Will generative AI mean the end of rational ignorance?

In this Substack post back in March, Andy Hall made the case for generative AI to create 'political superintelligence':

The more I work with and study AI, the more I believe it can give every human being on the planet access to a sort of political superintelligence, if we shape it right. And that intelligence, in turn, can make governments smarter and more effective, representatives more faithful, and institutions more responsive than anything we’ve built in over 2,000 years of experimenting with democracy.

Hall's post is worth reading in its entirety, but I want to explore a related point - will generative AI mean the end of rational ignorance for voters? Rational ignorance is the idea that it may be better for voters to not know what decisions policymakers are making on their behalf. That's because it's costly (in terms of time and effort) for voters to keep track of how the decisions that policymakers (and politicians) make on their behalf will affect them (economists call those monitoring costs). The benefit that a voter would receive by becoming informed of what policymakers (and politicians) are doing is relatively small, because their ability to change an election (and therefore policy) is very small. When the monitoring costs are greater than the benefits of being better informed, then voters would be better off not paying the monitoring costs. That is, voters would be better off not paying attention to what the policymakers (and politicians) are doing - the voters would be better off remaining rationally ignorant. This theory of rational ignorance was introduced in the 1950s by the late economist Anthony Downs.

Where does generative AI fit into this? Generative AI could meaningfully lower the monitoring costs for voters, as it gives the opportunity for voters to ask for quick summaries of policy proposals that may affect them. This will be even more effective as generative AI understands more about users' preferences. Moreover, agentic AI offers voters even greater opportunity to investigate what policymakers (and politicians) are doing, at relatively low cost.

When the monitoring costs decrease, then the rationale for voters to remain rationally ignorant weakens. We might expect voters to become more engaged with what the government is doing on their behalf, and to be more active in engaging with government to make their preferences known. Or, at least, maybe voters will delegate these activities to their favourite agentic AI model.

There are, of course, some reasons for caution. Generative AI might reduce the cost of obtaining political information without reducing the cost of checking whether that information is accurate or unbiased. Moreover, an overly sycophantic generative AI that knows the voter's preferences might reinforce the voter's existing views rather than challenging them. So, perhaps generative AI simply moves the monitoring costs from monitoring the government to monitoring the generative AI?

Hall makes the point that political superintelligence has the potential to increase the quality of governance. If generative AI enables voters to become better informed at low cost, it could strengthen political accountability. Policymakers (and politicians) who know that voters can easily scrutinise their decisions may be less willing to act against voters’ interests, or may face greater consequences when they do.

We may not have political superintelligence yet, and large numbers of voters may still be rationally ignorant. However, it may not be long before we start to see some substantive changes in the political process, driven in part by the emergence of generative AI.

[HT: Marginal Revolution for the Andy Hall post]

Why consumers won't resist an anti-dumping ban on potatoes, even though they should

In my ECONS102 class today, one of the things we discussed was rational ignorance - the idea that some people who are negatively impacted by a policy will not fight against it, or even make themselves aware of it, because the monitoring costs of watching the government's decision-making are greater than the costs that the policy would impose on them. It is rational for people to remain ignorant of the policy and its consequences. The example I use to illustrate this in class is trade restrictions on sugar in the U.S. (as I outlined in this 2017 post). However, an example much closer to home could be arising this week, as Radio New Zealand reported:

Potatoes New Zealand is asking the government to ban heavily discounted frozen potato fries from arriving in the country.

It says global potato prices have collapsed and there is a mountain of product sitting in European cool stores.

Potatoes New Zealand chief executive Chris Claridge believed heavily subsidised European producers were eyeing up world markets to dump surplus product.

He said the EU currently had 2.6 million tonnes of surplus frozen fries.

Claridge said the local industry, whose annual production is only 150,000 tonnes, is already having to absorb its own large losses from the lack of demand in the past two months.

He said the industry could not wait for the fries to arrive at the wharf and cause long term harm that it might not recover from.

"We want the government to immediately implement short term safeguard measures to protect our industry from dumping. We are not asking for a handout, we are just asking for a level playing field," he said.

Let's be clear. Cheap potatoes from overseas are a good thing for New Zealand potato consumers. Banning discounted frozen potato fries from overseas would have the effect of increasing the price of fries, compared to what the price would have been without a ban. Should consumers care about this? As a group, New Zealand fries consumers will end up paying a lot more for their fries. However, individual consumers probably don't spend a whole lot of money on fries, so even if the price of fries was 20% higher as a result of the ban, the higher cost of fries each consumer faces is probably much lower than the cost (in time and effort) associated they would face in lobbying the government not to impose a ban. So, even though a ban would make consumers worse off, they are actually better off remaining rationally ignorant of any policy.

In contrast, potato farmers are likely to be made much better off if they don't have to compete with cheap imported fries. Each farmer (and farm worker) will likely gain substantially from a ban. The costs associated with not having a potato ban in place are likely to be very high for farmers and farm workers, and much greater than the monitoring costs those groups face. Farmers have a strong incentive to lobby the government to impose a ban on imported frozen potato fries (and indeed, that is exactly what they are doing).

Rational ignorance leads to a situation where, if the costs of a policy can be spread over many people, and the benefits concentrated among the few, inefficient policy (i.e. policy that reduces total welfare) and policy that protects the interests of favoured groups and makes the majority worse off, can be introduced by government almost without incident. Someone needs to stand up for the consumers before the government seriously considers this policy, because the consumers are not going to resist it themselves.

[HT: Mrs Piercy-Cameron, and see this post by Mark Johnston at Econfix that covers the topic as well]

Strategic behaviour by Italian mayors differs by age

In my ECONS102 class, we cover a little bit of the theory of public choice. One aspect of that is the way that politicians behave. Of course, voters want politicians to act in the voters' best interests. However, there is a principal-agent problem here. Voters are the principal - they have engaged the agents (politicians) to act on their behalf. The problem is that politicians have their own motivations, which don't necessarily align with the goals of the voters, and if they aren't monitored closely, politicians will act in their own best interests (and not necessarily those of the voters).

That disconnect, between the goals of voters and the motivations of politicians, explains a lot of the reason why politicians act in ways that voters don't necessarily like. And, voters may let them get away with it because of rational ignorance. Monitoring the behaviour of politicians is costly to voters. If the costs of any negative behaviour of politicians is less than the cost of monitoring them, then it is rational for voters to avoid the monitoring costs and be rationally ignorant of the politicians' behaviour.

One of the things that politicians may do, which may not align with the goals of the voters, is engage in strategic behaviour designed explicitly to get the politician re-elected. They may provide 'favours' or re-direct resources to some groups of voters, or engage in high profile but costly (in terms of public welfare) activities that give them good press coverage. This strategic behaviour is likely to intensify in the lead-up to an election.

That brings me to this new article by Alberto Alesina (Harvard), Travis Cassidy (University of Alabama), and Ugo Troiano (University of Michigan), published in the journal Economica (ungated earlier version here). Alesina et al. use data on Italian mayors over the period from 1998 to 2014, to test how younger and older mayors behave differently.

In theory, there are a number of reasons to believe that younger mayors will behave differently from older mayors. Alesina et al. note that:

Younger politicians may differ from older ones for at least five reasons. One is that they have a potentially longer political career ahead of them and therefore have stronger career concerns. The second is simply that, as younger citizens, they have a longer horizon and therefore they may have an incentive to adopt more long-term policies... The third and more mundane reason is that younger politicians may be more energetic and productive at work. The fourth reason is that there could be different self-selection patterns by age: because people of different ages have different opportunities in the labour market, this may affect the decision to become a politician. The fifth reason is that politicians of different ages may have different political connections—innate or accumulated doing the course of their previous work.

The career-concerns reason is interesting to consider. Younger politicians have a potentially longer political career ahead of them. So, the benefits of engaging in strategic behaviour to ensure their re-election are higher for younger politicians than for older politicians. Alesina et al. find some support for this. After showing that younger candidates are statistically significantly more likely to be seek re-election, and more likely to be re-elected, than older candidates, they consider whether these results are indicative of younger mayors enacting better policies. They investigate this by looking at house prices (because areas with better local government policies would be attractive places to live in, so house prices would be higher). However, they find that:

...there is little evidence that house prices respond to the age of the mayor in office.

They also show that the age of the mayor has no effect on the speed of public goods provision (another indicator of the quality of governance). So, having established some evidence that younger mayors are not better politically than older mayors are, they consider how younger and older mayors differ in terms of local government spending. They find no statistically significant differences in local government revenue per capita or current expenditure per capita. However, with capital expenditure they find evidence of a political cycle in spending. That is, younger mayors spend more in the year immediately before an election, such that:

...a typical younger mayor will increase capital expenditure before the election by 9.66 euros per capita, while a typical older mayor will actually decrease capital expenditure before the election by 2.1 euros per capita.

Capital expenditure is attractive for political candidates to be strategic about, because it is highly visible (voters will remember the politician who cut the ribbon on their new expressway), and because unlike current expenditure it is less subject to balanced-budget rules.

If mayors are engaging in strategic behaviour, it is reasonable to consider how voters can respond to try to reduce this behaviour. Closer monitoring is unlikely to be effective because of rational ignorance. So in my ECONS102 class, we discuss alternative solutions to the principal-agent problem, one of which is paying an efficiency wage - effectively paying a higher wage to the agent, to increase the incentives for them to engage in behaviour that is aligned with the principal's wishes (otherwise, they lose their job and have to go work elsewhere for a lower wage). Interestingly, in supplementary results, Alesina et al. find that:

...the effect of age on political budget cycles is smaller when the mayor’s wage is higher...

So, maybe there is some support for increasing mayoral wages to reduce this strategic behaviour.

Arnold Kling on public choice theory and lobbying

In my ECONS102 class, we discuss the lobbying activities of firms with market power. The motivation for that discussion is that firms with market power make a large profit (how large the profit is depends in part on how much market power they have), so they have an incentive to use some of the profits (their economic rent) to maintain their market power. They can do this by lobbying government to avoid excess regulation. However, that simple exposition doesn't explain the full range of lobbying activities that firms engage in, and it doesn't explain why consumers don't engage in lobbying (e.g. for lower prices) to the same extent that producers do.

On Medium last week, Arnold Kling wrote an interesting article on why costs increase in some industries faster than others. However, on the above point it was this bit that caught my attention:

In reality, you do not produce everything in the economy. You are much more specialized in production than in consumption. This makes you much more motivated to affect public policy in the sector where you produce than in the sector where you consume.

In theory, government policy is supposed to promote the general welfare. But as a producer, your goal for government policy is to increase demand and restrict supply in your industry. If you are in the field of education, you want to see more government spending devoted to education, tuition grants and subsidies for student loans, in order to increase demand. You want to make it difficult to launch new schools and colleges, in order to restrict supply. If you run a hospital, you want the government to subsidize demand by providing and/or mandating health insurance coverage. But you want to restrict supply by, for example, requiring prospective hospitals to obtain a “certificate of need.” If you are a yoga therapist, you want the government to mandate coverage for yoga therapy, but only if it is provided by someone with the proper license.

Think about an average consumer (and worker), considering how much effort to put into lobbying the government for a policy change. They might be quite motivated to engage in lobbying government in terms of their employment or wages (e.g. subsidising wages, or introducing occupational licensing), where they are a producer, and can capture a lot of the gains from a policy change. In that case, the benefit to be gained from the policy change will affect them a lot, and may offset the cost of the effort of lobbying. However, they will be much less motivated to engage in lobbying government in terms of consumption goods. In the latter case, the benefit is much lower than lobbying in terms of employment or wages, while the cost is likely to be about the same.

This explanation also relates to the idea of rational ignorance. Consumers individually face only a small cost of a policy (like a subsidy on sugar farmers) that provides a large benefit to producers. The producers have a great incentive to lobby against losing the policy (or in favour of gaining it), but consumers have only a small incentive to lobby in favour of eliminating the policy (or against it being implemented in the first place).

There's a lot more of interest in Kling's article. Market power and lobbying is just one of many reasons why costs increase faster in some industries or sectors than others.

Rational ignorance is why we don't check our supermarket receipts

Last week, news.com.au reported:

WHEN you go shopping, do you casually throw your receipt in with the groceries, neglecting to read it over?

Or, worse, do you decline to print one out and walk away, ignorant what you’ve paid for all those carefully-selected items?

If you answered “yes”, you could be ripping yourself off, with scanning errors causing supermarkets to overcharge for everyday items — and many shoppers failing to detect, or act upon the mistakes to recoup what they are owed.

A survey of 2,141 Australians by comparison site finder.com.au found that two in five people had been overcharged at the till in the past year.

But one-quarter said they didn’t bother checking their dockets and, of those who did, they would only bother going for a refund if they were overcharged by more than $10.

There is a good reason why supermarket shoppers don't check their receipts. It takes time and effort to check those receipts, and the chances that the time and effort you spend pays off by your finding an error in your favour is low.

To illustrate, let's construct a plausible numerical scenario. Let's say that "two in five people" have been overcharged once each in the past year (as noted in the quote above), making a 40 percent chance that you've been overcharged once in the past year [*]. So, on average each person has been overcharged 0.4 times in the last year (some have been overcharged more times, and some have been overcharged fewer times). Let's assume each person goes to the supermarket roughly once per week (say 50 times per year). So, on average each shopper is being overcharged 0.4 times in 50 shopping trips, or a 0.8 percent chance that any given shopping trip results in an overpayment. Now let's generously assume that in each shopping trip where a shopper is overcharged, they are overcharged by $10 [**]. The expected value of checking every supermarket receipt is 0.8% x $10 = $0.08 (yes, that's EIGHT CENTS). This is the expected (or average) benefit you would gain from carefully checking every supermarket receipt to make sure you haven't been overcharged.

If the cost, in terms of time and effort, of carefully checking a supermarket receipt is more than $0.08, a rational person wouldn't do so. You would be better off to remain rationally ignorant of whether you overpaid the supermarket. Even at the minimum wage, $0.08 is the pay for about 18 seconds. Taking the minimum wage as the cost of people's time, you wouldn't want to spend any more than 18 seconds scrutinising each supermarket receipt. If your implicit value of time is higher than the minimum wage, you'd want to spend even less time than that.

You might argue that people are loss averse, so that they value losses much more than gains. Losing money to overcharging is a loss, so we should value the expected loss at much more than $0.08. However, it isn't a loss if you don't know about it! You're still better off being rationally ignorant, even if you're loss averse (maybe especially if you're loss averse).

I'm not surprised supermarket shoppers don't carefully scrutinise their receipts to check for overpayments on every item. It simply doesn't pay off for us.

*****

[*] Probably some people had been overcharged multiple times, but I don't think that will make much difference to this example.

[**] Probably most instances of overcharging are much less than $10. In my experience, overpayments I have caught in my own shopping trips (usually because I happened to be looking at the screen when the item was scanned and remembered the price) have been a couple of dollars at most.

US sugar producers' sweet deal continues

One of the things we discuss in the first week of ECON110 is rational ignorance - where it is better for voters to not know what decisions policy makers are making on their behalf. How does that work?

It is costly for voters to keep track of how the decisions that policy makers (and politicians) make on their behalf will affect them (we call these monitoring costs). When the costs to each voter of a policy change are smaller than the monitoring costs, it is in the best interests of the voter to remain rationally ignorant. It would cost them more for the voters to keep a close eye on the decisions of policy makers than the cost of the negative effect of the policy on them.

So, if policy makers can spread the negative consequences (costs) of a policy change across many voters then few of those voters will be made unhappy. Policymakers can then concentrate the benefits of the policy change on a few (or many) favoured individuals.

One of the examples I use to illustrate this is sugar tariffs in the U.S. The Heritage Foundation reports:

In fiscal year (FY) 2013, Americans consumed 12 million tons of refined sugar, with the average price for raw sugar 6 cents per pound higher than the average world price. That means, based on 24 billion pounds of refined sugar use at a 6-cents-per-pound U.S. premium, Americans paid an unnecessary $1.4 billion extra for sugar.

That works out at about US$4.36 per person, which is hardly enough for any voter to worry about. It also means that sugar consumers pay about 39% more for refined sugar as a result. However, the Heritage Foundation also reports:

That is equivalent to more than $310,000 per sugar farm in the United States.

Which of course makes sugar farmers and their workers much better off. So, sugar consumers may remain rationally ignorant of the effects of trade protection for sugar, while the sugar industry contributed some US$4 million to politicians in the 2016 election cycle (which a cynic might note is why the politicians are happy to enact trade protection for the sugar industry).

Anyway, I was interested to read a couple of weeks ago that the U.S. and Mexico have agreed a new deal for Mexican sugar producers. The Washington Post reports:

There is good news and bad news in U.S.-Mexico relations.

Unfortunately, they're the same news: The Trump administration and the Mexican government have reached a new agreement on access to the United States for Mexican sugar producers.

This is good news because it avoids an impending trade war over the commodity, thus preserving a modicum of good relations leading into negotiations over updating the North American Free Trade Agreement (NAFTA), according to the Washington Post.

It's bad news because the whole business perpetuates a system of market manipulations that hurts American consumers of the commodity while benefiting no one but a well- connected few who produce it in the United States...

Things have come to quite a point when the only way to save a free trade agreement is by enforcing less-free trade. But that is what is happening: Mexico's sugar exporters are being forced to accept a version of the country-by-country quota system they thought they had negotiated their way out of, fair and square, back when everyone signed NAFTA a quarter-century ago.

I recommending reading the whole article. This is not how free trade is supposed to work.