Economics 854 Midterm

Prof. Bryan Caplan

Spring, 2012

Part 1: True, False, and Explain

(10 points each - 2 for the right answer, and 8 for the explanation)

State whether each of the following six propositions is true or false.  In 2-3 sentences (and clearly-labeled diagrams, when helpful), explain why.

1.  T, F, and Explain:  The deadweight cost of a tax on pollution is always zero.

FALSE.  A tax on pollution can reduce deadweight cost.  But the deadweight cost of a tax on pollution only falls to zero IF (a) the tax brings the market level of output into equality with the efficient level of output, and (b) if there are no administration or evasion costs of the tax.  Even ignoring (b), a pollution tax can actually increase deadweight costs if the tax is high enough to reduce output below its socially efficient level.

2.  Suppose 60% of college graduates favor legalizing gay marriage, while 60% of non-college graduates oppose legalizing gay marriage.  College graduates are one-third of the voting population.

T, F, and Explain:  If college graduates receive 1.1 votes, the Median Voter Theorem implies that gay marriage will be legalized.

FALSE.  Since non-college graduates outnumber college graduates 2:1, and the two groups’ support for legalization are reversed (40/60; 60/40), college graduates would need TWO votes each to get 50% support for legalization.  With 1.1 votes per college grad, and 300 voters, there would be 100*.6*1.1+200*.4=146 votes in favor of legalization and 154 against.

3. “Politically, selection is far more important than adaptation.” (Poole and Rosenthal, “Patterns of Congressional Voting”)

T, F, and Explain:  Poole and Rosenthal’s finding undermines a key assumption of the Median Voter Model without undermining its main conclusion.

TRUE.  Poole and Rosenthal find that politicians rarely change their views much; instead, when voters change, they simply replace reigning politicians.  This contradicts the assumptions of the MVM, where candidates change their positions to maximize votes.  But it can still yield the standard Median Voter Model’s conclusion, that policy matches the bliss point of the median voter.

4. In a public opinion regression, suppose you replace education with IQ.

T, F, and Explain: You should expect ideology interacted with IQ to be more predictive than ideology alone.

TRUE.  Ideology interacted with education is more predictive than ideology alone.  The standard explanation is that better-educated voters are more likely to understand ideological concepts.  You should expect IQ to work the same way.  Not only is IQ highly correlated with education; it causally increases people’s ability to understand and manipulate abstractions like “ideology.”

Part 2: Short Essays

(20 points each)

In 6-8 sentences, answer all of the following questions.

1.  “Voting reveals how altruistic people claim to be; Tiebout competition reveals how altruistic people actually are.”  Explain why someone would believe this position.  Is it correct?  Carefully defend your answer.

Why believe this position?  Because voting for e.g. redistribution is basically cheap talk.  Due to the low probability of decisiveness, the expected marginal cost of voting for redistribution is very small even if you’re very rich.  For Tiebout competition, in contrast, moving to areas with higher redistribution and higher taxes usually has high costs.  Only a very altruistic rich person would deliberately move to an area with higher taxes in order to help out.

There is something to this argument, but it is seriously overstated.  Moving in order to pay higher taxes has high deadweight costs.  The lowest-cost way for any altruist to help would simply be to make charitable donations.  Furthermore, we shouldn’t forget the recipients of redistribution.  If they were unselfish, they would arguably move away from high tax areas to avoid burdening their fellow citizens.

2. In the GSS, the question LETIN asks:

Do you think the number of immigrants from foreign countries who are permitted to come to the United States to live should be increased a lot (=1), increased a little (=2), left the same as it is now (=3), decreased a little (=4), or decreased a lot (=5)?

Here are the results if you regress LETIN on ideology (POLVIEWS, 1=”extremely liberal”, 7=”extremely conservative”), years of education (EDUC), and dummy variables for race (BLACK, OTHRACE) and having two native-born parents (NATIVE).

How well do these results fit what we have learned about the determinants of public opinion?  Be careful to point out any anomalies.

Fairly well.  Ideology and education have the expected signs: conservatives are more anti-foreign, and the educated are more pro-market.  Most people who say OTHRACE are Hispanic, so this fits well with group interest.  The same goes for NATIVE: People who don’t identify with immigrants want fewer to come.  The sign on BLACK is somewhat surprising from a group-interest point of view: There aren’t many black immigrants, but native blacks still seem relatively pro-immigrant.  Perhaps blacks identify to some degree with all non-whites.

Key anomalies: Since the regression doesn’t control for income, the effect of education arguably reflects self-interest rather than greater economic literacy.  You could also argue that NATIVE reflects (genetic) self-interest rather than group interest because immigrants want to ease the immigration of their blood relatives.  Note, however, that since recent immigrants compete with previous immigrants in the labor market, self-interest should probably predict a negative sign on NATIVE, all things considered.

3. How would a purely genetic model of political preferences explain political change over time?  Use such a model to predict a long-run cycle of political change for a policy outcome of your choice.

In a purely genetic model, political change has to stem from demographic change: differences in fertility, longevity, or migration.  It is easy to see how demographic change could cause linear policy changes: E.g. policy becomes more socially conservative over time because social conservatives have more kids.  But demographic change can also lead to cycles.  Take abortion.  When abortion is legal, pro-life genes tend to grow over time.  Pro-life people don’t abort their kids; pro-choice people do.  Eventually pro-life genes will be common enough to ban abortion.  But once you ban abortion, the genetic selection for pro-life genes largely disappears, allowing pro-choice genes to spread and eventually re-legalize abortion.

4. Caplan argues that Gerber et al (“Personality Traits and the Dimensions of Political Ideology”) neglect a plausible explanation for the connection between personality and ideology.  How would Caplan justify his explanation?  How would Gerber et al respond?  Who is right?

Caplan argues that some personality types simply see the world more clearly than others.  His primary example is the trait of Agreeableness.  Scientists and economists tend to have low Agreeableness.  They focus on facts and logic, and put little value on good intentions divorced from good results.  It seems reasonable to expect such people to have more reality-based policy views.  The same arguably goes for Stability and Conscientiousness.  Gerber et al would probably respond by arguing that the cognitive benefits of low Agreeableness extend only to narrow, scientific questions, not policy analysis as a whole.  But this seems like a cop out to me.  If a scientific mind-set can unravel the mysteries of evolution, why not the mysteries of economic growth?