Archive for the 'Bad Reasoning' Category

Trading in Fallacies

Under quite general conditions, free trade pacts lead to higher average real incomes in every participating country. The argument for this proposition is simple, incontrovertible, and entirely non-controversial among those who have taken a few minutes to understand it. This stands in contrast to the arguments for, say, Darwinian evolution or anthropogenic climate change, which rely on vast bodies of evidence that most of us will never digest. Your opinions on evolution and climate change almost surely rely at least in part on the testimony of experts. Free trade is different. It doesn’t matter what the experts say, because you can check each step in the argument for yourself.

Educated people know this. So when they want to throw up roadblocks in the way of free trade, they don’t say silly and obviously false things like “free trade will make us poorer”. Instead, they say silly things like “Sure, free trade will make us better off on average. But there are still both losers and winners!” From this, they want us to conclude either that free trade is not a good thing, or that at the very least, the winners should compensate the losers.

This strikes me as an extraordinarily dishonest way of arguing, because pretty much nobody ever argues this way about anything else, even though every policy change in history has created both winners and losers. In fact, every human action has both winners and losers. When Archie takes Betty instead of Veronica to the ice cream shoppe instead of the movies, both Veronica and the theater owner lose out. It does not follow that all human actions are wrong, or immoral, or should be discouraged by law, and it does not follow that all human actions should be followed by compensation to the losers. What, then, is so special about free trade?

The problem is confounded by the fact that with free trade, unlike many other policies, the winners are often poorer than the losers. When Americans lose their $30 an hour jobs making air conditioners so that they can be made by $20-an-hour foreigners, the big losers are Americans whose wages fall from $30 to $20. The big winners are Americans who can now for the first time afford air conditioning. Most of those people are probably making less than $20 an hour. (On this point, see also here.)

For those who insist on repeating the old “What about the losers?” refrain, I’ve prepeared a little quiz to test your moral consistency:

  1. In 1998, a new grocery store opened in my neighborhood, offering better food at lower prices than the old grocery store. This is generally perceived to have been a good thing overall, but at same time it was bad for the owners of the existing grocery store.
    1. Does this mean that the new grocery store should have been prohibited from opening?
    2. Does this mean that the winners — i.e. my neighbors and I — should have compensated the losers — i.e. the proprietors of the old grocery store — for their losses?
  2. In 2005, I stopped going to the barber and started cutting my own hair. My friends think my hair looks better now, and there’s a general perception that the change has been a good thing overall.
    1. Does this mean that I should be required to return to my barber?
    2. Does this mean that the winners — i.e. my friends and I — should have compensated the loser — i.e. my ex-barber — for her losses?
  3. In 2008, Google introduced the Android operating system to compete with Apple’s iPhone monopoly. This is generally perceived to have been a good thing overall, but at the same time it was bad for Apple’s shareholders.
    1. Does this mean that Google should have been prohibited from developing the Android system?
    2. Does this mean that the winners — i.e. everyone who purchased an Android, and everyone who got his iPhone a little cheaper thanks to the competition — should have compensated Apple’s shareholders for their losses?
  4. In 1863, Abraham Lincoln signed the Emancipation Proclamation, ending slavery in the United States of America. This is generally perceived to have been a good thing overall, but at the same time it was bad for slaveholders.
    1. Does this mean that Lincoln should not have freed the slaves?
    2. Does this mean that the winners — i.e. the freed slaves — should have compensated the losers — i.e. the slaveholders — for their losses?
  5. In 2008, Bernard Madoff was arrested and his ongoing Ponzi scheme was cut short. This is generally perceived to have been a good thing overall, but at the same time it was bad for Bernie Madoff.
    1. Does this mean that Madoff should not have been arrested?
    2. Does this mean that the winners — i.e. the Madoff victims — should have compensated the losers — i.e. Madoff and his co-conspirators — for their losses?

Scoring: If your answers were mostly “no”, and if you are nevertheless skeptical of free trade pacts, you’ve got some explaining to do.

Continue reading ‘Trading in Fallacies’

Share/Save

And the Winner Is….

Several commenters on yesterday’s post have asserted (in every case without evidence or argument) that the benefits of free trade — that is, lower prices for consumption goods — tend to accrue disproportionately to the wealthy.

Okay, the people I see shopping at Wal-Mart don’t strike me as particularly wealthy, but maybe I’m mistaken. Maybe the commenters are right and it’s the rich, not the poor, who care the most about affordable goods. Maybe Bill Gates would be devastated if he had to pay 50% more for a washing machine, but Joe Sixpack would just kind of shrug it off. I guess that makes sense if Bill spends his million dollars a month as fast as it comes in, while Joe always seems to have half of his thousand-dollar monthly paycheck left over.

Could be. But I hope the people who say they believe this will have the decency never to tell me that we can stimulate the economy by transferring income from the rich to the poor, because the poor are more likely to spend it.

Click here to comment or read others’ comments.

Clintonomics

Hillary Clinton Campigns In Iowa, Meeting With Small Business OwnersAre you a corporate employee who wishes that your income were tied more closely to your employer’s profits?

I have good news for you: There’s an easy way to make that happen. Take 10% (or 5% or 20%) of your wages, and use them to buy corporate stock.

Are you a corporate employee who *doesn’t* wish that your income were tied more closely to your employer’s profits?

I have good news for you, too. You don’t have to buy additional stock if you don’t want to.

Hilary Clinton, however, wants to change all that. She wants to force you into a profit sharing arrangement that is, for all practical purposes, equivalent to forcibly converting part of your salary into corporate stock. If you were planning to do that anyway, this will make no difference to you. If you weren’t planning to do it anyway — if, for example, you preferred to diversify your risks by investing your wages in some other industry — then, of course, this will make you worse off.

(I trust that none of my regular readers is silly enough to respond that Clinton’s plan is much better than buying stock, because you get the profit-sharing in addition to your existing salary. But for the benefit of the occasional drive-by reader, this is not possible. Market pressures insure that your total compensation is equal to the value of what you produce for the company, and if one facet of that compensation goes up, then another must go down.)

Continue reading ‘Clintonomics’

Consistency Check

Donald Trump, objecting to the President’s post-Orlando call for stricter gun control, says that the president has “no clue”. Why? Because “The shooter was licensed…So he would have passed the test that the president would have thrown up there”.

Instead, Mr. Trump tells us that the lesson of Orlando is “We can’t let people in”. Of course, the Orlando murderer was a natural-born U.S. citizen, so he would have passed the test that Mr. Trump would have thrown up there.

Click here to comment or read others’ comments.

A Voter’s Guide to Thinking

Scott Adams (the Dilbert guy) offers a Voter’s Guide to Thinking that is so good I am going to reproduce it in its entirety:

  1. If you are comparing Plan A to Plan B, you might be doing a good job of thinking. But if you are comparing Plan A to an imaginary situation in which there are no tradeoffs in life, you are not thinking.
  2. If you see quotes taken out of context, and you form an opinion anyway, that’s probably not thinking. If you believe you need no further context because there is only one imaginable explanation for the meaning of the quotes, you might have a poor imagination. Sometimes a poor imagination feels a lot like knowledge, but it’s closer to the opposite.
  3. If a debate lends itself to estimates of cost (in money or human suffering) and you aren’t willing to offer an estimate in support of your opinion, you don’t yet have an opinion.
  4. If you are sure you know how a leader performed during his or her tenure, and you don’t know how someone else would have performed in the same situation, you don’t actually know anything. It just feels like you do.

    Continue reading ‘A Voter’s Guide to Thinking’

Boys, Girls and Hot Hands

This is a post about hot hands in basketball. But first, some relevant history:

The single most controversial topic ever broached here on The Big Questions was not Obamacare, or tax policy, or the advantages of genocide, or the policy treatment of psychic harms. It was this:

The answer, of course, is that you can’t know for sure, because (for example) by some extraordinary coincidence, the last 100,000 families in a row might have gotten boys on the first try. But in expectation, what fraction of the population is female? In other words, if there were many such countries, what fraction would you expect to observe on average?

The “official” answer — the answer, for example, that Google was apparently looking for when they posed this as an interview question — is that no stopping rule can change the fact that each birth has a 50% chance of being either male or female. Therefore the expected fraction of girls in the population is 50%.

That turns out to be wrong. It’s true that no stopping rule can change the fact that each birth has a 50% chance of being either male or female. From this it does follow that the expected number of girls is equal to the expected number of boys. But it does not follow that the expected fraction of girls in the population is 50%. Instead, that expected fraction depends on the country size, but is always less than 50%.

If you don’t see why, I encourage you to browse the archive of relevant blog posts. If you still don’t get it, I encourage you to keep browsing. Whatever your objections might be, you’ll find them addressed somewhere in the archive. I’m not interested in relitigating this. I will, however, happily renew my offer to take $5000 bets on the matter, on the terms described here. Last time around, all takers changed their minds before putting any money on the table.

Now let’s get to the hot hands.

Continue reading ‘Boys, Girls and Hot Hands’

Minimum Logic, Part 2

Yesterday’s post touched on several related points, and I’m afraid the most important one got buried near the end, so I want to repeat it:

1) In the presence of an effective minimum wage, all benefits of the earned income tax credit are transferred to employers. This is, as they say, a matter of Economics 101. (Edited to add: As Bennett Haselton points out in comments, I should have said “dissipated”, not “transferred to employers”. The point remains that the benefits don’t go to the workers, which, for this discussion, is what matters.)

2) Paul Krugman argues that we should have an effective minimum wage in order to prevent some of the benefits of the earned income tax credit from being transferred to employers.

In this context, it should be remembered that Krugman ordinarily reserves his deepest scorn for those who, according to Krugman, willfully ignore the lessons of Economics 101.

Let’s review the argument for 1), with reference to the graph below. In the presence of, say, a $5-an-hour minimum wage, employers will hire 1000 workers. Because more than 1000 people want to work, employers can extract extra concessions in the form of reduced on-the-job-training, shorter breaks, and harsher working conditions. They can get away with exactly $1-an-hour’s worth of this, because even at an effective wage of $4, there are still 1000 people willing to work.

Edited to add: I am assuming that these concessions are of relatively little value to employers (otherwise they wouldn’t have waited for the EITC to demand them!), so that the quantity of labor demanded does not change.

Now let’s add a $3-an-hour earned income tax credit, which shifts the labor supply curve to the dashed position. Ordinarily, this would lead to a lower equilibrium wage, transferring some of the benefits of the EITC to employers. But in the presence of the $5 minimum, wages can’t drop, and employment remains fixed at 1000, though now even more people want to work, allowing employers to impose even harsher conditions until the effective wage drops to $1 an hour (the wage at which there are still 1000 people willing to work). This process transfers all the benefits of the EITC away from the workers.

Continue reading ‘Minimum Logic, Part 2′

Minimum Logic

The question is often raised: “Why would you ever want to raise the minimum wage when you could raise the earned income tax credit instead?”. In other words, if you’ve got a choice between two ways to increase the effective wage rate, why would you choose the one that reduces employment over the one that increases employment?

Paul Krugman has an answer. He’s argued on numerous occasions that the EITC and the minimum wage are complements, not substitutes — that is, each makes the other more effective. So, according to Krugman, once you’ve raised the EITC, the case for a minimum wage hike becomes stronger, not weaker.

Here’s his argument: When you raise the EITC, more people enter the labor market. The increased supply of labor tends to drive wages down, which transfers some of the benefit from the workers you intended to help to the employers and/or consumers who you presumably care about less. To prevent this perverse consequence, one needs a hike in the minimum wage.

The other day, a colleague (who I’m not naming because I’m not sure whether he’d want to be quoted) pointed out that this argument makes not a shred of sense. Here’s why: Any effective minimum wage (that is, any minimum wage set above the wage rate that would prevail in an unregulated market) suffices to do the job Krugman wants it to do. At best, then, Krugman has made an argument for having some minimum wage, not a case for raising it.

Here’s the picture:

Continue reading ‘Minimum Logic’

This Would Be a Great Illustration of Comparative Advantage if It Weren’t Such a Great Illustration of Absolute Advantage

diracPaul A.M. Dirac was a pioneer of quantum mechanics and quantum field theory. His work pervades all of modern physics. He was, by almost all accounts, one of the top 10 physicists of all time, and by many accounts one of the top 2 physicists of the 20th century. And he’s one of my personal heroes.

When Dirac was awarded the Nobel prize in 1933, he was asked to say a few words at the banquet that kicks off the multi-day Nobel celebration — and chose, against tradition, to speak about a subject other than physics. Here is Paul Dirac on the source of all our economic problems:

I should like to suggest to you that the cause of all the economic troubles is that we have an economic system which tries to maintain an equality of value between two things, which it would be better to recognise from the beginning as of unequal value. These two things are the receipt of a certain single payment (say 100 crowns) and the receipt of a regular income (say 3 crowns a year) through all eternity. The course of events is continually showing that the second of these is more highly valued than the first. The shortage of buyers, which the world is suffering from, is readily understood, not as due to people not wishing to obtain possession of goods, but as people being unwilling to part with something which might earn a regular income in exchange for those goods. May I ask you to trace out for yourselves how all the obscurities become clear, if one assumes from the beginning that a regular income is worth incomparably more, in fact infinitely more, in the mathematical sense, than any single payment? In doing so I think you would then get a better insight into the way in which a physical theory is fitted in with the facts than you could get from studying popular books on physics.

True to form, then, Dirac set an agenda that others scurried to follow — the agenda in this case being the exploitation of the Nobel prize as a license to spout economic gibberish. Almost a century later, his program continues to flourish.

Click here to comment or read others’ comments.

Sweet Talk

Is it only me who is driven crazy by the American Heart Association’s campaign against “added sugars”, and the attendant campaign to label foods for their added sugar content?

Look. I am no expert, so correct me if I’m wrong, but as far as I can tell from a trip around the Internet, sugar is sugar. More precisely, fructose is fructose, glucose is glucose, and so it goes. The fructose in an apple is exactly as bad for you as the fructose in a Cola drink.

Now an apple provides all sorts of good nutrients and fiber that are missing from the Cola drink. But if you want to send that message, the way to send it is to advertise that apples provide all sorts of good nutrients and fiber that are missing from Cola drinks — not to suggest (nonsensically, as far as I can tell) that the “added sugar” in the Cola drink is somehow different from the non-added sugar in an apple. If your main concern is to watch your sugar intake, the distinction doesn’t matter. If your main concern is, say, Vitamin C, then sugar counts are irrelevant anyway. If you care a little about a lot of things, then it’s good to know sugar contents, vitamin contents, and a whole lot more. But I cannot imagine any individual, in any state of the world, who is better off counting added sugar than counting total sugar.

Continue reading ‘Sweet Talk’

What Is Larry Summers Thinking?

Larry Summers, writing in the Washington Post, tells us that:

While the recent decline in energy prices is a good thing in that it has, on balance, raised the incomes of Americans, it has also exacerbated the problem of energy overuse. The benefit of imposing carbon taxes is therefore enhanced.

He might have an argument in mind, but he doesn’t seem to have presented it.

The benefit of carbon taxes, as Summers says, comes from “the recognition that those who use carbon-based fuels or products do not bear all the costs of their actions.” In other words, without a tax, people use more oil than they should. I’m with him so far. Now what Summers appears to be thinking is that when the price of oil falls, people use more oil, which increases the gap between what they do use and what they should use. What this overlooks is that when the price of oil falls, there are increases in both the amount people do use and the amount people should use — and hence no particular reason to believe that the gap has grown.

Having made such an argument, one should draw a picture to make sure it’s right. Here are the demand and supply curves for oil. Points on the demand curve show the value to consumers of individual gallons of oil; points on the supply curve show the cost to producers of supplying those individual gallons; points on the social marginal cost curve show the cost to society (including pollution costs) of supplying those individual gallons:

Ideally, oil would be supplied only up to the point where demand crosses social marginal cost and no further. Unfortunately, it’s supplied up to the point where demand crosses supply. Those excess gallons create social losses measured by the skinny rectangles in the left-hand panel (the social loss from a gallon of oil is equal to the social cost of providing that gallon, minus its value to a consumer). These add up to the area labeled X on the right. The value of an appropriate-sized carbon tax is that we’d avoid that social loss. That is, the benefit of a carbon tax is measured by area X.

Now suppose oil becomes available more cheaply. This shifts both the supply curve and the social marginal cost curve vertically downward by the same amount and shifts area X to a new location. As you can see in the picture, there’s no particular reason to think that the area’s gotten any bigger:

Continue reading ‘What Is Larry Summers Thinking?’

Corrections

In yesterday’s post about Eric Garner, I wrote:

Suppose you are a typical street vendor of an illegal product, such as, oh, say, untaxed cigarettes.

Suppose the police make a habit of harassing such vendors, by confiscating their products, smacking them around, hauling them off to jail, and perhaps occasionally killing a few.

I have good news: The police can’t hurt you.

Here’s why: Street vending can never be substantially more rewarding than, say, carwashing. If it were, car washers would become street vendors, driving down profits until the rewards are equalized. If car washers were happier than street vendors, we’d see the same process in reverse. (The key observation here is that it’s very easy to move back and forth between street vending and other occupations that require little in the way of special training or special skills.)

Because police harassment of street vendors has no effect on the happiness of car washers, and because street vendors are always just as happy as car washers, it follows that police harassment has no effect on the happiness of street vendors.

So if you’re a street vendor, the police can’t hurt you. On the other hand, when the police go around putting people in deadly chokeholds, they’re clearly hurting someone. So the question is: Who?

Answer: Not the vendors, but their customers. Fewer vendors means higher prices. That hurts consumers, and the sum total of that harm adds up to the harm that we see in the viral videos.

Several commenters jumped in to question the claims that:

  1. If you’re a street vendor, the police can’t hurt you.
  2. The costs of police harassment ultimately fall on consumers.

I’d like to thank those commenters — particularly David Sloan, Keshav Srinivasan and Eric — for keeping me honest and for persisting when I was initially too quick to dismiss their questions.

With regard to the first point, what I actually should have said was:

  • If you’re a street vendor, the police can’t hurt you more than an eentsy weentsy bit.

That’s because harassment causes street vendors to move into a great many other occupations, one of which is car washing. For every displaced street vendor we get, say, 1/2000 of an extra car washer — bringing wages ever so slightly down in the car washing industry and therefore making both car washers and street vendors ever so slightly worse off.

I do not consider this a significant correction.

With regard to the second point, it would have been more accurate to say this:

  • The greater the harassment, the more of its burden falls on consumers in the harassed industry.

More precisely, if we consider the harassment equivalent to a tax of T, then the burden on producers tends to grow linearly in T while the burden on consumers in the harassed industry tends to grow quadratically in T.

However, here are two points I now realize I’d overlooked:

  1. The linear/quadratic thing is at least partially misleading, because there is a limit on how big T can be — if T grows beyond a certain point, then the first industry disappears entirely. So we’re not looking at arbitrarily large T’s here, making “growth rates for large T” less relevant. Thus workers collectively can in fact — and in contrast to what I said yesterday — bear a substantial burden of the cost.
  2. While consumer surplus in the first industry shrinks quadratically in T, consumer surplus in the other industries grows quadratically in T, and in fact, the total consumer surplus across all industries can increase as a result of the street harassment. Thus it’s possible for workers to bear more than the entire burden of the harassment!

Here’s an explicit model:

Continue reading ‘Corrections’

Borderline Disorder

Here’s one difference between me and Paul Krugman: He enthusiastically supports President Obama’s new immigration policy, which he calls a matter of human decency. I grudgingly support President Obama’s new immigration policy, which I call a bit less indecent than the policy it replaces.

krugHere’s another difference between me and Paul Krugman: I believe it’s the job of an economics journalist to call attention to unpleasant tradeoffs and offer frameworks for resolving those tradeoffs. Krugman apparently believes it’s the job of an economics journalist to sweep all tradeoffs under the rug in the name of advancing your policy agenda — appealing, if you will, to the stupidity of the American op-ed reader.

Krugman, for example, tells us that he opposes deportations because they’re cruel, but also opposes open borders because they’d make it both economically and politically impossible to maintain the modern American welfare state.

In furtherance of which, he offers this kind of claptrap:

Second, there are large numbers of children who were born here … but whose parents came illegally, and are legally subject to being deported.

What should we do about these people and their families? There are some forces in our political life who want us to … deport the undocumented parents of American children and force those children either to go into exile or to fend for themselves.

But that isn’t going to happen, partly because, as a nation, we aren’t really that cruel

Dammit, I hate this stuff. Krugman says (and I agree with him) that it’s cruel to deport people. He ignores the fact that it’s also cruel to keep other people out. Krugman says (and I agree with him) that letting more people in would put pressure on the welfare system. He ignores the fact that allowing people to stay also puts pressure on the welfare system. Why should we prioritize kindness to those who are already here over kindness to those who are clamoring to get here?

There might be a really good answer to that question, but you’d never know it from reading Krugman. In fact, the takeaway from Krugman’s column is that the cruelty of deportations is unacceptable only because Krugman says so, and the cruelty of closed borders is a necessary evil only because Krugman says that too. So the next time you want to know whether some other policy is unacceptably cruel or not, the only way to find out is to ask Paul Krugman.

And then there’s more:

Continue reading ‘Borderline Disorder’

A Little Perspective

As recently as a few months ago, doctors were held in high esteem and educated people believed that medicine could be useful. All that changed, of course, with the medical profession’s stunning failure to prevent or even predict the breakout of ebola in West Africa. Worse yet, many doctors to this very day cling to their old ways of thinking, writing prescriptions, setting broken bones, and performing surgery in bull-headed defiance of the urgent need to jettison everything we know about medical practice and start over from scratch.

Nobody, of course, writes such nonsense about medicine. Why, then, do so many write equivalent nonsense about economics?

Most economists failed to predict the 2008 financial crisis and ensuing recession for pretty much the same reason most doctors failed to predict the 2014 ebola epidemic — their attention was, quite reasonably, directed elsewhere. It’s easy to say in hindsight that if economists had paid more attention to the shadow banking system, they’d have seen what was coming. But attention is finite, and if economists had paid more attention to the shadow banking system, they’d have paid less attention to something else.

For a little perspective, have a look at this chart showing U.S.~per capita income in fixed (2005) dollars:


That little downward blip you see near the top is the recent crisis. The somewhat bigger downward blip in the 1930s is the Great Depression. The moral is that in the overall scheme of things, recessions don’t matter very much. At the trough of the Great Depression, people lived at a level of material comfort that would have seemed unimaginably luxurious to their grandparents. Today, while Paul Krugman continues to lament “the mess we’re in”, Americans at every income level live far better than Americans of, say, 1980. If you doubt that, you surely don’t remember what life was like in 1980. Here’s how to fix that: Pick a movie from 1980 — pretty much any movie will do — and count the “insurmountable” problems that the protagonist could have solved in an instant with the technology of 2014. Or reread any of the old posts on this page.

Continue reading ‘A Little Perspective’

Juke and Jive

leafWhich is better — an electric car (like, say, the Nissan Leaf) or a gas-powered car (like, say, the Nissan Juke)? There are innumerable websites to help you decide, but an awful lot of them seem to repeat the same bizarre logic.

Take, for example, the comparison page at CleanTechnica. Here we have, in the pro-Leaf column:

The benefits to…public health as a whole from not emitting the pollution that would come from burning gas.

This is immediately followed by a cost comparison, which counts (again in the pro-Leaf column) the $7500 tax credit for electric vehicles.

Sorry, but you can’t have this both ways. My friend Alice believes that when you shop for a car, you should respond to the incentives you’re faced with, and not worry about spillover effects on others. She, therefore, cares not a whit for public health benefits, but is very impressed with that $7500 tax credit. My friend Bob, on the other hand, has a highly developed social conscience. He, therefore, is very much concerned with his neighbors’ health, but correspondingly reluctant to lift $7500 from his neighbors’ pockets.

The CleanTechnica page, then, is addressed neither to Alice nor to Bob, nor, apparently, to anyone else with a coherent philosophy, but only some moral schizophrenic who cares passionately about the state of his neighbors’ lungs but not a fig for the state of their pocketbooks.

Continue reading ‘Juke and Jive’

Tipping the Scales

Former economist Paul Krugman has actually managed to get these words past an editor at the New York Times:

There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.

Now I think we can be quite sure that even Paul Krugman, with his gargantuan capacity for forgetting everything he once knew, is well aware that we already live in a world where only human people pay taxes. That’s an instance of the general principle that the legal incidence of a tax does not determine its economic incidence. The corporate income tax is levied by law on corporations, but its economic effects are felt entirely by humans.

Why then, did he write this in the first place? Well, the charitable reading — and I am all in favor of charitable readings — is that all he’s saying is that the legal incidence of taxation has shifted somewhat from corporations to individuals.

But why would that be interesting? And why would it be, as Krugman seems to take for granted, a clearly bad thing? Suppose that in 1990, I received a $1 dividend and paid a 25% tax, keeping 75 cents in my pocket, while in 2014, due to a fall in corporate rates (leading to higher dividend payouts) and a rise in personal rates, I received a $1.50 dividend and paid a 50% tax, keeping 75 cents in my pocket. Who cares?

Well, perhaps there are reasons to care, involving some non-obvious incentive effect of the sort that it takes an economist to notice. Well, that, then, is where the economist comes in — his job being to explain why he thinks these things matter. In this case, I don’t offhand see the argument, but I’m perfectly happy to believe there might be one. On the other hand, if Krugman actually has an argument in mind, one wonders why he’s so reluctant to share it.

Oh, he does pay lip service to the need for an argument, but all he offers is sophistry:

Continue reading ‘Tipping the Scales’

The Rising Tide

So the Obama administration has released a climate forecast, according to which Miami could be under water by the end of the century. Apparently we’re supposed to be very concerned about that.

To put this in perspective, we’ve currently got about 140,000,000 square miles of ocean on this planet — about 71.066% of the earth’s surface. Add Miami’s 35 square miles and that goes up to 71.066007%. You could add all of South Florida and barely notice the difference.

Here’s what Jeff Goodell of Rolling Stone says about that:

Of course, South Florida is not the only place that will be devastated by sea-level rise. London, Boston, New York and Shanghai are all vulnerable, as are low-lying underdeveloped nations like Bangladesh. But South Florida is uniquely screwed, in part because about 75 percent of the 5.5 million people in South Florida live along the coast.

What Mr. Goodell appears to overlook is that of the 5.5 million people now living in South Florida, approximately zero will be alive a hundred years from now, and those that are will presumably have had the sense to move inland well before the water reaches their breastbones.

Continue reading ‘The Rising Tide’

Something to Celebrate

Here’s a key lesson of economics: Trade is good, but trade with people very unlike yourself is even better. I’m a teacher who eats beef, drives a car and lives in a house. I don’t need other teachers so much as I need students, ranchers, autoworkers and architects. If your neighbors love gardening as much as you hate it, you’ll find it easy to hire a gardener. If it’s the other way around, you’ll do well in the gardening business.

The lesson spills over beyond the markets for goods and services. We learn new ways of thinking and new ways of living from people who think and live differently than ourselves.

We thrive on diversity — diversity of skills, diversity of interests, diversity of lifestyles, diversity of religious and political outlooks, diversity of culinary and artistic tastes, diversity of lifestyles, and, lest we forget, diversity of income. Capitalists need workers and workers need capitalists. A wealthy factory owner won’t stay wealthy for long if here’s nobody to work the assembly lines. A middle-class assembly line worker won’t be middle-class for long if there’s nobody building factories.

Let us then celebrate diversity, not try to extinguish it. And let’s not forget that diversity of income — or, if you prefer, “income inequality” — is just as much a blessing as diversity of skills, preferences, cultural outlooks, and ways of living.

Continue reading ‘Something to Celebrate’

Housing Problems

Josh Barro observes that home ownership is a really bad investment strategy insofar as it involves putting an awful lot of eggs in one basket — indeed, for many people it involves putting more eggs than they’ve got in one basket, since the mortgage market allows you to sink more than your entire net worth into a single house.

In fact, it’s even worse than Josh says. If your house is located anywhere near your workplace (in other words, if you’re almost anyone) then a local economic downturn can devastate your home value at exactly the same time that it’s costing you your job. That’s a whole lot of unnecessary risk.

As Josh acknowledges, that doesn’t mean you shouldn’t own a house; it just means you shouldn’t fool yourself into thinking it’s a wise investment.

But Dan McLaughlin at the Federalist isn’t satisfied:

Economists … should never make the mistake of ignoring consumer behavior they regard as irrational…What Barro should have asked himself (as any real economist should) before declaring that vast numbers of homebuyers and homeowners have been acting irrationally for millenia in buying their own homes is: what are they getting out of it that my analysis is missing?

I enthusiastically endorse the sentiment that when we observe “inexplicable” behavior, our first instinct should be to ask “What am I missing?”. But Barro at least tried to do that — he pointed to “a sense of security” and the desire to customize one’s residence. I agree with McLaughlin’s assessment that these are pretty weak answers, but unfortunately McLaughlin’s own “answers” are even weaker. According to McLaughlin, we own houses because we don’t like to move, and he elaborates at length on the reasons why —- moving is expensive, it means adjusting to new neighborhoods, uprooting your family, etc. etc.

The thing is, though, none of this is a reason to own rather than rent. You could accomplish all of the above with a 99-year lease (binding for the landlord but not for the tenant) which would give you all the residential stability of home ownership while transferring the risk to a professional landlord with diversified holdings.

So why do people buy houses? Offhand, I can think of three answers:

Continue reading ‘Housing Problems’

High Frequency Rentseeking

Spread Networks recently spent $300 million to build a fiberoptic cable that will let Wall Street traders shave .003 seconds off their execution times.

What’s the social value of that cable? If you can shave .003 seconds off the time it takes to execute a trade, how much good have you done the world?

Clearly, the full value of the cable resides in its ability to get things done faster. So start with a vast overestimate: Suppose the entire economy is on hold waiting for that trade to be completed. Then, thanks to the cable, we can all get on with our lives .003 seconds sooner and produce an extra .003 seconds worth of output.

In a $15-trillion-a-year economy, that comes to about $1500.

If we assume, more realistically, that just 1/1000 of the economy is hanging fire waiting for this one trade, the social contribution of a .003-second speedup is roughly $1.50. I’m confident it’s even more realistic to replace that 1/1000 with 1/1,000,000 . That gets us down to about an eighth of a cent.

But chances are you’d be willing to pay a hell of a lot more than an eighth of a cent for that extra speed, which is why Spread Networks is willing to pour $300 million into this thing, and why, quite generally, we should expect there to be more invested in such projects than they return in social value.

Continue reading ‘High Frequency Rentseeking’

Krugman Versus Keynes

Remember Paul Krugman? You know, the guy who thinks we’re so deep in a liquidity trap that pretty much all spending is good spending, even if it’s socially wasteful?

Well, here’s something odd. That very same Paul Krugman is outraged to the core by expenditures on fiberoptic cables to support high frequency trading — expenditures that I happen to agree represent a giant social waste.

“We’re giving huge sums to the financial industry for little or nothing in return”, gripes the very same Krugman who thought it was a swell idea to stimulate the economy through hundreds of billions in government spending, whether or not we got anything in return.

It’s true that Keynesian economists have reasons to believe that wasteful spending is sometimes good. But honest Keynesian economists tend to acknowledge that those reasons apply equally well to both private and public spending.

Krugman’s view, apparently, is that, at least in the current climate, wasteful spending is good as long as you’re spending taxpayer’s money, but bad if you’re spending your own money. That’s not Keynesianism. It’s just crankiness.

Click here to comment or read others’ comments.

Homer Nods

Well, nobody’s perfect.

When it comes to skewering bad reasoning — and making the right arguments crystal clear — Don Boudreaux is usually about as close to perfect as anyone gets. But this time I believe he’s committed a gaffe of his own.

In a column on the minimum wage, Don writes:

Suppose that I invent and use a machine to steal $15,000 every year from each of 500,000 poor Americans, with the $7.5 billion being transferred into my Swiss bank account. After skimming off a few hundred million bucks to cover processing and handling expenses, I share the bulk of these proceeds with about 16.5 million friends…Am I acting immorally? Most people would answer “yes”…

By way of context, a CBO study forecasts that raising the minimum wage to $10.10 per hour will cause 500,000 workers to lose their $15,000-a-year jobs, while raising the pay of 16.5 million others.

But Don’s analogy fails, because taking someone’s $15,000-a-year job is not the same thing as taking someone’s $15,000. I think it’s a fair guess that most minimum wage workers dislike their jobs. So losing one of those jobs has an upside, which has to be weighed against the downside of not getting paid. On balance, losing that $15,000-a-year job might be no more painful than losing, say, $5000 a year.

The right version of Don’s analogy, then, goes more like this:

Continue reading ‘Homer Nods’

The Talker of the Town

tillyOnce upon a time, the New Yorker took special pride in its famously scrupulous fact-checking department. Nowadays, they’ve apparently stopped caring whether the pieces they publish are even remotely plausible, let alone true.

Thus, writing about the Affordable Care Act in the current issue, Jeffrey Toobin is able to report that “it’s clear that the law is helping a lot of Americans” because, among other things, “more than a hundred million people have received preventive-care services, like mammograms and flu shots, at no cost!!!!!!!!!!!!!!!!!!!!!!!!!!!” (Emphasis added.)

Now surely nobody at the New Yorker, right down to the greenest intern, can possibly believe that it is possible to provide a mammogram or a flu shot at no cost. The statement is so ridiculous that one has to believe either that it was intended as some sort of parody (a reading which the context does not support) or that Toobin meant to say something entirely different. But what?

Continue reading ‘The Talker of the Town’

Chips off the Block

Last week, I wrote to condemn the gang of angry yahoos who have piled onto Walter Block for making a perfectly reasonable argument about slavery, involuntary association, and Civil Rights legislation. Today I write to give Walter’s argument the respect it deserves by trying to pick it apart.

It’s important to recognize that Walter wasn’t making a formal argument. Instead, he was offering a rhetorical framework to clarify some of the issues. His (informal) argument, if I understand it, comes down to essentially this:

Look. We all agree that slavery is bad. And when you think about it, pretty much all of the badness stems from its involuntary nature. This should make us wary of involuntary associations in general, and hesitant to impose them. This applies, for example, to laws that require restaurant owners to serve people they don’t want to serve.

Now I happen to be quite sympathetic to that argument (indeed, I’ve been known to make essentially the same argument myself). In fact, I’ll go further and say that I think any reasonable person ought to be at least somewhat moved by that argument. But I can see where it’s not airtight.

To see why not, let’s take a pass at formalizing this:

1) Slavery is bad.
2) For a thing to be bad, some aspect of it must be bad.
3) Slavery has no bad aspects except possibly involuntary association.
4) From 1), 2) and 3), we can deduce that involuntary association is a bad aspect of slavery.
5) From 4), we deduce that involuntary association is bad.
6) Involuntary association is an aspect of the 1964 Civil Rights Act.
7) Anything with a bad aspect is at least partially bad.
8) From 5), 6) and 7), we can deduce that the 1964 Civil Rights Act is at least partially bad.

Now let’s see where the problems are.

Continue reading ‘Chips off the Block’

Block Heads

walterblockThe righteously irrepressible Walter Block has made it his mission to defend the undefendable, but there are limits. Chattel slavery, for example, will get no defense from Walter, and he recently explained why: The central problem with slavery is that you can’t walk away from it. If it were voluntary, it wouldn’t be so bad. In Walter’s words:

The slaves could not quit. They were forced to ‘associate’ with their masters when they would have vastly preferred not to do so. Otherwise, slavery wasn’t so bad. You could pick cotton, sing songs, be fed nice gruel, etc. The only real problem was that this relationship was compulsory.

A group of Walter’s colleagues at Loyola university (who, for brevity, I will henceforth refer to as “the gang of angry yahoos”) appears to concur:

Traders in human flesh kidnapped men, women and children from the interior of the African continent and marched them in stocks to the coast. Snatched from their families, these individuals awaited an unknown but decidedly terrible future. Often for as long as three months enslaved people sailed west, shackled and mired in the feces, urine, blood and vomit of the other wretched souls on the boat….The violation of human dignity, the radical exploitation of people’s labor, the brutal violence that slaveholders utilized to maintain power, the disenfranchisement of American citizens, the destruction of familial bonds, the pervasive sexual assault and the systematic attempts to dehumanize an entire race all mark slavery as an intellectually, economically, politically and socially condemnable institution no matter how, where, or when it is practiced.

So everybody’s on the same side, here, right? Surely nobody believes the slaves were voluntarily snatched from their families, shackled and mired in waste, sexually assaulted and all the rest. All the bad stuff was involuntary and — this being the whole point — was possible only because it was involuntary. That’s a concept with broad applicability. One could, for example, say the same about Auschwitz. Nobody would have much minded the torture and the gas chambers if there had been an opt-out provision. And this is a useful observation, if one is attempting to argue that involuntary associations are the root of much evil.

Continue reading ‘Block Heads’

Minimum Insight

Paul Krugman argues that:

  1. Hiking the minimum wage has little or no adverse effect on employment
  2. and therefore

  3. A minimum-wage increase would help low-paid workers, with few adverse side effects

.

In other words, Krugman, not for the first time, is peddling the sort of claptrap that few of us would accept from a college freshman.

The first point — that hiking the minimum wage has little effect on employment — is an empirical one. Not all smart observers agree with Krugman’s reading of the data, but many do — so for the sake of argument, let’s assume he’s right about that.

The question now is: How the hell do you get from point 1 to point 2? Answer: Only by forgetting the most basic principle of economics, which is that things have to add up. If the minimum wage has no effect on employment, then it’s basically a pure transfer of resources. Which means that the costs and the benefits are equal. The only way there can be “few adverse side effects” —- i.e. few costs — is if there are few benefits. Our job as economists is to make sure people understand such things.

Continue reading ‘Minimum Insight’

A Little Knowledge is A Dangerous Thing

Sent by a reader:


(Click to enlarge.)

Some questions for the economics students:

  • Which vertical line segment illustrates the carbon tax revenue?
  • Which vertical line segment illustrates the compensation paid by the government?
  • Where does the difference come from?
  • What difference would it make if you changed the axis labels from “Polluting Products” and “Non-Polluting Products” to “Watermelon” and “All Things That Are Not Watermelon”?

Answers below.

Continue reading ‘A Little Knowledge is A Dangerous Thing’

The Compassionate Science

I’ve said this before and will say it again: Part of the reason I love economics is that economics is the compassionate science. It’s the discipline that requires us to think hard and to care about how policies affect everyone, not just the people who happen to be standing in front of us.

The response to the government shutdown has been as good an example of this as any. Nothing but a garguntuan failure of empathy can explain the chorus of voices insisting that the shutdown is a bad thing because government employees might lose their paychecks. It takes a mighty powerful set of moral blinders to care so much about the recipients of those checks and so little about the taxpayers who fund them.

It gets even uglier when that same chorus of voices responds “But the government employees are poor and the taxpayers are rich!”. Put aside the question of whether that’s true. If your goal is to transfer money to the poor, and if the poorest people you can think of are government employees, then the well of your compassion is truly dry.

Argue if you must for transferring income from the rich to the poor. But to turn that into an argument for transferring income from the taxpayers to the employees of the government, there are a couple of billion poor people you’ve got to willfully ignore.

When I blogged about this issue earlier this week, we had one commenter — a personal friend, actually, and someone I’ve been surprised and delighted to see showing up in our comments section from time to time — who broke my heart by pointing to the pain of Capitol Hill coffee shop owners who are losing business, apparently oblivious to the fact that taxpayers also visit coffee shops, and that for every dime not being spent by a DC bureaucrat, there’s an extra dime available to be spent by a Nebraska farmer or a New York cab driver. Our commenter apparently remembered to care about the guys selling coffee in DC but forgot to care about the guys selling coffee in Nebraska.

Continue reading ‘The Compassionate Science’

Acta Sanctorum

So if I have this right, it is now the official position of the Catholic church that:

  1. The late Pope John Paul II has the ongoing power to cure brain aneurysms.
  2. As far as we know, he has chosen to employ this power exactly once. (He also once cured a case of Parkinson’s.)
  3. While hundreds of thousands of others have suffered and/or died from brain aneurysms, John Paul has not been moved to intervene.
  4. The one victim he troubled himself to save was selected not because she was particularly deserving or particularly valuable to society, but because she chose the right guy to pray to — sort of like having to suck up to the teacher to get a good grade.
  5. All of this makes John Paul II particularly fit for veneration.

For God’s sake (you should pardon the expression), if you’re looking to make the case that John Paul II was capable of performing (or at least catalyzing) genuine miracles, isn’t the defeat of Soviet Communism good enough? That right there makes him a saint in my book — though if I ever come to believe that he can cure aneurysms and has been holding out on us, I might have to retract my endorsement.

Click here to comment or read others’ comments.

The Road Not Taken

Paul Krugman, having apparently received another of his divine revelations, proclaims that if we demand (somewhat) better working conditions in Third World countries (backed up, presumably, with boycott threats), “we can achieve an improvement in workers’ lives … And we should go ahead and do it.”

Don’t ask how he knows; the ways of the Oracle are mysterious and beyond human ken.

Look. A well designed policy of boycotts and boycott threats can certainly improve working conditions in the Third World. It can also lower either wages, employment or both. Whether or not that package amounts to “an improvement in worker’s lives”, as Krugman puts it, is an interesting and important question, and well worth thinking about. But apparently the last thing Krugman wants you to do is think about it, since he’s already told you the answer, and seems to presume you won’t have the slightest interest in where it came from.

Now, among the many differences between me and Paul Krugman, there are probably some that redound to his credit. But his propensity to hide all of his reasoning (if any) is not one of them. Compare, for example, my blog post of a few years ago on working conditions in 1911 New York City, when the Triangle Shirtwaist fire claimed 146 lives, most of them young women, partly because the fire exits were blocked to prevent pilfering. Would workers in 1911 have wanted safer working conditions (including unblocked fire exits)? This was my answer:

Continue reading ‘The Road Not Taken’