Rainfall, Human Capital, and Democracy

To what extent do natural environments explain political development? A lot, according to a recent paper by Stephen Haber and Victor Menaldo. They find that rainfall and democracy go together like porridge and Goldilocks – to get democracy to flourish, it shouldn’t be too wet or too dry:

Why are some societies characterized by enduring democracy while other societies are persistently autocratic? We show that there is a systematic, non-linear relationship between rainfall levels and regime types in the post-World War II world: stable democracies overwhelmingly cluster in a band of moderate rainfall (550 to 1300 mm of precipitation per year); persistent autocracies overwhelmingly cluster in deserts and semi-arid environments (0 to 550 mm per year) and in the tropics (above 1300 mm per year). We also show that rainfall does not work on regime types directly, but does so through the its impact on the level and distribution of human capital. Specifically, crops that are both easily storable and exhibit modest economies of scale in production grow well under moderate amounts of rainfall. The modal production unit is a family farm that can accumulate surpluses. In such an economy there are incentives to make intergenerational investments in human capital. A high level and broad distribution of human capital makes democratic consolidation more likely.

ht: Roger K., who referred me to a recent Amity Shlaes column that cites this research.

The Cost of Sunshine: The Downside of Disclosing Campaign Donors

Campaign finance rules emphasize sunlight. For example, all campaign donations above a modest amount (e.g., $200) must be publicly disclosed. That allows everyone to see who is providing financial support to which candidates.

That sounds good if you are worried about campaign contributions buying undue access to our elected leaders.

As I noted last year, however, that sunshine comes with costs. For example, it makes quid pro quo’s easier. Why? Because candidates know who is financing them. A completely anonymous system — in which no one, including candidates, knows the identity of donors — would make explicit quid pro quo’s much more difficult.

Full disclosure also discourages individuals from making donations that would be unpopular with their relatives, friends, neighbors, and employers. You can make anonymous donations to unpopular causes to your heart’s content without anyone knowing. But if you make even a modest donation to an unpopular political candidate that’s a matter of easily-Googleable public record. That can be a real deterrent.

Writing in today’s Wall Street Journal, James L. Huffman raises a related concern: that disclosure stacks the deck in favor of incumbent politicians:

[P]ublic disclosure serves the interests of incumbents running for re-election by discouraging support for challengers. Here’s how it works.

A challenger seeks a contribution from a person known to support candidates of the challenger’s party. The potential supporter responds: “I’m glad you’re running. I agree with you on almost everything. But I can’t support you because I cannot risk getting my business crosswise with the incumbent who is likely to be re-elected.”

Disclosure makes threats possible, and fears of retribution plausible. Within weeks of a contribution of $200 or more, the contributor’s name appears on the public record. Contributors know this, and they know that supporting the challenger can, should the challenger lose, have consequences in terms of future attention to their interests. Of course no incumbent will admit to issuing threats or seeking retribution, but the perception that both exist is widespread.

Huffman was the unsuccessful Republican nominee in Oregon’s Senate race in 2010. Depending on your view, that might mean that he speaks from experience or that he suffers from sour grapes. Without evidence, there’s no way to know how much, if at all, such concerns arose in his race.

But the broader issue he raises is worth pondering. Sunshine is sometimes the best disinfectant. But it also lets bad actors see what’s going on.

Taxi Medallions in DC: Who Would Win and Lose?

Today’s lesson in political economy: the looming battle over Washington’s cab market.

Three members of DC’s City Council (Marion Barry, Harry Thomas, Jr., and Michael Brown) want to require every taxi to have a medallion. The number of medallions would be much smaller than the number of cabs on the streets today.

As I noted a few months ago, this proposal would harm consumers more than it would help drivers. With fewer cabs on the road, it would be harder for passengers to find a ride and easier for drivers to turn down what they perceive as undesirable fares. If medallion prices rise, it may also make it easier for taxi drivers to lobby for higher fares in the future. All of that adds up to fewer cab trips.

The sponsors reportedly have close ties to some taxi drivers, so it isn’t surprising they favor drivers over consumers. What is interesting, however, is how they would favor some drivers over others.

The favored? Drivers with two or three decades on the road who are DC residents. In short, long-time incumbents who can vote.

The disfavored? Drivers with less experience or who live outside the district. In short, entrants and those who can’t vote.

This favoritism shows up in several ways in the proposed legislation:

  • Medallion prices. Under the proposal, initial medallion prices would vary by a factor of ten. A DC resident with 30+ years experience could buy a Class 1 unrestricted medallion for $500. A DC resident with 20+ years experience would pay $1,000. A non-resident with 20+ years would pay $4,000. Other qualifying drivers – if I am reading the proposal right, these would be DC residents who have filed DC income taxes for at least five years – would pay $5,000.
  • Right to purchase medallions. DC residents have priority over non-residents for most medallions, and priority further depends on seniority.
  • Property rights. Under the proposal, most medallions would become the buyer’s property and could be assigned or sold in the future. That means the driver would get the benefit of any price appreciation in the future. But that isn’t true for one category: Class 5 medallions that would be created for non-resident drivers who don’t get Class 1 through 4 medallions. Those medallions are not property and cannot be transferred; once the driver stops using them, they would be gone, and the number of taxis would decline further. (By the way, the price of Class 5 medallions is not specified in the legislation; instead it is left up to the Taxicab Commission.)

Bottom line: The proposal is a classic illustration of how the regulatory system might be used to favor (a) an organized group (taxi drivers) over a non-organized one (consumers), (b) incumbents over entrants, and (c) residents over non-residents.

The Supremes Reject Notion that Spending Can Occur Through the Tax Code

As regular readers may recall, I believe that many tax preferences — but not all — resemble spending programs run through the tax code. The tax exemption for municipal debt, for example, essentially taxes investors (who get lower interest rates than they could from other taxable investments) and gives the money to state and local governments (who pay lower interest rates than they otherwise would). It’s effectively taxing and spending, except the money never reaches Washington.*

As my colleague Bob Williams notes over at TaxVox, that perspective took a legal hit the other day when the Supreme Court ruled that state tax breaks are fundamentally different from spending programs, at least for purposes of legal standing:

In 1968, the Court ruled that citizens may sue to stop the government from spending that violates the Constitution, in the specific case supporting religious activity (Flast v. Cohen). Citizens had standing to sue, the Court concluded, because the challenged spending directly affected taxpayers who fund government programs.

The current case, Arizona Christian School Tuition Organization v. Winn et al., involves not direct government spending on an unconstitutional activity but rather a tax credit that serves the same purpose as a spending program. Arizona allows taxpayers to claim a non-refundable credit of $500 a year ($1,000 for couples) for donations to qualified school tuition organizations (STOs), which then use the funds to support tuition payments to private schools. The original suit claimed that STOs violated the First Amendment’s prohibition of government activities promoting the “establishment of religion” because tuition payments could go to parochial schools.

In a 5-4 decision, the Court ruled that the challenged tax credit was not government spending and therefore the claimants lacked the standing to sue allowed in Flast. Unlike spending, the majority argued, tax expenditures do not necessarily affect the tax bills of others; that is, the government won’t necessarily raise taxes to cover the revenue cost of a tax credit. In fact, the opinion claimed, “the purpose of many governmental … tax benefits is ‘to spur economic activity, which in turn increases government revenues.’” And further, private school tuition assistance might induce some students to switch from public to private schools, thus reducing government costs. Since tax expenditures thus don’t necessarily harm taxpayers, they have no right to sue.

As Bob notes, several of those arguments seem rather weak, particularly since spending programs can also “spur economic activity” or induce students to change schools.

You can find Justice Kennedy’s decision (joined by Roberts, Scalia, Thomas, and Alito), Justice Scalia’s concurrence (joined by Thomas), and Justice Kagan’s dissent (joined by Ginsburg, Breyer, and Sotomayor) here.

* High-income taxpayers also get some benefit from the exemption. I haven’t looked at the specifics recently, but for some testimony I gave back in 2006, my CBO colleagues estimated that the breakdown was about 20% benefit to high-income taxpayers, 80% benefit to states and localities.

The Rising Risk of Antibiotic Resistance

Scary theme of the week? Rising antibiotic resistance.

Megan McArdle highlighted this challenge in her presentation at the Kauffman bloggers event on Friday; if you have a moment, check out her chart at the 2:00 mark, showing that resistance to new antibiotics has been developing faster and faster.

You’ll hear more about resistance later in the week, as the World Health Organization will make make it the focus of Thursday’s World Health Day. It’s also the subject of a helpful overview in this week’s Economist.

Antibiotic resistance isn’t new. Indeed, as the Economist notes, Alexander Fleming identified this threat in the 1940s. But it appears to be getting worse. Evolutionary pressure combines with market failure to speed the creation of resistant bacteria:

Convenience and laziness top the list of causes of antibiotic resistance. That is because those who misuse these drugs mostly do not pay the cost. Antibiotics work against bacteria, not viruses, yet patients who press their doctors to prescribe them for viral infections such as colds or influenza are seldom harmed by their self-indulgence. Nor are the doctors who write useless prescriptions in order to rid their surgeries of such hypochondriacs. The hypochondriacs can, though, act as breeding grounds for resistant bacteria that may infect others. Even when the drug has been correctly prescribed, those who fail to finish the course are similarly guilty of promoting resistance. In some parts of the world, even prescription is unnecessary. Many antibiotics are bought over the counter, with neither diagnosis nor proper recommendations for use, multiplying still further the number of human reaction vessels from which resistance can emerge.

In economics lingo, there is an externality. If I take an antibiotic, I get the health or psychological benefits. But I also increase the odds of a new resistant strain of bacteria developing, particularly if I don’t take the drug appropriately. But patients and doctors often don’t take that risk into account when deciding whether and how to use an antibiotic.

That’s a tough problem to crack. The standard economist playbook says we ought to disseminate better information and strengthen incentives so that patients and doctors take these risks into account. Better guidelines for prescribing doctors, perhaps, along with better ways of monitoring and rewarding patients for taking the drugs appropriately. One might even consider a Pigouvian tax to discourage antibiotic use, although that raises a host of concerns of its own.

In addition, we could try to expand the supply of new antibiotics.

That raises the usual questions of how best to encourage innovation through patents, prizes, government-subsidized R&D, changes to the drug approval process, etc. But even intelligent policy can’t overcome nature itself. As the graph from the Economist suggests, the potential pool of antibiotics may be drying up.