Economic retrospective voting in dictatorships

Dictators have an interest in strong economic performance. In an Olson model, the dictator wants to maximize his total tax take, which generally means getting the underlying economic structure right but taxing at a rate that's too high from the perspective of maximizing GDP but just right from the perspective of maximizing the dictator's share of GDP.

But what happens when the dictator's tenure is at issue? Results then are less clear. If improvements in economic performance reduce unrest, then the dictator might tax less than would be otherwise optimal in order to lower his policing costs; if a strong economy builds alternative power bases that might provide threats to the dictator's position, then things are less clear.

ANU's Paul Burke looks at political survival in democracies and autocracies, finding that both autocrats and democrats are more likely to lose power when they preside over poor economic performance. In fact, they seem about equally responsive to economic conditions:

The LPM estimates in Table 10 provide no evidence that the short-run impact of economic growth on political survival differs between democracies and autocracies. Interestingly, the IV estimates suggest that the impact of the growth rate on next-year leader exit odds is smaller in democracies than autocracies, although the difference is only significant in the estimate in column 2 (and only at the 10% level). The IV estimates in columns 3 and 5-6 indicate that the short-run impact of growth on leader exits remains negative in democracies, albeit smaller (in absolute value terms) than that for autocracies.

Policy upshot?

Crisis assistance conditioned on the benevolence of national leaders may be valuable in shoring up the positions of benevolent leaders during times of economic hardship, while ensuring that corrupt or autocratic leaders do not receive relief from domestic political pressures at the very moment when these pressures are building in strength.

Crypto-optimism

Eli Dourado's excellent discussion of technologies of control and technologies of evasion reminds me of the anarcho-optimism of Cryptonomicon. Eli builds a business cycle story:

Here’s my model. First we need to differentiate between two kinds of innovation and think about their effects. The first kind of innovation is geared toward brute maximization of production. It is typically centralized and makes use of economies of scale. Examples might include an assembly line factory or a big, coal-fired power plant. Because these innovations tend to be centralized, they introduce points of control. The capital is typically fixed and therefore easy to tax and regulate. It’s well known in the development literature that it’s really hard for governments to control rural peasants who live off the grid. Once they move to the cities and plug into centralized services, it is easier to require them to send their children to school, for instance. Because these innovations introduce points of control, I will call them technologies of control.

On the other hand, not all innovations are about brute maximization of production. Some are about producing things that we already know how to produce in ways that have ancillary benefits. An important ancillary benefit is evading control. Examples of these innovations include 3D printers and solar power. The evasion of control that is possible with 3D printers is the subject of Cory Doctorow’s short story Printcrime. And portable solar power cells can make people harder to control by supplying electricity without the need to register an address, have a bank account, stay put, and so on. These are obvious examples, but control can be evaded through more subtle innovations as well. I will call innovations that circumvent points of control that can be used by governments or monopolies to exploit, tax, or regulate technologies of resistance.

Now, postulate some background rate of innovation. How many resources will be devoted to technologies of control and how many to technologies or resistance? The answer is that it depends on how invasive the state (or other monopolies) are. When the state is invasive, at the margin the incentive is to find ways to circumvent the points of control; a greater proportion of resources will go into technologies of resistance. When the state is non-invasive, at the margin the incentive is a purer maximization of production; a greater proportion of resources will go into technologies of control, which results higher growth.

Add in time-to-build or other frictions in shifting capital from technologies of control to technologies of resistance, and we get cycles.

I love the story, but I'm not sure how well parts of it match the stylized time path. Here's Eli:

So far, I’ve been pretty general about technologies of resistance, but I want to tie it back into McJolfsson’s story about rapid skill-biased technical change. The key point is that labor is extremely regulated; firms that use labor are subject to intense government control. In part this is because policies that give labor a “bigger piece of the pie” are popular with voters, and in part it is because labor can complain and enforce its rights in a way that machines cannot. If you own a business and you are subject to intense government control, you are going to invest resources in circumventing the points of control. In our economy, that means getting rid of lots of labor as cheaply as possible, which means skill-biased technical change. As Arnold Kling has said, “if a job can be defined, it can be automated or outsourced.” But it’s because there is so much control exercised in the labor market that the incentive to automate and outsource is so high.

Agreed. But surely American labour market regulation has been in decline since the late 1970s. I have a hard time seeing a big labour regulation shock anywhere in the 2000s that would have precipitated a dumping of labour. I suppose the shock has to come from technology reducing the costs of substitution more quickly than labour market deregulation reducing the need for such substitution. Do read Eli's full argument, which brings together Brynjolfsson's techno-optimist story with Cowen's Great Stagnation.

I'm a long term optimist on technologies of evasion. Eventually, something like BitCoin will be successful. Meanwhile, Patri is sparking more real-world hacks around control. The latest one: floating platforms 12 miles off San Francisco where foreign tech entrepreneurs could route around idiotic American immigration laws.

This immigration issue deeply affected the Blueseed team, of which two are immigrants (from Serbia and Romania), and the other is the son of Cuban immigrants. Rather than accepting the current reality, Dan tells us, "If U.S. policy hasn’t kept pace with the changing economic realities of the era, someone needs to find a solution that will help entrepreneurs come to Silicon Valley if they so desire. And that someone might as well be us. In other words, it’s time to stop complaining and start solving the problem."

On their website they state they plan to start accommodation prices off at around $1500 a month, and transportation will be provided to the mainland by a daily ferry. Internet connectivity will be provided via a point-to-point 40Gbps laser link with satellite link backup. They are also looking at additional backup solutions using submarine cable and potentially a series of WiMAX relay buoys. A visa is not required to earn a paycheck on Blueseed, and most residents will be able to travel back and forth to the mainland with a business/pleasure B1 Visa.

I worry that it will be really easy for the government to change a line of regulatory code to make it tough for Blueseed residents to commute back and forth; but, I'm also not sure that they'll face big pressure to do so and regulatory inertia would then work in Blueseed's favour. Until some California Congressman reckons the extra votes he gets from making a stink about platform-dwellers stealing jobs swamps the costs he'd impose on the tech industry.

A number I don't believe

Another plausible BERL estimate:

Given the make-up of the Auckland and Bay of Plenty regional economies, we illustrate the overall impact at a regional economy level of fast broadband from early roll-out and uptake. We estimate the productivity benefits of fast broadband could lift GDP by 7-9 percent above its business-as-usual level by 2025 if early roll-out, adoption and uptake is achieved. 

BERL's report on the benefits of broadband for Auckland is attached to the minutes of an Auckland Council Meeting.

I haven't the time to put into fisking this one. But a few bits of interest:

• They reckon the benefits to primary industry in the Bay of Plenty region is greater: "the estimated total regional benefit of broadband applications to the dairy production industry in the Bay of Plenty region is about $71 million. This is equivalent to about 7 percent of the export value of dairy product in the Bay of Plenty." Dairy can be made more productive by moving from zero internet to half-decent internet. Just imagine the benefits to Fonterra in being able to solve the Salesman problem if they have real-time access to milk volumes in the tanks at all the farms in the area. But I can't see how that's substantially better achieved at 10 mbps than at 500 kpbs.
• They figure the Auckland region's GDP, by 2025, is 1.8 billion dollars higher if broadband rolls out in 2012 instead of 2015. For NZ as a whole, we get a $4.7b boost. That's about a thousand dollars per capita. I can't believe that there's any difference a decade on that's discernible from noise.
• I can't help but suspect that there's rather a lot packed into the last two bits of "if early roll-out, adoption and uptake is achieved."
• They spend a fair bit of time highlighting the economic benefits of future growth in a bunch of industries where broadband hardly seems the binding constraint. Efficiency benefits of Kiwifruit farmers being able to file reports online with Zespri rather than paper forms hardly requires really fast broadband. I'm also not sure that broadband access is a bigger constraint for aquaculture than are regional consenting issues.

If the Auckland and Bay of Plenty Councils believe the results of the study they commissioned, I really hope that they go ahead and make the broadband investment using their own ratepayers' money rather than using the report to pressure Key into providing Auckland with what's mostly a private good.

HT: Henry Ergas, who's done great work debunking similar claims about Australia's national broadband network.