NAFTA + Ohio = Good Economy

Though you wouldn't know it if you listened to the politicians stumping in Ohio for the primaries, Ohio has benefited enormously from free trade, especially from the NAFTA agreement. If we stopped all international trade, it would not bring back those manufacturing jobs (jobs which were created by trade in the first place). Consider the unemployment rate in Ohio and Cleveland since January 1993 (Month 0), the start of NAFTA (other Ohio cities do not go back that far):
Since the start of NAFTA, Ohio and Cleveland have never experienced more unemployment than the month it began, which was not a historically high level anyway. Even during the recession, unemployment only got as high as 6.5 percent, which is still low by historical standards. Unemployment rate is by no means the only important statistic on labor force activity, but it is reflective and probably a surprise to those who listen to wanna-be presidents.

Sterling Example of Why You Should Not Trust Antitrust Suits

Google is attacking the proposed merger of Microsoft and Yahoo on the grounds that it will reduce competition. You should be able to clearly see that Google's real concern is that it will increase competition. Google has been distancing itself from the other two with superior product innovation. In order to catch-up and compete, these two hope to combine their resources. Antitrust law is special interest law, not consumer interest law.

This is not the first time Microsoft has dealt with this nonsense. Here is an excellent short petition from 240 economists when Microsoft was sued by the government the first time. A nugget:

The current spate of heightened antitrust activism seems to suggest that anti-competitive business practices abound. Headline-grabbing cases against Microsoft, Intel, Cisco Systems, Visa and MasterCard, along with a flurry of merger investigations now under way, would appear to demonstrate the need for a vigorously enforced antitrust policy that will create checks and balances to eliminate consumer harm.

However, consumers did not ask for these antitrust actions — rival business firms did. Consumers of high technology have enjoyed falling prices, expanding outputs, and a breathtaking array of new products and innovations. High technology markets are among the most dynamic and competitive in the world, and it is a tribute to open markets and entrepreneurial genius that American firms lead in so many of these industries. But, these same developments place heavy pressures on rival businesses, which must keep pace or lose their competitive races. Rivals can legitimately respond by improving their own products or by lowering prices. Increasingly, however, some firms have sought to handicap their rivals’ races by turning to government for protection.

Pushin' Primaries in Iowa and NH

The Associated Press review voter frustrations over the influence of New Hampshire and Iowa in the presidential primaries. The background on the issue is that these two states hold their primaries before all the other states, and candidates who perform badly often drop out before even appearing on another ballot.

Both states have been criticized as unrepresentative of the country given their size and lack of racial diversity. Iowa — population 3 million — is 95 percent white; New Hampshire — population 1.3 million — is 96 percent white. Democrats tried to inject more diversity into the process by adding early contests in Nevada and South Carolina, but Iowa and New Hampshire moved even earlier.

The system became so scrambled last year that New Hampshire Secretary of State Bill Gardner was prepared to move the primary into December to keep ahead of other states that scheduled their own early primaries and caucuses. If anything, the front-loaded calendar made Iowa and New Hampshire more important.

Put your game theory to work now: 1) Use the prisoners' dilemma to explain why a simultaneous game would lead to all states converging to a single point in time further from the general presidential election; 2) Using a sequential game, explain why the New Hampshire SOS Bill Gardner's (credible) threat to continue to move earlier may prevent this convergence outcome. For extra credit, think about the economic benefits of hosting the initial primaries that Iowa and New Hampshire have capitalized into their tax revenues and their constituents' economic profit make their threat to move earlier so credible.

Note that the latter part of the article discusses the argument that New Hampshire and Iowa more closely examine the candidates, weeding out the candidates without enough "substance." How does the median voter model undermine this service?

Public Choice Features in Region Focus

The current issue of Region Focus, a publication of the Richmond Bank of the Federal Reserve, has a pair of interesting articles regarding Public Choice Economics. The first is a discussion of the theory itself, which is very readable for undergraduate economists. It discusses Bryan Caplan's new book The Myth of The Rational Voter: Why Democracies Choose Bad Policies. I'm not yet on-board with his arguments, but I have not yet finished the book and I do think it is an interesting alternative way of thinking about democracy beyond the traditional median voter framework that I teach in Micro.
The second article is of interest to WVU students, as it is an interview with our own Russell Sobel about a variety of his best research: Why FEMA fails (he wrote pre-Katrina), testing for the magnitude of the incentive to drive more dangerously when safety regulations are increased, Why West Virginia is poor, and does Wal-Mart destroy small businesses.

The Charity of the Uncharitable

There is a famous paper by economist Gordon Tullock on why people vote for taxes that carry out actions one could do on their own, known as "The Charity of the Uncharitable." To restate this, Tullock asked why people would vote for a $100 tax to support some transfer to the poor instead of giving the $100 of your own free will to the poor (or some other charity). After all, either way it costs you $100, but the taxes force everyone (not just yourself) to give $100 to the poor. Why force others to be charitable when they may need that $100 for their own survival or charity of their own choice?

Tullock believed that since people innately realize, even if they don't acknowledge it, that their democratic vote doesn't matter. It is extremely rare for any election to be decided by one vote, thus usually your vote doesn't change the outcome. Given this, you are less likely to vote your true preferences and satisfy what he called internal dissonance, which is internal conflict between wanting to be charitable and simultaneously wanting to be greedy. Since your vote doesn't matter, you may as well vote for the tax to satisfy your charitable side but then privately behave greedily, allowing you to satisfy two conflicting desires.

The reason I bring this up? Scientific American reports that research has found that the brain responds the same way to paying taxes that directly fund charity as it does when money is being given to charity. Perhaps this is the biological proof of Tullock's theory. If you read the article, you will also see that people give less to charity individually than they do when paying taxes. It is however, not a definitive study, as it has several limitations many of which are mentioned in the article.