Hear hear. When someone says “I understand comparative advantage, but in this case it doesn’t apply”, or “I understand comparative advantage but in this case it is overridden by other considerations”, my experience tells me that you can be nearly sure you’re talking to someone who does not in fact understand comparative advantage.

If I were permitted to write a licensing exam for economic commentators, I would surely incorporate a standard textbook exercise or two on this subject. Being lazy, I’d probably lift them from an existing textbook. For example:

Suppose that an acre of land in Iowa can yield either 50 bushels of wheat or 100 bushels of corn, while an acre of land in Oklahoma can yield either 20 bushels of wheat or 30 bushels of corn.

Which state has the comparative advantage in growing wheat? Which state has the comparative advantage in growing corn?

Suppose the residents of each state consume 200 bushels of wheat and 360 bushels of corn. If, instead of pursuing policies of self-sufficiency, each state specializes in its area of comparative advantage, how many acres of Iowa and Oklahoma farmland are freed up for other uses?

Anybody? Bueller? Grove?

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In experimental plays of this ultimatum game, responders tend to reject splits that are substantially worse than 50-50. This is offered as some kind of reproof to the principles of economics. After all, the responder is turning down free money.

But so what? People turn down free money all the time. Just this morning, I saw a $20 bill fall out of a guy’s pocket and I returned it to him. I did that because I don’t like taking things that aren’t mine—a sentiment that’s easy to incorporate into orthodox theory. Likewise, if you put me in the ultimatum game (at least as it’s usually run), I’ll turn down whatever I’m offered, whether it’s 50/50 or 20/80 or 80/20. That’s because I don’t feel any better about taking money from the taxpayers who are presumably funding this experiment than I am taking money from the guy in front of me in the checkout line.

Now, not everyone is as moralistic as I am on this point (as I am not as moralistic as some others on some other points), but most people are not psychopaths, so most people are going to feel at least a little squeamish about taking money nonconsensually from others. Some might be willing to overcome that squeamishness in exchange for a reasonable share of the bounty (but not for a smaller share). That doesn’t mean they’re irrational. Quite the contrary. It means everyone has his price. Just like your Principles of Economics teacher taught you.

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A couple of bullet points from his latest:

• In response to the priorities of Senator John Kyl, Krugman writes: “So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count.” Oh, for goodness’s sake. $30 billion in aid to the unemployed might or might not be good policy and 20 times that much in tax cuts might or might not be good policy; that’s beside the point here. The point is that these are quite entirely separate issues and one’s position on the first need not dictate one’s position on the second. Aid to the unemployed is costly. Tax cuts are not. Didn’t I just say this?
• And Krugman goes on: “On paper, solving America’s long-run fiscal problems is eminently doable: stronger cost control for Medicare plus a moderate rise in taxes would get us most of the way there.” In the words of a certain Nobel laureate, this passage makes me want to stick a pencil in my eye. It’s like saying “Getting my family budget under control is eminently doable: fewer caramel macchiatos plus more trips to the ATM would get us most of the way there”. Yes, cutting spending will help. No, moving money around won’t.

  Like it or not, the government can always raise taxes and therefore always has a claim on your wealth. You are the government’s ATM. Making a withdrawal today (by raising your taxes) means there will be less available to withdraw tomorrow. Raising taxes does not make the government richer. Didn’t I say this already?

• Yes, I know, a bunch of silly Republicans (along with a bunch of silly Democrats) have gone around saying the deficit is all that matters, which implies that a tax increase can offset a spending increase. Yes, silly people are silly. But the existence of silly people is not enough to justify additional spending. For that, you’ve got to, you know, attempt to justify the additional spending.

Sometimes a caramel macchiato is worth the cost and sometimes it’s not. Sometimes an unemployment benefit is worth the cost and sometimes it’s not. We have useful ways of thinking about these things. Some people say: “You know, that macchiato is expensive but it’s worth it.” Others say: “I don’t think that’s a very wise expenditure right now.” Paul Krugman says: “AHA! So a caramel macchiato is unaffordable, but you still haven’t visited the ATM!” And I say: How’s that again?

Stay tuned for more Godel, more Darwin, and a little less Krugman.

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There’s no question that extending benefits would be good for the currently unemployed, and no question that it would be bad for those who are called on to foot the bill. Economists usually deal with that kind of conflict by asking what policy you’d prefer if you had amnesia, and and didn’t know your own employment status. (You can read a lot more about this approach to policy analysis in Chapter 16 of The Big Questions.) The amnesiac is an impartial judge who is forced to care about everyone, because he/she might be anyone.

To translate this philosophical position into concrete policy choices, we have to figure out what the amnesiac wants. Fortunately, we have a lot of experience observing amnesiacs, or at least their equivalents. When you buy health insurance, you don’t know how much medical care you’re going to need; when you accept a sales job, you don’t know how you’ll perform; when you buy a share of stock, you don’t know whether it will go up or down. So you’re making choices in the dark, much like an amnesiac who doesn’t know his own health status, or his own salesmanship skills, or how his own portfolio is doing. By observing those choices, we can estimate how real amnesiacs are likely to behave.

By the industry standards of economics, to justify further unemployment benefits, you’ve got to at least to attempt to argue that an amnesiac would favor them. And you do this not by posturing a la Krugman, but by computing.

Now that’s not an easy business. You need to make educated guesses about a lot of things an amnesiac might care about, like: What’s the chance of becoming unemployed? How costly is unemployment? What utility function do people maximize? How much do people discount the future? How much deadweight loss (i.e. lost production due to disincentive effects) is caused by taxation? Different economists might make different guesses, and so get different answers. But at that point we can at least pinpoint the locus of our disagreements and try to get better estimates in the areas where we differ.

To show you how that kind of thing might work, I’ve just written down a (warning: technical!) toy model where I invented answers to the key questions, did some computations, and concluded that our amnesiac would oppose further benefits. (Honest, I didn’t know in advance what answer I would get.) These computations prove nothing, because at least some of my invented answers surely have nothing to do with reality. But my point is that if you’re claiming as an economist to support further benefits, then it’s your job to do the hard work of writing down a more realistic model and show me how the numbers work out. As far as I’ve seen, neither Krugman nor any of his ilk have even tried to do that.

Edited to add: Joe Walsh of the University of Alabama writes to tell me there are arithmetic mistakes in my account of the toy model. For those who want to understand the model, a very good exercise would be to work through it, correcting all the arithmetic mistakes.

Edited further: It was an overstatement to say that my pdf file contains arithmetic errors. In fact all it contains is a typo. In the first displayed equation, c-50 should be just c. After making that correction, all of the follow-up math is right. Thanks to reader A.J. Lenze for checking this.

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If somebody asked me, How do I get to Heaven, I would tell them that the only way I personally am aware of is faith in Christ, because I believe the New Testament. That’s the only map I got. Somebody says, Well, I got a different map. O.K.! You know what? If it works, I’m not going to argue with you.

Well, that makes sense. If somebody asked me, How do I get to Mount Rushmore, I would tell them that the only way I personally am aware of is Route 90, because I believe in Google Maps. Somebody says, Well, I got a different map. O.K.! You know what, if it works, I’m not going to argue with you. Unless, of course, I actually care whether you make it to Mount Rushmore or not, in which case I might take the trouble to defend my map.

Or maybe I don’t argue because I know Google Maps is sometimes wrong. (Ask me sometime about how it directed me across a field of boulders in Vermont last year.) But the analogue in Huckabee’s case would be knowing that the New Testament is sometimes wrong, and I don’t think he wants to go there. That leaves us to infer that he really doesn’t care whether you get to Heaven or not. That’s certainly his privilege, callous as it may be. But then, a little farther down in the same New Yorker piece, we get this (on why we should subsidize education in poor districts):

To be truly pro-life means that we should be just as much concerned about the child who is eight years old and living under a bridge or in the back seat of a car.

So there we have it. The governor, who surely considers himself truly pro-life, cares passionately about how things turn out for you at age eight (and, we may infer, at eighteen and at eighty) but pretty much not at all about how things turn out for you in the infinitely many years thereafter.

This sounds so implausible that I am forced to conclude he can’t mean a word of what he’s saying. (And as readers of The Big Questions are aware, similar implausiblities convince me that the same is true of very many ostentatiously religious people.)

Is there any way to spin this that makes any sense at all? Let’s do this as a flow chart (click to enlarge):

All paths, it seems to me, end in questions to which the only possible answer is “He doesn’t really mean it.” Is there a path I’m not seeing?

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If that made you scratch your head, your scalp will probably be rubbed raw before you’re finished reading Anatole Koletsky’s Wall Street Journal essay, excerpted from his book Capitalism 4.0. (Caveat: I have not read the book, so I’m not sure how much danger the rest of it poses to your scalp, or to your sanity.) Mr. Koletsky’s “proof” that some questions “cannot be answered, even in a probabilistic sense” is this:

In 1980, nobody would have put any significant probability on computer sales exceeding car sales by a factor of 10 to 1.”

But that’s not all! There’s also this:

What is the probability that someone in the next hundred years will invent a soft drink more popular than Coca-Cola? This probability must surely rate at almost 100%, yet that would also have been true in 1910. There is no rational way of making such an assessment(!!!!!!!!!!!!!!!!). [Snarky emphasis added.]

Look. This isn’t rocket science. Over the course of a hundred years, a whole lot of things happen. When a whole lot of things happen, some of those things (like a particular set of Powerball numbers or the computer revolution, or the continued success of Coca-Cola) will have been extremely unlikely. That’s how probability works. If, over the course of the past century, no very unlikely things had happened, then we’d know that our probabilistic models weren’t working. So far they seem to be working just fine.

Of course the same models predict that more likely events will occur more often. For example, I could easily have predicted a year ago—or even a decade ago—that with extremely high probability, a lot of nonsense would be published in the year 2010. Thanks to Mr. Kaletsky for doing his bit to confirm that prediction.

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The artwork above is courtesy of Jodi Beggs, proprietress of the lively Economists Do It With Models site, who graced us with a visit in yesterday’s comments and expanded on those comments on her own page. (That’s me kicking Paul Krugman in the gut.)

Jodi objects to the tone, and in part to the substance, of my response to Paul’s recent attacks on the “deficit hawks” who oppose various spending programs that Paul happens to favor. I’d summarized his rhetorical technique as follows:

• Identify an adversary who is concerned about the cost of some program Krugman likes.
• Label that adversary a “deficit hawk”.
• Belittle (perhaps reasonably) excessive concern about the deficit while ignoring legitimate concerns about the costs of spending and taxation, which is not at all the same thing.
• Omit any attempt at an honest reckoning of costs and benefits.
• Pretend you’ve said something relevant.
• Sneer.

I particularly objected to Paul’s labeling as “hypocrites” those who support both spending cuts and tax cuts. Paul thinks that’s hypocritical because spending cuts and tax cuts have opposite effects on the deficit. I think that’s completely ridiculous because the merit of a policy depends on many things other than its effect on the deficit. Here’s Jodi’s attempt to prove that we’re both right and both wrong:

If all people claim to care about is size of the deficit, then they are being hypocritical in advocating one method of reducing the deficit and eschewing another. If all people care about is economic efficiency, then they are by definition internally consistent if they advocate both benefits and tax cuts. The reality of the situation is that most reasonable people put some weight on both deficit reduction and economic efficiency, so people are not automatically hypocritical or consistent just because they are simultaneously in favor of cuts in unemployment aid and taxes.

I agree in principle, but I object in practice, because in practice nobody cares primarily about the size of the deficit.

Look. Any time the government spends money, there are two or three downsides (which might or might not be outweighed by the upsides). Call the downsides Thing One, Thing Two, and Thing Three. Thing One, the biggee, is that resources get consumed. Thing Two, which can also be pretty big, is that the program must be financed by (current or future) taxes, which discourage productive activity. And finally, there might or might not be a Thing Three, which is that any increase in the deficit could conceivably have some minor disadvantages that are, by any reckoning, eensy weensy compared to Things One and Two.

Because Things One and Two are so much bigger than Thing Three, it must be extremely rare for the prospect of Thing Three to sway anyone’s opinion about the overall desirability of any given spending program. So for Paul to pretend that most of the opposition to his favored programs is based on Thing Three still strikes me as, yes, pummelling a straw man.

Everyone agrees that the deficit is a relatively minor issue (though some of us have said so more consistently than others). Paul wants to pretend that his opponents believe otherwise so that he can prove them wrong. That’s easier, I suppose, than engaging the issues they might be right about.

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In America, many self-described deficit hawks are hypocrites, pure and simple. They’re eager to slash benefits for those in need but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

Where to begin?

First, no economist—let me repeat that—NO economist, not even Paul Krugman on the days when he’s being an economist—would count a tax cut as a cost for purposes of policy analysis. A cost is something that consumes resources, not something that changes the ownership of resources. My Principles of Economics students all understand this; so, presumably, does the Nobel-prize winning author of a prominent Principles textbook. (A possible exception: You could call a present-day tax cut costly if it necessitates a future tax increase which, for some reason, is costlier to collect than the present-day tax. I guarantee you this is not what Krugman has in mind. If it were,the $1.3 trillion number that he highlights would be totally irrelevant to the actual cost.)

Next, unemployment benefits are costly, both insofar as they discourage recipients from seeking work and insofar as they necessitate taxes that discourage productive activity. The cost of $77 billion worth of benefits is not $77 billion, but it’s not zero either.

So unemployment benefits are costly and tax cuts are not. Which doesn’t mean that all unemployment benefits are bad or that all tax cuts are good, but it’s plenty adequate to absolve the hypocrisy charge.

But Krugman, as is his wont lately, appears committed to the following flat-out dishonest rhetorical agenda:

• Identify an adversary who is concerned about the cost of some program Krugman likes.
• Label that adversary a “deficit hawk”.
• Belittle (perhaps reasonably) excessive concern about the deficit while ignoring legitimate concerns about the costs of spending and taxation, which is not at all the same thing.
• Omit any attempt at an honest reckoning of costs and benefits.
• Pretend you’ve said something relevant.
• Sneer.

In short: Keep on pummelling that straw man.

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A.C. Pigou taught us that we get better outcomes when decisionmakers bear the costs of their actions. Ronald Coase taught us that Pigou’s lesson cuts two ways. The shrimp boats that are sitting idle today are sitting idle partly because BP decided to drill in the gulf, but also partly because the shrimpers chose to operate in the vicinity of an oil rig. In this case, making BP feel the costs of its own decisions entails insulating the shrimpers from the costs of theirs.

In this particular case, I’m inclined to believe that it’s a good thing for BP to pony up. But contrary to what I’ve been reading around the web, there’s absolutely nothing in economic theory to dictate that conclusion; instead the conclusion depends on the particulars of the case. Is it cheaper to deal with the problem of spills by encouraging oil companies to be more responsible, or by encouraging others to stay out of their way? That’s an empirical question. Theory can’t answer it.

The various commentators who think they can justify holding BP liable by crying the word “externality”—and stopping there—exhibit a commendable grasp of environmental economics circa 1930. But this is 2010.

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Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.

That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.

Yes. That’s the long-term cost of borrowing an extra trillion dollars. (Actually, the cost is even lower than Krugman says it is.) But the long term cost of spending an extra trillion dollars is somewhere in the vicinity, of, oh, about a trillion dollars, or about 7.4% of GDP.

Now you might argue that if some of that spending puts unemployed resources to work, then the true cost of spending a trillion is somewhat less than a trillion, but Krugman, at least here, does not attempt to make that argument. Nor do I expect that even Paul Krugman would dare to argue that an adjustment for unemployed resources could reduce the cost of government spending by roughly 98%.

Krugman is right when he says that borrowing is cheap. But the issue isn’t borrowing; it’s spending—and spending is expensive. It appears that like the President, Krugman wants to divert your attention from spending to borrowing so he can dismiss legitimate concerns without even acknowledging them. It’s a cheap trick. Don’t let either of them get away with it.

Edited to add: In fairness to Krugman, he appears to be imagining that the trillion is never paid back, so that the cost of spending it is simply the debt service of 17.5 billion per year forever. But his column makes it sound like the cost is a single one-time payment of 17.5 billion, which is absurd.

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