Replicating Successful Government Interventions

According to Stuart M. Butler and David B. Mulhausen, it is not easy.

the task of mimicking and scaling up programs that work is not so straightforward. Success is never a simple matter of easily traceable cause and effect, and even the people who have achieved a breakthrough often cannot pinpoint exactly what worked and why. Social outcomes have an impossibly complex array of causes, and the circumstances that characterize one place are rarely identical — and are often not even very similar — to those found elsewhere. A seemingly successful preschool program in Chicago may fail in Atlanta, even if it is reproduced virtually identically, because of differences, both large and small, between the two cities.

I think that a big problem is that success can be mis-measured in the first place. For example, the authors write,

Early-childhood education offers a good example of such pitfalls. Head Start, a federal program that funds preschool initiatives for the poor, was based on a modest number of small-scale, randomized experiments showing positive cognitive outcomes associated with preschool intervention. These limited evaluations helped trigger expenditures of over $200 billion since 1965. Yet the scaled-up national program never underwent a thorough, scientifically rigorous evaluation of its effectiveness until Congress mandated a study in 1998. Even then, the publication of the study’s results (documenting the program’s effects as measured in children in kindergarten, first grade, and third grade) was delayed for four years after data collection was completed. When finally released, the results were disappointing, with almost all of the few, modest benefits associated with Head Start evaporating by kindergarten. It seems the program had been running for decades without achieving all that much. Worse yet, the scant evidence of success has not stopped Head Start’s budget from continuing to swell: The program cost $8 billion last year.

In the private sector, if a firm gets off to a promising start but then founders, it sinks. Government programs keep right on going. This is one of the issues that I will be raising when I discuss a new book at Cato on Thursday. I will offer an even more pessimistic take than the authors of the article or the author of the book.

My Review of Calomiris and Haber

Is here. An excerpt:

The authors posit a contrast between what they call liberal democracy and populist democracy. Liberal institutions are designed to limit the power of what James Madison called factions, in part by making the government relatively unresponsive to public clamor. Populist institutions are designed to increase the power of those who can command electoral majorities.

A central claim of the authors is that banking crises are more likely in heavily populist countries than in countries that are less populist. They cite Canada as an example of the latter. For instance, in Canada, Senators still obtain office by appointment, rather than by direct election.

Wesley Mouch’s Assistant

CBS reports,

Lesley Stahl: Let me interrupt you. You were the government. How many of the loans were you involved in?

Steven Koonin: Difficult to know the exact number. But I would say in the order of 30.

Lesley Stahl: Did you make mistakes?

Steven Koonin: I think I didn’t do as good a job as I could’ve. In retrospect, I would’ve done things a bit differently.

Lesley Stahl: Part of this was supposed to be creating new jobs. Everything I’ve read there were not many jobs created.

Steven Koonin: That’s correct.

Lesley Stahl: So what went wrong there?

Steven Koonin: I didn’t say it would create jobs. Other people did.

Honestly, I did not know what to excerpt. Read the whole thing. Wesley Mouch was, of course, Steven Chu, the Energy Secretary in President Obams’s first term.

What Kind of Corporatism?

A commenter on this post writes,

corporatism is the only game in town (http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/07/crony-capitalism-the-only-capitalism.html). The question then is what KIND of corporatism?

Libertarians who say that regulation = corporatism and who shrink back from any effort to regulate end up de facto enablers for the worst kind of corporatism from a progressive POV: the kind that makes the public in public/private partnership the junior partner.

I believe that you get the benefit of markets when businesses are allowed to fail. The worst evil of corporatism is its protection of incumbent businesses. What disturbs me about the progressive vision is that it seems to involve regulation of a static business environment rather than encouragement of a dynamic market with creative destruction.

Public Choice 101

From Cathy Reisenwitz.

Earlier this year, Center for American Progress donor Citibank hired lobbyists to literally write 70 out of 85 lines of a bill regulating derivatives trading which passed the House. If this regulation was meant to hurt Citibank’s profitability while defending their customers it’s unlikely to have done so.

There are three main reasons corporations like Citibank write their own legislation. First, lawmakers feel pressure from constituents to regulate industries about which their staffs know nothing; corporate lobbyists and lawyers provide much-needed information. Second, it’s much easier and faster for a company to understand and comply with a regulation it wrote. Third, and most important, companies write regulation that is easier and cheaper to comply for them than for their competitors.

Read the whole thing. Of course, it will change no one’s mind. The way to resist public choice theory is to insist that with sufficient moral authority “we” can regulate in a non-corporatist way. That is a non-falsifiable hypothesis, because the premise of sufficient moral authority is never satisfied.

The Market is a Process, not a Decision Mechanism

Veronique de Rugy testified,

But unlike in the marketplace, the incentives for good management in government are very weak. For instance, even though lawmakers are expected to pursue the “public interest,” they make decisions that use other people’s money rather than their own. This means that their exposure to the risk of a bad decision is fairly limited, and there is little to no reward for spending taxpayers’ money wisely or providing a service effectively or efficiently

This is standard public choice theory, and it is not wrong. But it is not persuasive to those who believe that moral authority is or ought to be sufficient to overcome such problems.

I think that many commentators contrast the market and government as mechanisms for making decisions. In this contrast, the market sometimes has an efficiency advantage, but government is presumed to have a moral-authority advantage.

Instead, think of the market as a process for testing hypotheses. The process is brutally empirical, winnowing out losing strategies and poor execution. In contrast, elections are a much weaker testing mechanism. Elections are unable to winnow out sugar subsidies, improvident loan guarantees, schools that produce bad outcomes, etc.

It is a lack of understanding of this dynamic that leads some people to surprised that healthcare.gov does not work as well as one of the leading commercial web sites. I keep trying to reiterate, as I do on this podcast, that something like Amazon is a rare survivor of a tournament. The private sector produced plenty of business ideas and software systems that were as bad as Obamacare and healthcare.gov, but those get winnowed out.

Cognitive Capture

Acemoglu and Robinson write,

the excess returns of connected firms may be a reflection of the perception of the market (and likely a correct perception) that during turbulent times there will be both heightened policy discretion and even more of the natural tendency of government officials and politicians to rely on the advice of a small network of confidants. For Timothy Geithner this meant relying on, and appointing to powerful positions, financial executives from the firms he was connected to and felt comfortable with. But then, there is no guarantee that these people would not give advice favoring their firms, knowingly or perhaps subconsciously (for example, they may be under the grips of a worldview that increases the perceived importance of their firm’s survival for the health of the US economy).

This refers to an “event study” that looks at how the prices of different financial firms responded to the announcement that Timothy Geithner would be Treasury Secretary. Pointer from Mark Thoma.

I tend to discount event studies. For one thing, I suspect that there is a lot of “survivor bias” in that event studies that fail to lead to results that show something the authors want to show probably never see the light of day. But I happen to agree with the hypothesis that financial regulators are subject to cognitive capture by the large financial firms.

Dean Baker on Housing Finance Policy

He writes,

Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.

Pointer from Mark Thoma.

I have argued that the general trend of housing policy is to give Wall Street and the housing lobby, particularly the Mortgage Bankers Association, exactly what they want. Baker is one of the few economists on the left who is willing to speak up on this. When I suggested to an audience of conservatives that we needed to engage Brookings and the Urban Institute to study the effects of housing finance subsidies, people came up to me afterwards to say that they thought that those think tanks would not want to offend important donors.

Wesley Mouch Outcome

Detroit News reports,

Fisker Automotive Inc. filed for Chapter 11 bankruptcy on Friday and the Energy Department sold its green-energy loan for $25 million to investor group Hybrid Tech LLC. Taxpayers will lose $139 million on the $192 million loan to the failed electric vehicle startup, the Energy Department confirmed

I referred to energy secretary Steven Chu as Wesley Mouch. Of course, right now the Wesley Mouch award is more likely to go to Obamacare than to the crony-capitalist “green energy” loan guarantees. Competition is tough.