August 5, 2011


Tullock challenges for Facebook
Gordon Tullock believed that what is important will be manipulated by the government. He was always sceptical of innovations which claimed to undermine government’s role.

BRUNO FREY provides two Tullock challenges (Tullock Challenges: Happiness, Revolutions and Democracy) to two innovations, which are seen as new ways to undermine government’s role: Happiness Index and Facebook. Experts say Happiness Index could push governments into doing things which make people happier while Facebook is seen as a major force in overthrowing governments in Egypt and Tunisia.

Frey points that both these so-called innovations are likely to be manipulated by government for its own benefit, and used to influence policy consequences. In first, they could introduce a new happiness indicator favouring the politicians in power. As far as Facebook are concerned, government has a lot of incentive to manipulate them such as monitoring of these networks by police and secret service, employing professional pro-government bloggers, and can use internet to divert attention form politics like attractive films, and video clips.

The lesson from Tullock is that one needs to probe further before accepting public choice innovations.

Taylor’s Rule versus Taylor Rules
The Crisis led to various debates over Taylor rules such as – Was fed policy too low before the crisis? Is current Fed policy good enough, post crisis? Was QE needed? Taylor’s original rule says Fed policy should be around 0.5% and QE is not needed. However, variants show Fed policy should be negative and as rates cannot go down beyond zero, QE is needed.

With this background, ALEX NIKOLSKO-RZHEVSKYY AND DAVID PAPELL write a timely paper (Taylor’s Rule versus Taylor Rules).

They say that the original rule is applicable when monetary policy works the best. If the Fed had followed Taylor’s rule, it would have avoided fueling both the Great Inflation of the 1970s and the Great Deviation of the 2000s, while closely following its successful policy of the 1990s. Moreover, the original rule shows QE was not needed and Fed funds rate around 0.5% would have done the job.

Even now, Fed seems to be using Taylor variants to defend its ultra loose policy. If history is any guide then Fed is again deviating from the policy suggested by the original rule. And whenever that happens, it is a disaster.

SEBI’s objective and functions – a legal perspective
DHARMISHTA RAVAL points how SEBI is as much a legal body as a finance one and has been designed accordingly (Improving the legal process in enforcement at SEBI).

She says India set up a few independent regulators after 1991. These included SEBI (securities markets), TRAI (telecom) and CERC (energy). Of these, SEBI has been seen as more effective in terms of delivering on a mandate that includes (a) protection of the investor, (b) prudential regulation of markets intermediaries and (c) development of the markets. SEBI was different as regulators in other countries did not have an explicit mandate to develop securities markets.

SEBI Act of 1992 is broadly in two parts – Role of Government in SEBI, (appointment of board members, SEBI accounts to be maintained by GoI, Functioning of SAT) and Role of SEBI (regulating intermediaries, insider trading/ take-overs etc, regulations on stock exchanges etc.)

SEBI act is different from other acts as here SEBI is allowed to frame both the regulatory framework and implementation. Other regulators usually just implement government orders. Hence, it has been more independent compared to others. SEBI is also more transparent as it first prepares a concept paper and asks people for comments and then frames laws based on feedback..

Should EU public policy tilt towards industrial policy?
Such titles immediately raise eyebrows. Should one move towards industrial policy in advanced economies? This short paper (Rethinking industrial policy) by PHILLIP AGHION et al says industrial policy is not necessarily bad. If done properly, it could be important for Europe in certain areas and help Europe become more competitive.

They point to three reasons where Europe needs industrial policy.

  • climate change: without government intervention in clean technologies it will encourage investment in dirtier technologies.
  • laissez-faire complacency by many governments has led to mis-investment in the non-tradable sector at the expense of growth-rich tradables.
  • China and some others are big deployers of growth-enhancing sectoral policies. The challenge for Europe is how it can design and govern sectoral policies that are competition-friendly and thus growth-enhancing.

They look at criticisms of industrial policy. First, government cannot pick winners. Second, it leads to rent seeking and corruption. Both are true but there are many benefits as well. They point to a pretty interesting research finding where tariff protection leads to benefits in some cases. They point to further evidence that industrial policy and competition policy should be seen as compliments not substitutes.

There are many papers debating the role of government in today’s economies. This one just adds to the debate.

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