Posts Tagged ‘public policy’
“The question isn’t ‘what can an economy produce today?’, but ‘what can it learn to produce?'”*…
… and how we do we create the conditions to encourage that learning? Industrial policy, one possible answer, is making a comeback. But as Henry Farrell explains, that raises another challenge…
… For decades, economists have argued that state policy makers lack the requisite knowledge to intervene appropriately in the economy. Accordingly, decisions over investments and innovation ought be taken by market actors. Now, the “market knows best” paradigm is in disrepair. It isn’t just that “hyperglobalization” has devoured its own preconditions, so that it is increasingly unsustainable. It is also that some goals of modern industrial policy are in principle impossible to solve through purely market mechanisms. To the extent, for example, that economics and national security have become interwoven, investment and innovation decisions involve tradeoffs that market actors are poorly equipped to resolve. There are good reasons why Adam Smith did not want to see defense policy handled through the market’s division of labor.
What we now face is a quite different kind of knowledge problem. We lack the kinds of expertise that we need to achieve key goals of industrial policy, or to evaluate the tradeoffs between them. This lack of knowledge is in large part a perverse by-product of the success of Chicago economists’ rhetoric. Decades of insistence that economic decisions be handed off from the state to markets has resulted in a remarkable lack of understanding among government policy makers about how markets, in fact, work. This has a variety of consequences. Policy mistakes are more likely. Market actors find it easier to manipulate the understanding of government policy makers, e.g. as to the extent and kind of subsidies required in particular sectors or for particular purposes.
One way to remedy this is to rethink the kinds of specialist education that public administrators receive, both to ensure that low and mid-level functionaries are better equipped to take the decisions they need to take, and to signal increased prestige for non-traditional forms of policy knowledge. As the sociological literature suggests, elite US policy schools such as the Harvard Kennedy School, Johns Hopkins School of Advanced International Studies and Georgetown University (to name three entirely random examples) play a key role not simply in directly imparting knowledge through education, but in disseminating norms about the kinds of knowledge that are considered to be appropriate for policy decisions. These schools have by and large converged on a framework derived from a watered down version of neoclassical [indeed. one might suggest, neoliberal] economics. I argue that new skills, including but not limited to network science, material science and engineering, and use of machine learning would be one useful contribution towards solving the new knowledge problem…
Assuring access to the right tools and techniques: “Industrial policy and the new knowledge problem,” from @henryfarrell in @crookedtimber.
* Joseph Stiglitz (@JosephEStiglitz)
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As we retool, we might send thoughtfully calculated birthday greetings to Paul Collier; he was born on this date in 1949. An economist who specializes in development, he is a professor at Oxford and director of the International Growth Centre.
Collier is a specialist in the political, economic and developmental predicaments of low-income countries, and is probably best known for his 2007 book, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. His philosophy, developed there and in his 2010 The Plundered Planet, is encapsulated in his formulas:
- Nature – Technology + Regulation = Starvation
- Nature + Technology – Regulation = Plunder
- Nature + Technology + Regulation (good governance) = Prosperity
“Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience”*…
Regulation often addresses real public needs/concerns. But the costs of compliance often favor the largest players in a regulated market– which can lead to consolidation. From the Oxford Martin School, a current example…
Exploiting the timing and territorial scope of the European Union’s General Data Protection Regulation (GDPR), this paper examines how privacy regulation shaped firm performance in a large sample of companies across 61 countries and 34 industries. Controlling for firm and country-industry-year unobserved characteristics, we compare the outcomes of firms at different levels of exposure to EU markets, before and after the enforcement of the GDPR in 2018. We find that enhanced data protection had the unintended consequence of reducing the financial performance of companies targeting European consumers. Across our full sample, firms exposed to the regulation experienced a 8% decline in profits, and a 2% reduction in sales. An exception is large technology companies, which were relatively unaffected by the regulation on both performance measures. Meanwhile, we find the negative impact on profits among small technology companies to be almost double the average effect across our full sample. Following several robustness tests and placebo regressions, we conclude that the GDPR has had significant negative impacts on firm performance in general, and on small companies in particular…
“Privacy Regulation and Firm Performance: Estimating the GDPR Effect Globally,” from @oxmartinschool via @benedictevans
[Image above: source]
* Adam Smith
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As we seek balance, we might recall that it was on this date in 1969 that the U.S. officially withdrew $500, $1,000, $5,000, and $10,000 bills from circulation, pursuant to an executive order by President Richard Nixon. The larger bills had been used by banks and the government for large financial transactions, but had been rendered obsolete by the electronic money transfer system.
Those large-denomination bills were last printed on December 27, 1945 and are still considered legal tender. Indeed, (a version of) the $500 is still used in the game of Monopoly.
“Got a big dream, from a small town”*…
Take one isolated, High Desert town (John Day, Oregon), add an abused river, a dying timber industry, and a hotter, drier climate. Then mix in a local leader’s grand, out-of-the-box ideas about rural sustainability. What do you get?
One day in October of 2021, a handful of city leaders in John Day, a small town in rural Oregon, gathered to watch a crane operator set a new bridge. Fashioned from a repurposed railroad car, the bridge spans the John Day River, just blocks from downtown.
Not much else was there that day, aside from some heavy equipment, a freshly poured sidewalk, and piles of concrete and crushed mining tailings. But to the small group that came to watch, the bridge forged connections both physical and symbolic. It was a small piece of a grand vision called the John Day Innovation Gateway—an uncommonly ambitious, multimillion dollar blueprint for a town of just 1,750 residents.
The plan, several years in the making, aimed to restore the river, revive the town’s riverfront, and rebuild the local economy. In doing so, town leaders hoped, the Innovation Gateway would propel John Day into the 21st century with a resilient infrastructure that anticipates the massive changes and challenges brought by climate disruption.
For John Day and many other communities in the western U.S., those challenges include hotter, dryer summers, more intense heatwaves, and dwindling snowpacks, so crucial for water supplies during dry months. These trends are already worsening. In fact, a recent study found that the West’s 22-year “megadrought” is making the region drier than it has been in the last 1,200 years.
To prepare itself for this future, the city of John Day has acquired $26 million (and counting) for its various projects—a staggering amount for a town so small it doesn’t even have a traffic signal. A local newspaper article from 2019 listed no less than 23 projects in various stages, from sidewalk and trail upgrades to plans for a new riverfront hotel and conference center.
All of this activity has excited hope among many John Day residents. Others, however, have been alarmed at the scale of the changes afoot, and the way they’ve been handled. And, as projects have moved from the drawing board to groundbreaking, the protests are growing louder…
Trying to reconcile process with action, the present wrestles with the future; in the middle it all, a determined small town City Manager: “The West’s Rural Visionary,” by Juliet Grable (@JulietGrable) in the always-illuminating @CraftsmanshipQ.
* Lil Wayne
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As we face the future, we might send foresightful birthday greetings to Vilhelm Bjerknes; he was born on this date in 1862. A physicist turned meteorolgist, he helped found the modern practice of weather forecasting. He formulated the primitive equations that are still in use in numerical weather prediction and climate modeling, and he developed the so-called Bergen School of Meteorology, which was successful in advancing weather prediction and meteorology in the early 20th century.
“Political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness…. Such phraseology is needed if one wants to name things without calling up mental pictures of them.”*…
Mental models can be helpful, but they can also obscure as much as they reveal…
“The era of big government is over,” then-US President Bill Clinton proclaimed in 1996. But President Joe Biden’s multi-trillion-dollar spending plans are suggesting precisely the opposite. Behind the politicians stand the policy gurus, eager to put their names on – as the fashionable phrase goes – a new “policy paradigm.”
Paradigm-peddlers have not yet settled on a single label for the post-pandemic era, but frothy ideas abound. Countries should “build back better,” but only after a “great reset.” Economic growth used to be a pretty good thing on its own; these days, it is unmentionable in polite company unless it is “inclusive, equitable, and sustainable.” (I can see why, but must all three adjectives always be strung together?)
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Harvard University’s Dani Rodrik was right to argue recently that we should beware of economists bearing policy paradigms. Such frameworks are supposed to organize thinking, but more often than not they substitute for it.
Consider a paradigm that the pandemic is supposed to have killed: neoliberalism. Neoliberal once meant a particular approach to free-market economics. Applying the description to leaders like Margaret Thatcher and Ronald Reagan made some sense. But in current parlance, the term also applies to former UK Prime Minister Tony Blair, former German Chancellor Gerhard Schröder, and the social democrats who have governed Chile for 24 of the last 30 years – in fact, to anyone who thinks markets have some role to play in human affairs.
Through repeated, careless use, neoliberal has now become one of those words that, as George Orwell said, “are strictly meaningless, in the sense that they not only do not point to any discoverable object, but are hardly even expected to do so by the reader.”
But meaningless is not the same as useless. If a speaker at an academic seminar, policy conference, or cocktail party tars someone as a neoliberal, two messages are immediately clear: the speaker is good, and the target is bad, unconcerned with the plight of the downtrodden. Tarring someone with this particular epithet is virtue-signaling par excellence. It marks the speaker as a member of a progressive tribe concerned about the world’s poor.
The right has its own ideological identity markers. In the debate about Obamacare and health insurance in the United States, or about vouchers for school funding anywhere, anyone claiming to support “freedom of choice” is not just making a point, but also sending a signal.
Both freedom and choice have multiple meanings that philosophers have been debating at least since classical Greek times: freedom to or freedom from? Choice to do what? Is someone with little money or education really “free to choose,” as the Nobel laureate economist Milton Friedman used to say? In fact, today’s freedom-of-choice advocates probably do not want to pursue those ancient and endless debates; they are simply signaling their membership in the ideological free-market tribe.
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As the world seeks to ensure recovery from the COVID-19 crisis, simplistic political and economic ideologies will not lead to effective policymaking. Rodrik rightly pines for economic thinking that is unbeholden to cliché or to narrow identity politics. As he says, “The right answer to any policy question in economics is, ‘It depends.’” Circumstances matter, and the devil is in the details.
I want the same thing as Rodrik, but you can’t always get what you want. Because nowadays (at least outside Trumpian circles) identities based on race or religion are unacceptable, ideologies have become the last refuge of the identity-seeking and politically savvy scoundrel, and new economic paradigms the weapon of choice…
In the old joke, a man walks into a psychiatrist’s office and says, “Doctor, my brother’s crazy! He thinks he’s a chicken.” The doctor says, “Why don’t you bring him to me?” And the man replies, “I would, but I need the eggs.”
Political ideologies can be crazy, and those who peddle them often behave like chickens. But how we crave those eggs…
Simplistic political and economic ideologies that serve as identity markers will not lead to effective policymaking; but something in human psychology makes many crave them anyway: “The Perils of Paradigm Economics,” from Andrés Velasco (@AndresVelasco).
[image above: source]
* George Orwell, Politics and the English Language
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As we acknowledge nuance, we might send qualified birthday greetings to Sidney James Webb; he was born on this date in 1859. An economist, he was an early member of the Fabian Society (joining, like George Bernard Shaw, three months after its founding). He co-founded the London School of Economics (where Andrés Velasco is currently Dean of the School of Public Policy), and wrote the original, pro-nationalisation Clause IV for the British Labour Party.
A committed socialist, Webb and his wife Beatrice were staunch supporters of the Soviet Union and its communist program. Ignoring the mounting evidence of atrocities in the USSR in favor of their commitment to the concept of collectivism, they wrote Soviet Communism: A New Civilisation? (1935) and The Truth About Soviet Russia (1942), both positive assessments of Stalin’s regime. The Trotskyist historian Al Richardson later described Soviet Communism: A New Civilization? as “pure Soviet propaganda at its most mendacious.”
“Create more value than you capture”*…
As Donald Trump’s presidency careened to its ignominious end, with a mob of his supporters storming of the US Capitol, Facebook and Twitter banned the US president for inciting the violence. With that act, the scope of the political power wielded by Big Tech became impossible to ignore.
Whether these platforms have too much political power is a debate that is just beginning. Their outsize economic power, though, is unquestionable. The combined market capitalization of the five largest US tech platforms – Alphabet (Google), Amazon, Apple, Facebook, and Microsoft – rose by $2.7 trillion in 2020. Following the addition of Tesla to the S&P 500, the Big Six tech firms now represent nearly one-quarter of the index’s valuation. And with the spread of COVID-19, the leading digital platforms have become de facto essential service providers, enabling a mass transition to remote and isolated living.
And yet the political pressure on Big Tech has continued to rise. There is a growing consensus that platforms have been abusing their power, driving profits by exploiting consumer privacy, crushing the competition, and buying up potential rivals.
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The economics of platforms is different from the economics of traditional offline and one-sided markets. Policymakers therefore need to reconsider some of their most basic assumptions, asking themselves whether they are even focusing on the right things.
A key challenge is to determine how the value of data diverges from the value created by providing a data-generating service. Platforms have the power to shape how decisions are made, which in turn can alter the value of the data being amassed. The implication, as Google co-founders Larry Page and Sergey Brin foresaw in a 1998 paper, is that advertisers or any other third-party interest can embed mixed motives into the design of a digital service. In the case of internet search, the advertising imperative can distract from efforts to improve the core service, because the focus is on the value generated for advertisers rather than for users.
As this example shows, it is necessary to ask who benefits the most from the design of a given service. If a platform’s core mission is to maximize profits from advertising, that fact will shape how it pursues innovation, engages with the public, and designs its products and services.
Moreover, it is important to understand that even if antitrust authorities were empowered to break up companies like Google and Facebook, that would not eliminate the data extraction and monetization that lie at the heart of their business models. Creating competition among a bunch of mini-Facebooks would not weed out such practices, and may even entrench them further as companies race to the bottom to extract the most value for their paying customers…
Digital markets do not have to be extractive and exploitative. They could be quite different, but only if we ourselves start to think differently. We need to recognize, as Adam Smith did, that there is a difference between profits and rents – between the wealth generated by creating value and wealth that is amassed through extraction. The first is a reward for taking risks that improve the productive capacity of an economy; the second comes from seizing an undue share of the reward without providing comparable improvements to the economy’s productive capacity.
For the past half-century, corporate governance has rested on the notion of shareholder value. The result is an economy in which it is increasingly important to differentiate firms that are actually driving innovation from those that are not. There is no shortage of firms that are engaged merely in financial engineering, share buy-backs, and rent-seeking, extracting gains from actual risk takers while under-investing in the goods and services that generate value.
The digital economy has accelerated this conflation of wealth creation and rent extraction, making it all the more difficult to differentiate between the two. The issue is not just that financial intermediaries are shaping how value is created and distributed across firms, but that these extractive mechanisms are embedded within user interfaces; they are baked into digital markets by design…
The proliferation of such practices shows why we need to focus more on the “how” of wealth creation, and less on the “bottom line.” An economy that produces wealth from privacy-respecting innovations would not function anything like one that encourages the systematic exploitation of private data.
But building a new economic foundation will require a shift from the shareholder model to a stakeholder model that embodies a deeper appreciation of public value creation. Wealth and other desirable market outcomes are collectively co-created among public, private, and civic domains, and should be understood as such. Policy analysis and corporate decision-making can no longer be guided solely by concerns about maximizing efficiency. We now also must consider whether wealth generation is actually improving society and strengthening the ability to respond to social challenges.
After all, the fact that platforms are creating wealth does not mean they are creating public value. A firm with access to massive amounts of data and network effects could, in theory, use its position to improve social well-being. But it is unlikely to do so if it is operating under a framework that prizes the generation of advertising revenue over everything else, including the performance of products and services…
Today’s digital economy has grown up around a business model of data and wealth extraction, confounding traditional antitrust paradigms and undermining the public and social value that otherwise could be derived from technological innovation. An acute diagnosis of a fundamental structural challenge, and thoughts on steps to address it– Mariana Mazzucato (@MazzucatoM), Tim O’Reilly (@timoreilly), and colleagues: “Reimagining the Platform Economy.” Do click through to read piece read the entire piece.
* Tim O’Reilly
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As we dig deep, we might recall that it was on this date in 2005 that YouTube was founded and registered (though it didn’t launch until November of that year). The creation of three PayPal vets (Chad Hurley, Steve Chen, and Jawed Karim), it was bought by Google one year after launch (in November 2006) for $1.65 billion. Operating as one of Google’s subsidiaries, it is now (per Alexa Internet Rankings) the second most trafficked web site, after its parent’s search page.
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