Tiebout sorting and the rights of transients

My brother, an MIT graduate, ran for the city council of Cambridge, MA, among other things criticizing a comment by another candidate that the local college students shouldn't vote because they were only there for a short period of time. On some level this felt fallacious to me, insofar as the college students represent a particular set of interests; if there are 20,000 students at any given time, the 20,000 students who are there might be expected to represent the 20,000 students who will be there in 10 years, and the short time that any one student is there is (exactly) balanced by the large number of different students rotating through.

On the other hand, increasingly as government gets more local, I can think of a compelling case for restricting the franchise to people who have been there a while. In particular, I think we should do so where Tiebout sorting might be expected to operate well — where people have reasonable choice among and information about different communities in which to live — and where the near term is to be traded against the long term in a significant way. Where there are decisions to be made with long-term ramifications — should we raise taxes to build more classroom space? — allowing people to move in, vote for the short-term expedient, and move out before the long-term (relative) cost of that decision is to be borne results in all communities emphasizing the short-term expedients, while requiring that people live in a place for a few years before they vote — or perhaps buy property, or otherwise commit themselves to the community — allows for real sustainable differences in priority (some people want lower taxes and less spending on education, even including the long term ramifications, while others want more) where people with different preferences can sort themselves as Tiebout described.

MIT students have a certain amount of flexibility to live in Boston or Somerville, even if we don't consider choosing a different school to be a real choice; on the other hand, MIT institutionally has much less such flexibility, and the students, faculty, and so on will be affected by the city's policies. It would be good to have that represented somehow, but on many issues, I can see the value to excluding the transients from the decision.

clever people

Robert Shiller has long been a fan of increasing the "completeness" of markets, creating more and more derivatives to require that "the market" be explicit about its beliefs; for example, in his 2000 book Irrational Exuberance, he proposed long-dated S&P dividend futures so as to require a market forecast of future dividends and their growth, after which one could see whether anyone really bought the implications of the levels of stock prices. In principle, there are all kinds of problems of both self-delusion and private information that could be solved by more and more derivatives.

Of course, in the last few years it has become clear that relatively simple derivatives, like MBS tranches (or even credit default swaps), seem to have befuddled people well smarter than the median. It's not that a large number of people who do understand the derivatives is necessarily needed for them to have their benign effect — up to some solvency limits, some people out there can arbitrage really bad mispricings and should keep things grossly in-line. The problem, though, is the amount of damage people seem to be able to do to themselves and then, transitively, to their creditors, or to people whose reputation may be tied up with theirs, that is on some level independent of the good these things do. Mortgage credit derivatives did create a market price for mortgage credit risk, and even did help spread and diversify it, and yet some people got themselves into a lot of trouble taking on too much risk that they didn't understand, and a lot of other people got in trouble.

It's possible the mispriced supersenior mortgage tranches would have been better priced with even more complete markets, but we will never have complete markets (and we wouldn't have the solvency to correct them if we did). I'm a fan of more complete markets in general, but expecting them to solve all of our problems strikes me a bit like some leftist beliefs in government; the problem, we're told, is that our problems haven't been dealt with by sufficiently clever people, and yet neither the government nor the financial markets are populated entirely, or even mostly, by particularly clever people. Mankind is not perfectable, whether by government or by market.