sociological Theory," which outlines a theory of the circulation of political elites. He sees the political elite as composed of a mix of two types of individuals, "lions" and "foxes."

The "lions" are strong-willed and rule in a forthright manner, relying on tradition and "group persistence." The "foxes" are devious and chip away at the "lions'" power through cunning and deceit. Eventually rule by the lions gives way to rule by the foxes who outmaneuver and undercut the traditions that gird the lions power. Eventually, however, the foxes in all their maneuvering end up in a position so far away from the underlying traditions, that they are exposed and upended by resurgent lions who bring the political culture back to its underpinning traditions in a direct manner.

The qualified application of this theory to this election would be this. The two "fox" candidates who maneuvered through positions, votes, and transactional politics to take their respective party nominations, Romney and Clinton, have fallen (or are falling) by the wayside. This is not because of their intrinsic failings, but rather after 15 years of Clinton I's triangulation followed by Tony Snow style press conferences, forthrightness is favored over political cunning.

The corollary to this, is that the "lions," Obama and McCain, have overcome a politically inevitable opponent and shown that predictions of their political death were "greatly exaggerated." Obama, a far-sighted cub, offers to renew the tradition of "communitarianism," while McCain, wizened member of the pride, offers us a return to pre-Conservative Republicanism.

Ironically, an election focused on change may really be about bringing us back to long-held traditions.