If you happen to be attending Harvard this semester, one of your course options is Greg Mankiw’s Freshman Seminar 43j, “The Economist’s View of the World”:
This seminar probes how economic thinkers from the right and left view human behavior and the proper role of government in society. Each week, seminar participants read and discuss a brief, nontechnical, policy-oriented book by a prominent economist. Regular writing assignments are also required. Students should have some background in economics, such as an AP economics course in high school or simultaneous enrollment in Social Analysis 10.
Is it better to tax consumption or to tax income? Is it better to tax carbon or to mandate fuel efficiency? Is it better to foster global competition or to protect local industries?
Today, I will attack none of these questions. Instead, I will attack the meta-question of how to attack such questions. For economists evaluating alternative policies, the industry standard is the efficiency criterion, also known as the welfare criterion. (I’ll illustrate what that means as I go along.) But now comes Princeton Professor Uwe Reinhardt with a piece in the New York Times that questions the orthodox approach found in virtually all modern textbooks (including one in particular).
Let’s first dispense with the straw man. I’ve never heard of an economist who believes that every efficient policy is good, and I’ve heard of very few who believe that every inefficient policy is bad. It’s true that most economists do seem to believe that any good policy analysis should start by considering efficiency. That doesn’t mean it should end there.
I think economists are right to emphasize efficiency, and I think so for (at least) two reasons. First, emphasizing efficiency forces us to concentrate on the most important problems. Second, emphasizing efficiency forces us to be honest about our goals.
By way of followup to yesterday’s post on locavores, I present this letter to the editor of Science, written in 1976 by Harvard economist Robert Dorfman. You can think of Earl Cook, to whom Dorfman is responding, as the Steven Budiansky of his time.
The article by Earl Cook, “Limits to exploitation of nonrenewable resources”, is extremely informative. In fact, I should like to assign it to my class except that it is marred by an egregious fallacy. Since this fallacy has been turning up repeatedly in writings about environmental and natural resource problems, I wish to call it to the attention of Science readers.
The mistake has to do with the nature of social cost. Cook, for example, writes “To society … the profit from mining (including oil and gas extraction) can be defined either as an energy surplus, as from the exploitation of fossil and nuclear fuel deposits, or as a work saving, as in the lessened expenditure of human energy and time when steel is used in place of wood … “. A number of other authors also equate social cost with the expenditure of energy.
Steven Budiansky, the self-described Liberal Curmudgeon, thinks there’s something wrong with the locavore movement, and says so in the New York Times. But he misses the point just as badly as the locavores themselves.
The locavores, in case you don’t follow this kind of thing, are an environmentalist sect who make a moral issue out of where your food is grown — preferring that which is local to that which comes from afar. For example, as Budiansky puts it, “it is sinful in New York City to buy a tomato grown in California because of the energy spent to truck it across the country”.
Ah, says Budiansky, but let’s look deeper — the alternative to that California tomato might be one grown in a lavishly heated greenhouse in the Hudson Valley, and at a higher energy cost. This leads him off on a merry chase through what he calls a series of math lessons, adding up the energy costs of growing and transporting food in different locations. The implicit recommendation seems to be that when you’re choosing a tomato, you should care about all the energy costs.
The Washington Post’s Ezra Klein had a great idea this week: He asked a bunch of economists and pundits to tell him where the Laffer curve bends. In other words, what is the marginal tax rate above which higher taxes lead to lower revenues? Meanwhile, coincidentally or not, Paul Krugman blogged on the very same question.
There’s a lot worth mentioning here, but let me start with one point that will be relevant below: Imposing a 20% income tax is not the same as cutting your wage by 20%. That’s because the income tax grabs not just a chunk of your current wages, but also a chunk of the future interest and dividends those wages enable you to earn. So a 20% income tax will, in general, discourage work more effectively than a 20% wage cut. This is important if you’re using data on wage cuts to predict the effects of income taxes.
That having been said, let’s see what we can learn from the responses:
Yesterday’s post on deflation prompted a flurry of comments and emails remarking on how much economists disagree. This, I think, misses the point. Indeed, what I was trying to emphasize was that we all agree on the advantages of deflation as spelled out in Milton Friedman’s essay on The Optimum Quantity of Money. (I’ve put a quick summary of the key points here.) Therefore, the commentators who are currently worried about deflation must fall into two categories: First, there are the ignoramuses, of whom there are plenty on all sides of all issues. Second, there are those who are clearly not ignoramuses. Those in the latter camp have surely digested Friedman’s analysis, and understand the upside of deflation, but believe it is outweighed by some downside. It is frustrating to me that many of those commentators have failed to explain exactly what downside they have in mind.
So apparently we’re all supposed to be worried these days about the specter of deflation. I am doubly baffled by this—I don’t see the problem in theory and I don’t see the problem in practice. Maybe there’s something I’m missing.
Start with the theory: We learned long ago from Milton Friedman (who might have learned it from Irving Fisher) that a little bit of deflation is a good thing. That’s because deflation encourages people to hold money, and people who hold money aren’t buying stuff, and when other people don’t buy stuff, there’s more stuff left over for you and me.
There are a couple of other ways to see this, though they all come down to the same thing. Here’s the first: falling prices are good for buyers and bad for sellers, but that all washes out. It washes out in the aggregate because each gain to a buyer is offset by an equal and opposite loss to a seller. And it more or less washes out for each individual, because each of us sells roughly as much as we buy (including the sale of our labor.) But over and above all that, deflation enriches the holders of money, because their money increases in value as it sits around. That part is pretty much (may Milton’s ghost forgive me for putting it this way) a free lunch.
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?
Quite a few people got this right in comments. In Iowa, the opportunity cost of a bushel of wheat is 2 bushels of corn. In Oklahoma, the opportunity cost of a bushel of wheat is 3/2 bushels of corn. Becauses 3/2 is less than 2, Oklahoma is the low-cost wheat producer, which is the same thing as saying that Oklahoma has the comparative advantage in wheat.
Commenting on this essay by former Intel chief Andy Grove, Tyler Cowen writes that “Only he who first shows he understands comparative advantage has license to partially reject it.”
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.
Stop me if you’ve heard this one. A subject (called the proposer) is placed in an isolation booth and given ten dollars to divide between himself and the stranger in the booth next door. The stranger (called the responder) can accept or reject the division. If he accepts, they each take their shares and go home. If he rejects, they each go home with nothing.
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.
Okay, if Paul Krugman is going to keep on writing the same column twice a week every week forever, then I am going to keeping on objecting to it forever, though not, I promise, twice every week.
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?
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:
Paul Krugman sinks to a new low with this passage:
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:
How far is it from Seattle to Vancouver? About 142 miles, according to Google maps. But a classic paper from about 15 years ago estimates the distance as 75,000 “economic miles”, meaning that the cost of transporting goods across the border is equivalent to the cost of adding an extra 75,000 miles to the trip. A subsequent paper estimates the economic distance from the United States to Japan as roughly 7 light years, raising the question of why we trade with Japan when it would be so much cheaper to trade with Alpha Centauri, a mere 4 light years down the road.
When big companies (like, say, British Petroleum) wreak great havoc (like, say, by spilling millions of gallons of oil into the Gulf of Mexico), it can be good policy to make them compensate their victims (like, say, with a $20 billion claim fund). It can also be bad policy.
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 a blog post on what he calls the “Bad Logic of Fiscal Austerity”, Paul Krugman lays the following calculation before the public:
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.
I guess this is why I never got that call from the New York Times.
To be a Times contributor, you apparently have to write like Mara Gay, who penned these lines for a front page article last week:
New York may soon become the first state to offer employment protection for nannies.
The state Senate passed a bill of rights for domestic workers this week, a measure that would require employers to offer New York’s approximately 200,000 household workers paid holidays, overtime pay and sick days.
Supporters say the step will provide needed relief to thousands of women — and some men — who are helping to raise the children of wealthier New Yorkers without any legal workplace rights beyond the federal minimum wage.
Now, you see, if I had been writing this article, it might have opened more like this:
Let’s try for a little perspective. The BP oil spill threatens to cause something like $10 billion worth of damage. That’s pretty bad. By contrast, an extra trillion dollars worth of federal spending threatens to cause something like $300 billion worth of deadweight loss (that is, underproduction due to tax avoidance and disincentives to work). That’s 30 times worse. How is it that so much angst about the former seems to be coming from people with a history of shrugging their shoulders at the latter?
Both $10 billion and $300 billion are extremely rough guesses, but the $300 billion figure comes from the widely cited estimates of Harvard’s Martin Feldstein, according to which a one dollar tax increase triggers about 30 cents in deadweight losses. Since a trillion in new spending means a trillion in new taxes (either now or in the future), we get $300 billion in deadweight loss.
Of course $10 billion worth of oil-related damage is still big enough to be worth a goodly dollop of angst. But keep these things in mind:
In his speech at Carnegie-Mellon yesterday, the President lamented the growth of federal spending and proposed to attack the problem partly by letting the Bush tax cuts expire. Can you say non sequitur, boys and girls?
Now as it happens, I’ve got this maple tree in my yard that’s been growing much too fast for my tastes. In fact, it’s been growing far faster than I have. But inspired by the president, I’ve found a solution. I’m going to stock up on E.L. Fudge Double Stuf cookies so I can grow faster than the maple.
The President raises the real problem of excessive spending so that he can misdirect your attention to the phony “problem” of excessive government debt—that is, an excessive gap between spending and tax revenues. This is very like my raising the real problem of my overlarge maple tree in order to misdirect your attention to the phony “problem” of an excessive gap between the height of the maple and the size of my waistline—giving both me and the President equally flimsy excuses to do exactly what we wanted to do in any case, namely gorge out on junk food or let taxes rise.
Today is the 209th birthday of Frederic Bastiat, the patron saint of economic communicators.
Of all the essays ever written, the one I most wish every voter could read and understand is Bastiat’s That Which is Seen and That Which is Not Seen. A boy breaks a window. Someone in the crowd observes that it’s all for the best—if windows weren’t occasionally broken, then glaziers would starve. This can’t be right, says Bastiat. If it were, we’d have no reason to diapprove of a glazier who pays boys to break windows. But why is it wrong? It’s wrong because it focuses on what is seen—six francs in the glazier’s pocket—and ignores what is unseen, namely the shoemaker who is deprived of a sale because those six francs come from what would have been the homeowner’s shoe budget.
Bastiat’s great insight in this essay is that exactly the same fallacy, in only slightly subtler form, underlies many of the public policy positions that were taken seriously in the 19th century—and, we might add, in the 21st.
Alright, this is hilarious. Or pathetic. Or hilarious in a pathetic sort of way. Or something.
Last week in Boston, a water main broke, rendering tap water undrinkable (unless it was boiled). This inspired the journalism majors at Boston station WHDH to produce some highly emotional footage about two tragic side effects—side effects which, as far as it was possible to tell based on everything they teach in journalism school, were entirely unrelated.
First, we had the report on price gouging, featuring a woman weeping—-weeping!—-because her son had been charged $1 a bottle instead of the recent sale price of $3.99 for a case of 24. Then, we had the entirely separate report on frustrated consumers who had visited five stores and/or waited in long lines to buy bottled water. Apparently nobody at WHDH thought to ask how much longer those lines might have been if prices hadn’t risen.
Nor, apparently, have the folks at WHDH ever learned that the whole point of prices is that they adjust quickly to changes in market conditions, and that that’s a good thing. Even the convenience store owner who is a pure altruist and refuses to profit from a crisis would be well advised to raise the price of water and donate the proceeds to charity, rather than allowing all of the available water to be snatched up by whoever happens to arrive first or elbow everyone else out of the way.
Having linked recently to a Fox News segment hosted by a close evolutionary cousin of a sea cucumber, I am delighted to balance the scales with this clip of a thoughtful and literate three-way conversation about Arizona’s anti-immigration statute, featuring Judge Andrew Napolitano, the journalist Jack Hunter, and my hero, George Mason University’s inestimable Don Boudreaux.
Mark Skousen, the editor of Forecasts and Strategies, and the proprietor of FreedomFest (where I’ll be speaking on multiple topics this July) sent me the above graph, highlighting just how very jobless this recovery has been, even compared to what we saw after the severe recession of 1981. (There’s been nothing nearly as bad in the intervening three decades.)
What accounts for the difference? The glib answer is “Obama versus Reagan”, but there are plenty of alternative stories. I find some of those stories more convincing than others, but the one thing I’m sure of is that I haven’t put in the kind of hard thought or careful study that entitles me to a strong opinion. I’d be interested, though, in hearing what you guys think.
If you’re planning to lie about your weight on an online dating site, you’d be well advised to shade downward if you’re a woman and (more surprisingly) upward if you’re a man.
That’s one apparent lesson of the data in this recently published paper by three careful researchers. If I’m reading their tables correctly, they say roughly this:
Taking as given your reported age, height, race, weight, income, attractiveness, education, marital status and so forth, there is some class of users who have about a 50/50 chance of contacting you. Now if you are a 5′4″ woman and you subtract 11 pounds from your reported weight (lowering your body mass index, or BMI, by about 1), then you’ll hear not from 50% of that class but from almost 60%. On the other hand, if you are a 5′10″ man and you *add* 7 pounds to your weight (adding about 1 to your BMI), you’ll hear from about 53%.
Moreover, these effects fall off very slowly, so that even very thin women gain from underreporting their weights, and even very heavy men gain from overreporting. The effects also fall off very slowly with BMI differences, so that even quite heavy men prefer thinner women, and even quite thin women prefer heavier men.
You guys—with your thoughtful, witty and relevant comments—have made me thankful I took up blogging. My (considerable) experience with the mainstream media suggests that you meet a much lower class of people there. Let me give you an example.
Once upon a time I wrote a Forbes column drawing an analogy between protectionism (which discriminates on the basis of national origin) and racism (which discriminates, of course, on the basis of race). (Of course the analogy isn’t perfect. For example, racism can be a solitary hobby, whereas protectionism by its nature forces other people to discriminate as well.) There were many responses, of which my favorite was Pat Buchanan’s screed containing both some hilariously misguided economics and a paragraph I’ve had posted on my office door ever since:
Now I do not know what parents pay to send their kids to the University of Rochester. But if the philosophical imbecility of Landsburg is representative of the faculty, it is too much.
Shortly afterward, I was scheduled to appear on John Gibson’s program on Fox News, where the following exchange took place:
This, in turn, led to a flurry of email. To give you the full flavor, and so as not to bias the sample, I am appending every single email I received on this subject, excepting only one relatively positive note from my mother.
A friend living in England (the philosopher Jamie Whyte, actually, whose writing has graced this very blog) sends along a little vignette for the benefit of my American readers who see European health care systems through rose colored glasses.
A 64 year old breast cancer survivor suffering severe back pain is told she’ll have to wait five months for an appointment with an orthopedic surgeon through the National Health Service (NHS). She therefore (and perfectly legally) chooses to pay 250 pounds (about 385 dollars) for a private appointment. He puts her on a waiting list for surgery to remove a cyst from her spine, surgery which is routinely covered by the NHS. But the NHS decides that since she can afford 250 pounds for a private appointment, she can also afford 10,000 pounds (over 15,000 dollars) for private surgery. They therefore deny to provide her the surgery for which she’s been paying taxes her whole life.
This was not an isolated incident; until recently, cancer patients were routinely denied further NHS treatement after privately purchasing lifesaving drugs that are not available through the NHS.
More details here. It’s worth reading the comments, where readers excoriate the patient for “queue jumping” because she used the price system to signal her high demand for medical services. Note that nobody complains about “queue jumping” in the market for, say, oranges, because oranges are not rationed by government bureaucrats and therefore do not generate queues.
The lesson, I think, is that once an inefficient bureaucracy becomes entrenched, a certain fraction of the electorate becomes incapable of imagining anything better. In this case, that fraction seems to have forgotten first that some people need medical care more desperately than others, so that “queue jumping” can be desirable, second that private payments to doctors actually call forth more medical care and therefore shorten queues, and third that maybe it would be better to have a system that didn’t require queuing in the first place.
What a relief. Now that April 15 is out of the way, my tax rate is back to zero for another year.
At least that’s the way the President of the United States seems to have it figured—your tax burden, according to him, is measured by what you’re paying right this moment as opposed to what you’re obligated to pay in the future.
That’s the only possible interpretation of his statement last night that Tea Partiers (and others) should be thanking him for cutting taxes. The reality is that President Obama, like President Bush before him, has rather dramatically raised government spending and therefore has raised your taxes. To say otherwise is like saying you got your new swimming pool for free because you put it on your credit card.
Once the money is spent, the bill must eventually come due—and there’s nobody around to foot that bill except the taxpayers. We are locked into higher current spending and therefore locked into higher future taxes. The president hasn’t lowered taxes; he’s raised and then deferred them. To say otherwise is—let’s be blunt—a flat-out lie.
Having blogged twice this week (here and here) on Paul Krugman’s green economics essay, I want to add a couple of quick comments on what it takes to contribute usefully to this discussion.
Yesterday I blogged about Paul Krugman’s recent piece on climate control policy. The bottom line: After recovering from a shaky start, Krugman does a good job of laying out the issues and posing many (though not quite all) of the right questions. But I’m not sure he gets the answers right.
A few years ago, writing in Slate, I listed the key questions that the Al Gores of the world mostly fail to address or even acknowledge. (See also the discussion on pages 186-190 of The Big Questions.) Krugman (thankfully) is no Al Gore, and he does address most of these questions. Let’s see how he does with them.
Halfway through reading Paul Krugman’s New York Times piece on green economics, I had my snarky retort all ready to go. Then in the second half he went and got all reasonable on me. I still don’t buy his conclusions, but (sadly for readers who like fireworks), he’s not (at least in this instance) nuts.
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