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Suppose that year after year, you spend more than you earn. You are worried that you’ve become fiscally irresponsible. Which of the following is not a path back to fiscal sanity for your household?
Do we all understand why the answer is C? Good. Now let’s try another one.
Continue reading ‘How to Be Fiscally Responsible’
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I don’t usually post on Sundays, but this letter to the New York Times from the indispensable Don Boudreaux is too priceless to pass up.
Edited to add: I don’t always read Krugman’s column, but since Don’s link sent me there today, I can’t resist noting one more outrage: Krugman thinks that extending estate tax relief to the top .25% of estates is a policy “on behalf of” that .25% of the population, as opposed to a policy on behalf of everyone who benefits from capital accumulation, higher wages and economic growth.
Or more precisesly, he doesn’t think that. But he says it.
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I stirred up some controversy on Tuesday with my post equating Olympic athletes to Ponzi schemers, so I want to provide a little more explanation.
What do scammers and Olympians have in common? Let’s start with a simpler question: What do sugar and arsenic have in common? Answer: There’s such a thing as having too much of either. With arsenic, any amount is too much; with sugar, some is good but too much is bad. Likewise for scam artists and athletes. Scam artists, like arsenic, are bad in any quantity; athletes, like sugar, are good in moderation and bad in excess.
Continue reading ‘Arsenic and Gold Medals’
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Harvard’s Robert Barro, who is good at this stuff, estimates (in round numbers) the effects of last year’s stimulus package (numbers represent billions of dollars):
The executive summary is that income (that is, the total income of all Americans) rises in 2009 and 2010 (while the stimulus money is being spent), and continues a bit higher for another year after that, but falls in later years (when the taxes, with their accompanying disincentive effects, come due). (Of course, the day of reckoning can be delayed, but not forever—so the arithmetic still rules). Adding up over five years, income falls by $300 billion, or about $1000 per American.
These numbers confirm my prejudice that the stimulus package is a bad idea, but they still make me uncomfortable. Let me first add a few remarks about what the numbers mean and then I’ll tell you what I don’t quite get about them.
Continue reading ‘So How’s That Fiscal Stimulus Working For You?’
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What must it be like, I wonder, to be the parent of an Olympic athlete, watching your kid accomplish magnificent feats of almost no social value? When your kid is a taxi driver or a shoe salesman or a carpenter, you can take pride every day in knowing that he or she has taken someone home, or helped someone walk, or given someone shelter. When your kid is an Olympic gold medalist, mustn’t you feel a little sheepish about all the superhuman effort that went into nothing more than taking a gold medal away from someone else?
Continue reading ‘The Olympics, Bernie Madoff and Me’
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Back in March, 2001, I wrote a little fable about taxation for the op-ed piece of the Wall Street Journal. Several readers have asked me to post that fable here on the blog. Your wish is my command. At the bottom of this post, I’ll say a few words relating the fable to another recent blog post.
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Once upon a time, a man went to work and earned a dollar. He used the dollar to buy a share of stock. The stock paid a dividend of 10 cents a year, 10% being the going rate of return in the land.
Continue reading ‘Fairy Tales Can Come True’
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Interviews with Democratic Representative Barney Frank and Republican Senator Richard Shelby are the final installments in BigThink’s series of video interviews on “What Went Wrong?” during the financial crisis. (You’ll also find links to all the previous installments.) If you have a taste for politics, you can comment here on what you thought of them.
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I am opposed to all taxes on interest, dividends and other forms of capital income. Supporters of these taxes keep making the same fallacious argument. The purpose of this post is to shame those people out of ever making that argument again. (They are, of course, free to make other arguments.)
The fallacy I have in mind goes like this: First, economics teaches us that everything should be taxed at the same rate to avoid unnecessary distortions. Second, QED.
With appropriate caveats, the first part is true. The problem is with getting from there to the second part.
Continue reading ‘A Quick Economics Lesson’
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While scanning Randy Cohen’s recent Ethicist columns for something to complain about, I found this query about allocating faculty offices:
I am a faculty member at a university undergoing major campus renovations, including new office spaces. Departments were asked to determine their own ways of assigning rooms, but the task is complicated by factors like seniority and rank — does someone with tenure deserve a better room? Some faculty members have greater teaching demands and might need larger rooms to meet with students. What is the most ethical way to allocate offices: seniority? Rank? Lottery?
True to form, Cohen has nothing interesting to say, and offers no rationale for his random suggestions. It never seems to have occurred to him that scarce resources tend to be allocated most efficiently by markets. If he’d done a little research, he might have found this charming account of how the economists at Arizona State solved the office allocation problem.
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Peter Leeson of George Mason University (currently visiting the University of Chicago) offers a new take on the medieval practice of “trial by ordeal”:
“For 400 years the most sophisticated persons in Europe decided difficult criminal cases by asking the defendant to thrust his arm into a cauldron of boiling water and fish out a ring. If his arm was unharmed, he was exonerated. If not, he was convicted.”
According to Leeson, this is less crazy than it sounds: As long as defendants believe (superstitiously) that ordeals yield accurate verdicts, guilty defendants always confess to avoid the ordeal. At the same time innocent defendants always opt for the ordeal—and are always acquitted, provided the priests cheat by (for example) substituting tepid for boiling water, or “sprinkling” a few gallons of cold holy water over the cauldron, or liberally redefining what counts as “unharmed”.
Continue reading ‘Trial by Ordeal’
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Once upon a time in America, whenever an administration spokesman spouted economic nonsense, you could rely on Paul Krugman for a sneer, a blast of outrage, and frequently an imputation of the basest motives. That time ended on approximately January 20, 2009. Today Krugman sleeps at the wheel while administration press spokesman Robert Gibbs spews forth the following:
I think it’s safe to say that for quite some time, when it came to building the solar panels and the wind towers and the wind turbines and a lot of the manufactured equipment for clean energy, we had a number of foreign countries that were doing much better in addressing that demand than we were. And as the President has said often, the type of demand for these components in manufacturing is only going to increase as we seek solutions to our energy problems.
And we have to ask ourselves as a country, are we going to create those jobs and create those components, or are we going to import those components from overseas? The President believes that we have an opportunity to lead the world in this type of manufacturing.
Nobody in the Bush administration ever displayed more economic ignorance, but Krugman was all over those guys every time they came close. Now he lets it slide. So let me do his job for him:
When the domestic demand for a product increases, the law of comparative advantage tells you to import more of it, not less. If it is in fact true that “the type of demand for these components is only going to increase” then American manufacturers might want to start producing them, but American consumers will certainly want to import more of them, and any attempt to circumvent that is a good way to make Americans poorer.
(For those following along in their economics textbooks: The world supply and demand for, say, wind turbines, must be more elastic than the domestic supply and demand, so a demand shift has a smaller effect on the world price than the autarkic domestic price and so must increase the foreign comparative advantage—or decrease the domestic comparative advantage, if any.)
For goodness’s sake—if Barack Obama or Robert Gibbs discovers that he really likes bananas on his Cheerios, is his first thought that he’d better start growing bananas, or is his first thought that he’d better figure out where to buy them? That’s the kind of question Paul Krugman used to ask. I miss him.
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At Big Think, a consortium of bloggers (including me) have been invited to submit questions for use in video interviews with major players in the financial crisis. I posed a question to Mark Zandi, the chief economist at Moody’s, who had recently said this:
“It’s no coincidence that the great recession ended just as the stimulus package began providing its maximum economic benefit.”
My question was:
How do you know?
Here, from the video, is Mr. Zandi’s answer:
Continue reading ‘What Went Wrong’
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In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.
Pigou’s solution—and it’s often a good one—is to make sure that people do feel the costs of their actions, via taxes, fines, or liability rules that allow the victims to sue for damages. Do a dollar’s worth of damage, and you’re charged a dollar.
Pigou endorsed this policy not because it seems fair, though it does seem fair to many, but because it yields, under what he believed to be very general conditions, the optimal amounts of damage. We don’t want too much pollution, but we don’t want too little, either, given that pollution is a necessary by-product of a lot of stuff we enjoy. Pigou offered a proof—now standard fare in all the textbooks—that his policies lead to the perfect compromises, in a sense that can be made precise.
The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out that Pigou’s argument runs both ways. If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.
Continue reading ‘Happy 99th Birthday, Ronald Coase’
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Merry Christmas. As my gift to you, I present the long overdue answers to the remaining problems from my Oberlin honors exam. The original questions are here and here; the first round of answers is here.
Continue reading ‘The Big Answers, Part II’
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In the spirit of the season, I offer you one of the most popular of my old Slate columns. Merry Christmas.
Here’s what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.
Scrooge has been called ungenerous. I say that’s a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?
Continue reading ‘A Christmas Post’
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Over at National Review Online, John Derbyshire starts off with some kind words about The Big Questions, and then goes off on an ill-considered screed about immigration. First, by all means let’s quote the kind words:
Steven’s new book, The Big Questions, has a lot of good things in it, as one would expect from an author who proudly declares himself a math geek. His explanation of Heisenberg’s uncertainty principle (pages 135–141) is a model of clarity in the popularization of science. His geometrical illustration of a Talmudic rule on the division of an estate (pages 205–213) shows the mathematical imagination at its best.
Landsburg is an economist by profession — a professor of economics, in fact — and has the economist’s insight that many matters commonly discussed in terms of morality can be reduced to cold arithmetic: “When things are priced correctly, there’s no need to moralize about them.” He gives some illuminating examples.
But then things take a darker turn:
Continue reading ‘Of Jerks and Bullies’
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Over at Econlog, Arnold Kling chides me for the way I concluded yesterday’s post on health care and Harvard Professor David Cutler:
My gut instincts point me in a different direction that Professor Cutler’s do, but I think we agree on what the big problems are and on what would count as solutions. I think almost all economists would agree on that much, and that’s a lot.
Here is Arnold:
My disagreement with Cutler is more than mere gut instinct. Cutler and I might agree that there is overuse of medical procedures with high costs and low benefits. We might agree that incentives affect this. However, Cutler is confident that central planning represents the solution, not the problem. He believes that remote bureaucrats can measure health care quality well enough and implement compensation schemes that are fine-grained enough to achieve significant improvement.
For the record, Arnold and I are saying the same thing, though I tried to say it a little more politely. David Cutler, Arnold Kling and I all agree that incentives matter and that it’s important to get them right. Arnold Kling and I agree that David Cutler probably doesn’t know how to do that.
Continue reading ‘Health Care Postscript’
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Yesterday I had the privilege of meeting David Cutler—Harvard health economist, advisor to President Obama, and co-author of much of the health reform legislation currently moving through Congress. While I am very skeptical of some of Professor Cutler’s policy goals, I was reminded once again that, for all our bickering around the edges, nearly all economists of all political stripes have a shared and useful way of thinking about the world.
I took the opportunity to ask Professor Cutler about a question that arose on this blog last week. I had posted about my fear that a public health insurance option would be manipulated by politicians intervening to get better coverage for their contributors and constituents, while passing the costs off to less well-connected groups. Some of the commenters—notably Cos and Sierra Black—asked whether this has been a problem in other countries. I had to admit that I had no idea, so I put the question to Professor Cutler. Here is what he said:
Continue reading ‘Making Health Care Work’
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A little while back, I posted the first half and then the second half of the honors exam in economics that I administered at Oberlin College. Since then, I’ve slowly doled out a few answers, but I’m getting more and more requests for the complete set. Here, then, are the questions and answers for the first half; I warn you that some of these are pretty technical. I’ll post the second half soon.
Continue reading ‘The Big Answers, Part I’
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The people at Big Think have posted their latest videos in the “What Went Wrong” series about the financial crisis; I am one of a consortium of bloggers who have been invited to submit questions the interviewees and to blog about their answers.
The most interesting of the current interviews is with hedge fund manager Peter Thiel. A few choice quotes:
Continue reading ‘What Else Went Wrong’
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If you want to understand why a public health insurance option is such a bad idea, just imagine a world where we’ve passed the Coburn Amendment, requiring all members of Congress to subscribe to that public option. In that world, a powerful Senator who develops a hankering for a nose job can make a few phone calls and nudge the public insurance commissioner toward a new appreciation for the moral imperative of covering cosmetic surgery.
And if the Senator is successful, where do the funds come from? Either higher premiums, paid for mostly by subscribers who never wanted this kind of coverage, or by dipping into general revenues. After all, the funds have to come from somewhere.
With or without the Coburn Amendment, and however unlikely you might find this particular scenario, the public option is nakedly vulnerable to exactly this type of corruption. A Senator who would never dream of intervening quite so blatantly on his own behalf might think nothing of intervening on behalf of a big campaign contributor, and will certainly think nothing of intervening on behalf of politically potent interest groups—that, after all, is what politicians do for a living.
Continue reading ‘Playing Politics’
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Here are solutions to the two game theory problems from my honors exam:
Continue reading ‘Playing Games’
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James Hansen heads the NASA Goddard Institute for Space Studies. If you have a question about radiative transfer in planetary atmospheres, he’s your go-to guy. But if you have a question about economics—say, about the merits of cap-and-trade programs—you might want to consult a different sort of specialist. Hansen’s recent New York Times piece provides ample confirmation of that.
The column oozes nonsense throughout, but it will be instructive to hone in on one exceptionally silly paragraph. Here is Hansen trying to explain why cap-and-trade is inferior to a carbon tax:
Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead, it allows somebody else to buy a bigger S.U.V.—because the total emissions are set by the cap.
Continue reading ‘It’s Not Rocket Science’
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I am part of a consortium of bloggers who have been recruited by the proprietors of Big Think to explore the roots of the financial crisis. Big Think is conducting a series of video interviews with a variety of experts; we bloggers are invited to submit questions to be asked in these interviews, and we have agreed to blog more or less simultaneously about those interviews as they are posted.
The first interview, with David Wessel of the Wall Street Journal, is now posted. Some of what he says strikes me as right, some strikes me as wrong, and some strikes me as confusing.
Continue reading ‘What Went Wrong?’
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Two weeks ago, I posted the first half of the honors exam that I administered last spring at Oberlin college. I am following up today with the second half. Once again, I’ve translated some of the questions from economese to English, but am fairly confident that nothing significant has been lost in the translation. This starts with Question 6:
Continue reading ‘The Honors Class, Part II’
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Today I’ll give the solution to another of the problems from my honors exam:
Question 5. Rank these taxes in order of how much you’d dislike paying them:
Assume that the tax rates are adjusted so that your total tax bill is the same in each case.
Continue reading ‘The Best of Taxes and the Worst of Taxes’
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I am a proud member of the Sierra Club. No, not that Sierra Club; what I mean to say is that I am a regular reader of the parenting blog ChildWild, and a fan of its wise and charming proprietor Sierra Black. I am therefore delighted that Sierra seems to have become a regular reader and frequent commenter here on The Big Questions, and glad to see she’s sticking around despite frequent disagreements—much as I do on ChildWild.
Over on another thread, amidst a discussion of the case for free trade, Sierra threw me for a brief loop with an issue I’d never seen raised before, though I’ve since learned that it’s commonplace in certain corners of the Internet. I thought, then, that it might be worth responding in a separate post.
(I’ll admit too that another motive for the separate post was my conviction that I’d be able to slip in a perfect pun around the phrase “Sierra, Madre”—Madre, of course. meaning mother, and what with her running a parenting blog and all and—well, it’s bad enough to have to explain your jokes, but here I am trying to explain a joke I couldn’t even figure out how to make. But by the time I’d realized the pun was stillborn, I was already committed to this post.)
Here’s the relevant part of Sierra’s comment:
Continue reading ‘From the Sierra Club’
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Over on Econlog, Bryan Caplan uses an example from The Big Questions to illustrate his intuitionist approach to meta-ethics: Start with concrete, specific cases where your ethical intuition is clear, and reason by analogy from there. If you have multiple intuitions that lead you down conflicting paths, give some thought to which ones you’re most willing to jettison.
Bryan’s example is about discrimination, a subject that has come up before on this blog, but I want to emphasize that the argument Bryan quotes is quite separate from the arguments we got into in that earlier thread, and, for the sake of clarity, I hope we manage to keep them separate.
Bryan (paraphrasing me!) starts with the rather strong intuition that it’s okay for tenants and workers to discriminate. If you don’t want to live in an Albanian-owned building or an work for an Albanian employer, that’s your right (no matter how strongly we might strongly disapprove of your attitude). By analogy, then, it might seem that landlords and employers should have the same right to discriminate.
Continue reading ‘Analogize This’
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I’m going to dole out the answers to the first half of my honors exam slowly over the next several days. After that I’ll post the second half of the exam.
Let’s start with this one:
Question 3. Snidely Whiplash owns all the grocery stores and all the houses in the Yukon Territory. He charges a competitive price for groceries, and rents the houses at the highest price residents (who are all identical) are willing to pay. (If he charged any more, they’d all leave town). True or False: If Snidely raises the price of groceries, he’ll have to lower the price of housing, so he’ll be no better off than before.
Continue reading ‘Snidely Whiplash’
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Lots of economics this week. We celebrated the Dr. Jekyll side of Paul Krugman (after having lamented his Dr. Hyde a week ago), explored the economics of college admissions and of work and play, and ended the week with a pop quiz. I’ll discuss some of the quiz answers in the near future.
Midweek we took a break to celebrate the centenary of the great Johnny Mercer.
To round out the week’s economics theme, here’s some recommended reading from around the web:
Continue reading ‘Weekend Roundup’
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