I’ve seen some speculation that Jim Steinberg might be among Obama’s top choices for National Security Adviser. I met Jim a few times when I was working at Brookings and I think he was the most impressive person I encountered there. One time Mary Graham and I went in to talk to him about some work we were doing on disclosure policy (transparency vs. security-type stuff) and I was taken aback by how quickly he cut through the clutter (both of what we were saying and of the policy area as a whole) and seized the key issues. I don’t remember specifically what he suggested or anything; I just remember a feeling of awe. One of the reasons I am excited about the new administration is that people like Jim Steinberg will be making important decisions.
On Waxy.org I found an interview and screencast about bandcamp.mu, a new site that tries to make it as easy for bands to publish and share music as it is for bloggers to write blog posts. From experience I know that bands struggle with how to share their music and establish a web presence. MySpace really changed how bands operated on the web but, from the bandcamp perspective, MySpace gives the band too little flexibility over how their stuff will be distributed. I hope this site is a success.
Last week the keyboard and trackpack on my MacBook Pro stopped working (again!). I took it into the Apple store and had to leave it there (again!). So, over the weekend it was back to the thinkpad. The transition was pretty easy because so much of my work is on svn and google docs. The best part was that I got to download and use Google Chrome, which is not yet available on the Mac. I think the overall performance was quite good, but there were a few little things I especially liked. So, my MacBook comes back with a replaced topcase (again!), and I’m happy to have it back, but now I miss a few things about Google Chrome as I go back to Firefox:
- The “type anything” address bar: I found it really useful to be able to type “besley coate scholar” and just key down to “Search Google Scholar for ‘besley coate'”
- The way it handles downloads is really nice — each document available as a little tab along the bottom of the window, with options for how to handle that file and others like it always available.
The intellectual case for transparency is easy to make, but it’s hard to demonstrate that transparency has the benefits its advocates (like me) claim. On Kevin Lewis’s List I came across a paper that appears to do a nice job of documenting the benefits of financial disclosure regulation to investors. The abstract is below. Their approach is to look at how the stock market reacted to events surrounding the passage of Sarbanes-Oxley. As SOX came closer to passage, firms that had been “managing” their earnings more closely saw a larger stock price boost than firms that had been doing less book-cooking. The authors appear to interpret this as evidence that SOX-induced financial disclosure benefited investors, since the firms more affected by it saw a larger boost in price.
It’s a result that may be counterintuitive to a lot of people: the BAD firms are the ones that benefited from the regulation. (More intuitive would be a story where the bad guys who had been getting away with something took a hit as it became clear that the free and easy days were over.) But the paper’s interpretation of stock price movements reflects the way financial economists tend to look at these things: investors had already discounted the price of these bad companies based on their questionable financial reporting, so signs that this would stop and that the real value of the firm would become clearer led investors to feel better about the investment and trade away the discount.
If this is how things work, why would firms obfuscate in the first place?
Also, how do we know that the news about SOX being passed was not interpreted by investors the opposite way, ie, “Well, if it’s going to be this lax, then these bad guys are going to get off easy”?
I may come back to this one. Anyway, here is the abstract:
Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management
Haidan Li, Morton Pincus & Sonja Olhoft Rego
Journal of Law and Economics, February 2008, Pages 111-134
The Sarbanes-Oxley Act (SOX) of 2002 is the most important legislation affecting corporate financial reporting enacted in the United States since the 1930s. Its purpose is to improve the accuracy and reliability of accounting information that is reported to investors. We examine stock price reactions to legislative events surrounding SOX and focus on whether such stock price effects are related cross-sectionally to the extent firms had managed their earnings. Our univariate results suggest that significantly positive abnormal stock returns are associated with SOX events, and our primary analyses reveal considerable evidence of a positive relationship between SOX event stock returns and the extent of earnings management. These results are consistent with investors anticipating that the more extensively firms had managed their earnings, the more SOX would constrain earnings management and enhance the quality of financial statement information.
Macher and Richman’s review of empirical research on transaction cost economics (working paper version, published in Business and Politics earlier this year) includes this statement about the importance of TCE research relating to economic development:
It is perhaps difficult to understate the policy implications of this research, especially as developing countries consider implementing a host of new and unproven approaches.
Let me try to understate its importance: “It’s not important at all.” See, that wasn’t so difficult.
“Difficult to understate” gets 750 google hits, some of which seem like appropriate uses but many of which seem to reflect the same mistake Macher and Richman made. (By contrast, “difficult to overstate” gets 96,100.)
I was watching an episode of the Wire the other day, season 4, where Councilman Carcetti has a talk with the former mayor of Baltimore. When Carcetti asks him why he didn’t run for reelection after his first term, the former mayor starts his reply with, “Let me tell you a story . . . .” He goes on to tell a figurative story (a parable, I guess) about arriving his first day and being handed bowl after bowl of shit to eat by various constituencies in Baltimore politics — the Irish, the blacks, the Poles, etc.
It occurred to me that I never respond to a question with “Let me tell you a story.” I know enough to include anecdotes in my writing and in presentations, but in conversation I tend to quickly veer towards abstraction, wondering what the big forces are at play, whether there’s any data out there. This is a useful response for an academic but I realize some people don’t find this style of communicating very persuasive. I think pretty much everyone loves stories, and only a few people really like data.
Answering a question with “Let me tell you a story” is such a big-shot move that I’m not sure I can pull it off with a straight face, but I’m going to try, as a social experiment. Watch out.
This question came up in a discussion I was having with a British friend about money in politics. I came up with a pretty vague answer (something about how they provided legislators with information and this wasn’t really my area), but I realized if I’m going to call myself a political scientist I need to have a better answer. So I dug a little deeper and here’s an initial report.
The clean, uncontroversial work that lobbyists do is to provide information to politicians. A lobbyist might provide a research report about the facts of an issue before the legislature, or perhaps some analysis of how voters and interests groups would react to different legislative outcomes. Of course this analysis will serve the interests of the lobbyist’s client, but I can’t really see an ethical problem with advocacy, and at any rate there is no practical way to limit this kind of advocacy and respect principles of free speech.
Lobbyists also of course use material means to influence legislators. Among the legal things that Abramoff did for his clients was to encourage them to provide campaign contributions to members of Congress (for example, Bob Ney) and/or their PACs. (The best source I found on Abramoff was this article in the Washington Post.) Abramoff also helped his clients give money to Christian activist Ralph Reed’s company, Century Strategies. I have no reason to think that this was itself illegal. (My sense is that Abramoff got in trouble mostly for stealing from his clients, not for the political influence he actually brought to bear.) From anecdotes like this, it is clear that the lobbyist’s role was to act as an intermediary between the interest group and political actors who have the power to get things done. (In this case, both Ney and Reed were able to support legislation that would help Abramoff’s clients, Indian tribes running a lucrative casino.) But this kind of behavior really can’t and in fact shouldn’t be stopped. One could argue that the rules about political contributions should be modified to make it harder for groups like the Indian casinos to give to politicians and activists, but it is hard to argue that intermediaries should (or could) be prevented from acting as a go-between for legal exchanges between donors and recipients.
Regulation in the wake of the Abramoff scandal has focused not on this matchmaker role but rather on the direct exchanges he and others made — the trips, meals, and other gifts that Abramoff used to cement the loyalty of Delay, Ney, and others. According to a guide to the House’s internal ethics rules, members of Congress previously faced limits on the value of gifts they could receive from any individual in the course of the year. Now, members of Congress are not allowed to receive anything at all from a “registered lobbyist, agent, or a foreign principal, or private entity that retains or employs such principals.” Gifts from other sources are subject to tighter value limits than those that applied before.
The constraint on gifts that can be given to members of Congress seems like a good idea because direct exchanges between lobbyists and legislators are unseemly. (The photo of Abramoff with Ney, Reed, and a few other staffers on a golf course in Scotland looks bad for everyone.) But it’s hard to believe that curtailing these kinds of gifts would diminish the impact of lobbyists. Interest groups want to influence policy, and as long as they have the right to contribute money to political causes, and as long as policymakers care about whether those contributions get made, there will be mutual gains from the kinds of exchanges that lobbyists can engineer. The gifts that have been banned by ethics rules represent one naive way of using interest group money to appeal to politicians. I don’t see how you can shut down the other, ultimately more powerful ways.
I need to look into what some of the current proposals are (floated by Obama and others) to cut down the influence of lobbyists. I suspect it’s just window dressing. For example, I believe that Obama’s campaign is not receiving campaign contributions from lobbyists, and criticized Hillary’s campaign for not doing the same. As with the gifts, a direct contribution from a lobbyist to a politician is merely the least imaginative way to curry favor, so eliminating these contributions can hardly be expected to have any effect on how policy gets made.
For the past couple of months I’ve been wanting to start a blog in which I could record some thoughts that come out of my academic work, my programming, and other aspects of my life. I have outlets for statistics stuff (the Social Science Statistics blog at Harvard) and my work on ProxyDemocracy (at the ProxyDemocracy blog) but I found myself wishing I had a place to collect my thoughts and share ideas when those venues weren’t really appropriate.
“Left Shift,” chapter from upcoming book with Ansolabehere
“Equal Votes, Equal Money: Court-Ordered Redistricting and Public Expenditures in the American States,” Ansolabehere, Gerber, and Snyder, APSR, Dec 2002
These two papers assess the impact of court-ordered redistricting on state politics in the US. In the ten years following the landmark Baker vs. Carr decision of 1962, all US states redrew their congressional district boundaries to more closely approximate a “one-man, one-vote” rule. Malapportionment had become rampant in many states, with (at the extreme) a voter in a rural county in California having 400 times the voting power of a resident of Los Angeles. This had come about because levels of representation remained fixed while county populations changed, often drastically. It is easy to imagine that this would happen through neglect and inertia, but of course any system of representation creates a constituency that opposes change.
Both papers assess the impact of the Warren Court’s judicial intervention, but they differ in the effect they are looking for. The 2002 APSR paper examines the change in intra-state transfers (primarily state education distributions to the counties), which would be expected to change because more even representation across counties should lead to more even spending. “Left Shift” looks at changes in the level of state spending (such as the total expenditures on welfare and education), which would be expected to change if the more strongly represented counties preferred a different level of spending. Both papers manage to recover the effect theory would lead us to expect. (In both cases the authors state that previous work had failed to find these effects.)
The APSR paper appears to be mainly a product of data collection — the production of county level data on population, representation, spending, and demographics for both before and after the redistricting. The demographic data is of particular interest because it seems likely that other factors at least partly explain the changes in transfers they document. For example, perhaps the districts that gained representation also received more transfers because predominantly black counties had been underrepresented and blacks were also granted expanded social services in the wake of desegregation. Perhaps it was these other reforms directly benefiting blacks, rather than electoral reforms giving them more representation, that explain the increased spending on these counties. The authors address this by including “percent black” among their demographic variables, and relate that it does not affect their results: they say there is not a statistically significant interaction term between changes in malapportionment and percent black (presumably as measured in the 1960s) in a regression predicting county-level changes in spending. For me, this was not quite reassuring enough (considering that this would be the leading counterexplanation for their findings), but fairly convincing and surprising.
“Left Shift” takes on a complementary problem: did changes in representation lead to changes in policy? The prediction at the time of these reforms was apparently that state governments would adopt more liberal policies once the power of rural districts were curtailed, and Snyder and Ansolabehere report that previous work had not found this correlation. Their approach is to dig into the survey data to look at the changes in public opinion (as represented in the statehouse) that would result from reapportionment. What they find (using a variety of surveys) is that only in a subset of states did opinion vary geographically in the way the liberal advocates of reapportionment thought. In the Northeast, the Great Lakes states, and the coastal West (essentially, the future blue states), the overrepresented rural areas were more conservative and more likely to favor small government than the underrepresented cities and suburbs. In the rest of the country, the differences were smaller; in the South, suburban voters were among the most conservative. The effect of redressing urban/rural electoral imbalances on social spending is thus expected to vary from region to region. Indeed, Ansolabehere and Snyder report, policy did get more liberal in the “Left Shift” states and not in the remainder.
Here, the potential for confounding is large and not really addressed. The Left Shift states are essentially the blue states, as I mentioned above, and my impression was that there has been a divergence in political preferences on national politics between blue and red states. Blue state/red state polarization in national politics is something which clearly cannot be attributed to changes in the structure of representation in state legislatures. Perhaps political preferences in the blue states are diverging from those in the red states, perhaps due to economic conditions, geographic sorting, changes in the party platforms, or the political rise of the Christian right. If so, “Left Shift” can not get a good estimate of the effect of redistricting on state spending: the treatment is perfectly confounded, as they say in the causal effects literature.
Overall, I find these papers to be admirable in their marshaling of lots of interesting data that is appropriate to the hypotheses they want to assess. The strengths and weaknesses of the papers are an outgrowth of the policy intervention they study. The strength is that the units (states) did not choose to implement this reform, which alleviates a host of confounding problems. On the other hand, redistricting had no control group. (In “Left Shift” the authors try to argue that the non-Left Shift states are a control group in the sense that the policy should not affect them, but it is clear that there may be other confounding factors that applied differently to the treatment and control groups, rendering the estimation muddled.) What is admirable is the relative cleanness of the estimation, considering the substantive importance of the questions they examine.
“Micro-Based Estimates of Demand Functions for Local School Expenditures”
This paper uses the same Michigan survey data we saw in the Gramlich and Rubinfeld paper, but this one focuses on school expenditures and features a econometric technique to estimate a continuous demand function from a three category survey response.
The dependent variable in most of the Gramlich and Rubinfeld paper was per capita government spending, which had been backed out of survey responses where people were presented with the amount their municipality spent and asked to provide how much more or less they would like the municipality to spend. Here, respondents are asked what they think education spending should be: “more,” “less,” or “the same.” The econometric move the authors are hawking here appears to be an MLE approach to converting this categorical answer into something continuous. It looks to me like they assume that individuals in different municipalities have the same tastes (conditional on their individual characteristics), and they use the variation in the actual spending across municipalities to identify the width of their indifference band. In other words, the width of the indifference band is another parameter in the likelihood model (along with coefficients on individual characteristics, which determine the expected value of the underlying continuous demand for public goods).
The alternative would have been to estimate ordered probit or something like that, but this would not have made full use of the fact that actual expenditures vary across municipalities. The authors want to get a demand function out of this data, and this is how they’ll get it.