Archive for the 'Policy' Category

Trump and Tax Returns

I am glad I don’t live in a country where the penalty for criminal behavior includes having your tax returns released to the public.

I am doubly glad I don’t live in a country where the penalty for criminal behavior includes having your tax returns released to the public before you are convicted and indeed before you are ever charged.

I am triply glad that I don’t live in a country where the penalty for criminal behavior includes having your tax returns released to the public at the whim of your political opponents.

And I am quadruply glad that I don’t live in a country where those political opponents get to invent penalties that are not envisioned by any statute.

I wish many things for Donald Trump, and I am sure he would not want me to get most of my wishes. But it would be an outrage for the Ways and Means Committee of the House to release his returns under the current circumstances, where, it seems to me, the release is clearly intended as a punishment for some very bad acts that very clearly occurred.

On the other hand: I have long argued (see Chapter 15 of The Armchair Economist) that when voters make choices on the basis of promises that are ultimately not kept, they should have legal recourse in the form of a lawsuit against the politician who broke those promises. In 2016, Donald Trump repeatedly promised to release his tax returns as soon as they were not “under audit”. It’s not at all clear to me why this promise would have changed anyone’s vote, but presumably Trump (who has presumably thought about this harder than I have) believed it would sway at least some voters; otherwise why would he have made such a big deal about it?

In my ideal world, there would be a class-action suit against Trump by voters who relied on his 2016 promise to release these returns, and, after a trial, he might be ordered to fill the breach by releasing those returns today. One could argue that the Ways and Means Committee is simply bringing about my desired outcome by other means.

But: First, as I just said, in my ideal world, the order to release the returns would come after a trial. We have not had that trial. And second, I am actually very very glad that I do not live in a world where my personal policy preferences are implemented without first going through some sort of process whereby they become law. Like so many of my best ideas, this one is not yet a law. I’m glad I do live in a country where (by and large) non-laws are not enforced, even when I believe they ought to be laws.

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Abortion Policy

Let’s try to make the best possible case for restricting abortion and see how far we get.

To make that case as strong as possible, let’s start from the presumption that we care about the interests of the unborn in just the same way as the interests of the born.

Now caring about someone’s interests is not a sufficient reason to defer to those interests, because there are usually competing interests that have to be weighed in the balance (in this case the interest of the mother). Often, competitions between interests play out in the marketplace, so that policymakers are unnecessary — if you and I both want the same house, we settle that conflict by bidding for it.

But sometimes markets don’t work very well, and then there’s a policy problem to resolve. For example, suppose your boat happens to be in the vicinity of my dock when it springs a leak and starts to sink. The only way to save the boat is to tie it to the dock. If I happen to be out sunning myself on that dock, we can strike a bargain. But if I’m nowhere to be found, the law enforces the outcome that we presumably would have reached and allows you to tie up to my dock.

The same fundamental problem applies in the case of abortion. You might be willing to pay a substantial fraction of your lifetime income to prevent yourself from being aborted, but at the time of the abortion decision, those negotiations are quite impractical. So by analogy with the boat and the dock, one might argue that the law should enforce the outcome that we presume those negotiations would have led to, by prohibiting the abortion.

But if that argument is correct, it applies to the unconceived as well as to the unborn — that is, it seems apparent that most adults who are glad they were not aborted are equally glad that they were conceived in the first place, and would have agreed to pay just as much to bring about the conception as to prevent the abortion. This suggests that if the law should strive to prevent abortions, it should also strive to bring about a considerable number of additional pregnancies.

But even if you accept that argument, it is not an argument for involuntary impregnation; it is at best an argument for subsidized impregnation. It’s a general principle of cost-benefit analysis that taxes and subsidies are almost always better than mandates, because they allow for different individuals to make different choices that account for circumstances invisible to the policymaker. That’s why it’s better to tax carbon than to mandate gas mileage. And likewise, even if you accept the anti-abortion argument, it is not an argument for banning abortion; it’s at best an argument for taxing abortion.

How big should the tax be? Another principle of cost-benefit analysis is that everyone’s interests should count equally. So if we take all of this seriously, then one additional pregnancy compensates for one additional abortion — one potential life is lost; another potential life is gained; and that’s a wash. Therefore the policy implication is that abortion should, at most, be taxed at a rate necessary to fund the subsidization of one additional pregnancy.

In other words — if A has an abortion but simultaneously coughs up enough money to induce B to become pregnant and carry a baby to term, then even if you buy the market-failure rationale for restricting abortion, the world as a whole is no worse off than before — and in fact better off, because the pregnancy has been voluntarily transferred from A to B. If A is willing to pay that price, I can’t find any reason to disallow it.

(In fact, one could well argue that the mere fact of A’s pregnancy is no reason to impose a tax burden on A — if A has an abortion, the rest of us can perfectly well pick up the tab to enlist B as a substitute, so that A doesn’t need to be taxed at all. I’m putting that argument aside only because I’m trying to bias the outcome in favor of a large deterrent.)

That sets a maximum penalty for abortion. If you’re skeptical of the initial premise that we care about unborn people the same way we care about everyone else (or skeptical of the market-failure argument) then the penalty should be lower — maybe a lot lower. In no case would you want to impose a ban.

To avoid those conclusions, you’d need (for starters) a clear reason to favor the conceived-but-unborn over the not-yet-conceived. Unless you’re prepared to descend into deontology, I think that reason is going to be hard to come by, again because I am exactly as happy to have been conceived as I am to have been unaborted. And even if you find that reason, you might be able to use it to argue for a higher tax but still not, I think, an infinite one.

Edited to add: The more I think about this, the more it seems to me that the correct conclusion is that if we, as a society, care about preventing abortions then we, as a society, should be subsidizing births, and the cost of those subsidies should be spread widely, so that the right tax on abortion should in fact be zero.

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Mea Culpa

Economists, like everyone, should admit to their mistakes and correct them. That’s what this post is for.

The argument against taxing capital income runs like this:

1) Current and future consumption should be taxed at the same rate.

2) A tax on capital income is equivalent to a tax on current consumption coupled with a higher tax on future consumption.

Conclusion: Capital income should not be taxed.

I made this argument several years ago in a talk at the Cato Institute. I recently got a complimentary note from someone who had just watched the video of that talk, which caused me to go back and watch a few snippets to remind myself of what I’d done to earn this compliment. And I was mortified to see myself stating not point 1) above, but this far more general point:

1′) All things should be taxed at the same rate.

The status of 1′) is complicated. It is true that in an ideal world, all things including leisure would be taxed at the same rate. But in a world where you can’t tax leisure, the ideal tax system is far more complicated, with the optimal tax on each consumption good varying according to various elasticities and cross-elasticities of demand and supply. So 1′) is true in an ideal world, but surely false in our world, where leisure is very difficult to tax.

Fortunately the full generality of 1′) was not needed for my argument; all I actually used was 1). But in the video, I very clearly stated 1′) as if it were gospel, and even devoted an entire slide to it. This mistake doesn’t overturn the conclusion, but it’s still surely egregious enough that if, say, Paul Krugman had made a mistake like this, I’d have been all over him.

So: Mea culpa.

A subsidiary point: The word “should” in these statements can be interpreted in (at least) two ways — from the point of view of efficiency and from the point of view of fairness. In the few paragraphs above, and in the bulk of my Cato talk, I was using the word “should” in the first sense. But I also tried to address fairness issues in the Cato talk, and from that angle, I’m less sure that 1′) is wrong.

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A Question About Covid Policy

There’s been a lot of chatter lately, in print and on the web, about whether hospitals should refuse to treat unvaccinated Covid patients. Among other things, it’s been pointed out that there are potential logistical nightmares in trying to ascertain whether a patient is vaccinated before treating him, especially in emergency situations.

But it seems to me that the hospitals never were the right institutions to making these decisions in the first place — the insurance companies are. Why haven’t the insurance companies announced that they won’t cover the costs of Covid care unless you’re vaccinated? If you show up at the hospital unvaccinated and accept treatment, you’d be on the hook for the costs — at least up to the point where you’re left bankrupt.

Creating appropriate incentives is, after all, a large part of what we pay our insurance companies to do. Nobody wants to buy insurance from a company that approves every claim (and charges commensurate premiums). When you buy insurance, part of what you’re buying is the company’s promise to exercise due diligence and not fritter away its resources. There’s a pretty good argument that subsidizing people to remain unvaccinated counts as frittering.

It seems to me that “no coverage if you’re unvaccinated” would be both good social policy and clearly a win for the insurance companies themselves (because it’s a win for their customers). So the question is—why isn’t it happening?

And here’s where I hit the limits of my knowledge — is there some law that’s preventing this? Or some regulation? Or is it not happening for some other reason that I haven’t thought of?

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Good thing we dodged that bullet

In the days following the 2020 presidential election, fears ran rampant that Donald Trump, having lost the election, would try to do something truly crazy like launch a missle strike or deploy troops to prevent an orderly transition. But among the grownups at the Pentagon, there was one even bigger fear:

For the Joint Chiefs, the biggest worry was the revival of one of Trump’s hobbyhorses: pulling troops out of Afghanistan, what he had called the “loser” war. A long line of advisers—Mattis, McMaster, Kelly, Mike Pompeo, and former secretary of state Rex Tillerson among them—had repeatedly discouraged this idea from the first time Trump brought it up in 2017. American intelligence units in the region needed military support to keep up their work. The United States had hundreds of millions of dollars’ worth of equipment and vehicles on the ground that would have to be methodically removed, or else they could be confiscated by the Taliban and make enemy forces that much better equipped to terrorize civilians and attack the Afghan government. Even if Trump decided to dramatically reduce forces in the region, his generals and top advisers warned him that pulling out of Afghanistan wasn’t as simple as putting a bunch of soldiers on a bus and heading out. Withdrawal had to be executed carefully and in stages, protecting each flank and helping the Afghan government remain stable.

Pentagon leaders worried about a Saigon situation, with a chaotic last-minute exit and desperate people rushing to a rooftop to catch the last helicopter out. The Joint Chiefs began preparing for the possibility. If the president ordered a military action they considered a disaster in the making, Milley would insist on speaking to the president before passing on the order, so he could advise against it. Under this plan, if the president rejected Milley’s counsel, the chairman would resign to signal his objections. Then, with Milley out of the picture, the Joint Chiefs could demand in turn to give the president their military advice. This would buy time. In informal conversations, they discussed what would happen if they, too, got the brush-off from Trump. They considered falling on their swords, one by one, like a set of dominos. They concluded they might rather serially resign than execute the order. It was a kind of Saturday Night Massacre in reverse, an informal blockade they would keep in their back pockets if it ever came to that.

— Carol Leonnig and Philip Rucker
I Alone Can Fix It: Donald J. Trump’s Catastrophic Final Year

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People Respond to Incentives

Marty Makary, Professor of Health Policy at Johns Hopkins, as quoted by Alex Tabarrok:

Ironically, those in the Oxford-AstraZeneca trial who inadvertently received half the initial vaccine dose had lower infection rates

Makary and Tabarrok’s main point (with which I fully agree) is that it’s criminally stupid for the FDA not to approve the A-Z vaccine immediately — and their main argument would stand with or without the observation about infection rates.

But I’m quoting the same observation for an entirely different reason: To point out that sometimes you need economics to explain the medical data.

In particular: Half-dosed subjects will generally have fewer side effects. Subjects with fewer side effects will think it more likely that they’ve gotten the placebo. Subjects who think they’ve gotten the placebo are going to continue taking more precautions with masks, social distancing, etc. Therefore it’s entirely plausible that half-dosed subjects will have lower infection rates.

Thanks to Romans Pancs for pointing me in this direction, and reminding me of the Thanksgiving puzzle that I posted here.

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Query

Can one of my more knowledgeable readers answer this?

If there are 23 cabinet positions, of which, say, 6 are vacant and 17 are occupied, what counts as a majority for purposes of the 25th amendment? Is it half of 23 or half of 17?

I realize there are additional ambiguities in the 25th amendment, which talks about “principal officers of the executive department”, without ever using the word “cabinet”. But I think I understand those issues. I’d just like an answer to the specific question above.

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How To Auction Vaccines

I hold this truth to be self-evident: It is downright crazy to try to distribute vaccines without using prices. I said as much last week.

The question then becomes: How should those prices be implemented?

Method I: Distribute vaccine rights randomly and let people trade them. This suffers from the fact that you can’t know how much the vaccine is really worth to the people you’re bargaining with, which is a barrier to efficient bargaining.

My immediate instinct (which I still think is a pretty good one) is (after pre-vaccinating certain key groups like first responders and health care workers) to give everyone a choice: You can have your vaccine now, or you can have a check for (say) $500 and your vaccine in six months. This suffers from the need to get the price right (presumably involving some trial and error) but I stand by it as far far better than the Soviet-style central planning we’re about to actually get.

But now Romans Pancs has done far better than I have, by actually thinking about the details of the optimal auction design and getting them right. His paper is here. (You’ll need to sign up for a free account before downloading.) Anyone who actually cares about getting vaccines distributed efficiently should start by reading this paper.

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Priority Care

Here is a scenario not unlike many that could well play out in the near future, courtesy of our friends at the Centers for Disease Control:

  • Edna, age 65 and retired, lives alone and likes it. She gets along well with her neighbors but prefers not to socialize much. She’s entirely comfortable with her Kindle, her Netflix, and her Zoom account, which she uses to keep in touch with her family. She does look forward to the day when she can hug them again, but for the time being, she’s wistfully content.
  • Irma, age 62 and retired, lives alone but mostly lives to dance. In normal times, she’s out dancing five nights a week, and out with friends most afternoons. Confined to her apartment, she’s feeling near suicidal.
  • Tina, age 65 and a corporate CEO, has discovered, somewhat to her surprise, that she can do her job via Zoom as well as she can do it from her office. It took a little getting used to, but with all the time she saves commuting, she’s actually able to work more effectively, and everything’s humming along just as it should.
  • Gina, age 58 and also a corporate CEO, has a very different management style. She’s accustomed to popping into her managers’ offices unannounced at all times of day to keep tabs on what’s going on, and she’s found that this way of working is extremely effective for
    her. Since the pandemic started, she’s lost her grip and the corporation is foundering.

Now: A vaccine becomes available. The CDC decides that people over 65 will be near the front of the line to receive it.

Question 1: Should Edna be allowed to sell her place in line to Irma? Should Tina be allowed to sell her place to Gina?

Question 2: Do you think the CDC will allow that?

I am quite sure that the answer to Question 1 is yes, and nearly as sure that the answer to Question 2 is no. Which means something is wrong.

It is tragic that so much of pandemic-management policy has been made in defiance of basic science. It is equally tragic that so much policy is about to be made in defiance of basic economics. Because if there’s one thing that economics teaches us, it’s that you cannot distribute a scarce resource efficiently unless you use the price system. No bureaucrat at the CDC has enough information to distinguish Edna from Irma, or Tina from Gina. Therefore they won’t even try.

Essentially everyone understands that it would be insane to try to distribute food or housing or pretty much anything else without using prices. But when it comes to Covid vaccines, the reasoning seems to be that vaccine distribution is uniquely important, so we should do a uniquely bad job of it. Go figure.

If you think it would be a nightmare for all the Edna/Irma and Tina/Gina pairs to negotiate individual contracts, there’s a simpler way to accomplish the same thing: Let Irma and Gina buy their way to the front of the line, then take all the money you collect and redistribute it to the population as a whole so that Edna and Tina get their shares. In other words, let the price system do its job.

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Teaser

Here are the opening paragraphs of my (paywalled) op-ed in today’s Wall Street Journal.

For nearly four years, I’ve looked forward to voting against Donald Trump. But Joe Biden keeps testing my resolve.

It isn’t only that I think Mr. Biden is frequently wrong. It’s that he tends to be wrong in ways that suggest he never cared about being right. He makes no attempt to defend many of his policies with logic or evidence, and he deals with objections by ignoring or misrepresenting them. You can say the same about President Trump, but I’d hoped for better.

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Take the Tablet

My thoughts on risk assessment and Covid-19 policy are here.

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Are Old Lives Worth Less?

For cost-benefit analysis, the usual ballpark figure for the value of a life is about $10,000,000. But I keep hearing it suggested that when it comes to fighting a disease like Covid-19, which mostly kills the elderly, this value is too high. In other words, an old life is worth less than a young life.

I don’t see it.

People seem to have the intuition that ten years of remaining life are more precious than one year of remaining life. That’s fine, but here’s a counter-intuition: An additional dollar is more precious when you can spend it at the rate of a dime a year for ten years than when you’ve got to spend it all at once — for example, if your time is running out. (This is because of diminishing marginal utility of consumption within any given year). So being old means that both your life and your dollars have become less precious. Because we measure the value of life in terms of dollars, what matters is the ratio between preciousness-of-life and preciousness-of-dollars (or more precisely preciousness-of-dollars at the margin). If getting old means that the numerator and the denominator both shrink, it’s not so clear which way the ratio moves.

Instead of fighting over intuitions, let us calculate:

I. Value of Life for the Young

Suppose you’re a young person with 2 years to live and 2N dollars in the bank, which you plan to consume evenly over your lifetime, that is at the rate of $N per year. I’ll write your utility as

U(N,N)

Suppose also that you’re willing to forgo approximately pX dollars to avoid a small probability p of immediate death. Then (by definition!) X is the value of your life. (The reasons why this is the right definition are well known and have been discussed on this blog before. I won’t review them here.) This means that

(1-p)U(N,N) = U(N – (pX/2), N – (pX/2))

= U(N,N) – (pX/2)U1(N,N) – (pX/2)U2(N,N)

(where the last equal sign should be read as “approximately equal” and the Ui are partial derivatives).

Because you’ve optimized, U2(N,N) = U1(N,N), so we can write

X = U(N,N)/U1(N,N)

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Is It A Crime to Stop the Economy?

[I am happy to turn this space over to my former colleague and (I trust) lifelong friend Romans Pancs, who offers what he describes as

a polemical essay. It has no references and no confidence intervals. It has question marks. It makes a narrow point and does not weigh pros and cons. It is an input to a debate, not a divine revelation or a scientific truth.

I might quibble a bit — I’m not sure there’s such a thing as a contribution to a debate that nobody seems to be having. I’d prefer to see this as an invitation to start a thoughtful and reasoned debate that rises above the level of “this policy confers big benefits; therefore there’s no need to reckon with the costs before adopting it”. That invitation is unequivocally welcome. ]

—SL

It is a Crime to Stop the Economy

A Guest Post

by

Romans Pancs

The Main Argument

It is a crime against humanity for governments to stop a capitalist economy. It is a crime against those whom the economic recession will hit the hardest: those employed in the informal sector, those working hourly customer service jobs (e.g., cleaners, hairdressers, masseurs, music teachers, and waiters), the young, the old who may not have the luxury of another year on the planet to sit out this year (and then the subsequent recession) instead of living. It is a crime against those (e.g., teachers and cinema ushers) whose jobs will be replaced by technology a little faster than they had been preparing for. It is a crime against the old in whose name the society that they spent decades building is being dismantled, and in whose name the children and the grandchildren they spent lifetimes nourishing are subjected to discretionary deprivation. Most importantly, it is a crime against the values of Western democracies: commitment to freedoms, which transcend national borders, and commitment to economic prosperity as a solution to the many ills that had been plaguing civilisations for millennia.

Capitalism and democracy are impersonal mechanisms for resolving interpersonal (aka ethical) trade-offs. How these trade-offs are resolved responds to individual tastes, with no single individual acting as a dictator. Governments have neither sufficient information, nor goodwill, nor the requisite commitment power, nor the moral mandate to resolve these tradeoffs unilaterally. Before converting an economy into a planned economy and trying their hand at the game that Soviets had decades to master (and eventually lost) but Western governments have been justly constrained to avoid, Western governments ought to listen to what past market and democratic preferences reveal about what people actually want.

People want quality adjusted life years (QALY). People pay for QALY by purchasing gym subscriptions while smoking and for safety features in their cars while driving recklessly. Governments want sexy headlines and money to buy sexy headlines. Experts want to show off their craft. But people still want QALY, which means kids do not want to spend a year hungry and confined in a stuffy apartment with depressed and underemployed parents; which means the old want to continue socialising with their friends and, through the windows of their living rooms, watch the life continue instead of reliving the WWII; which means the middle-aged are willing to bet on retaining the dignity of keeping their jobs and taking care of their families against the 2% chance of dying from the virus.

Suppose 1% of the US population die from the virus. Suppose the value of life is 10 million USD, which is the number used by the US Department of Transportation. The US population is 330 million. The value of the induced 3.3 million deaths then is 33 trillion USD. With the US yearly GDP at 22 trillion, the value of these deaths is about a year and a half of lost income. Seemingly, the country should be willing to accept a 1.5 year-long shutdown in return for saving 1% of its citizens.

The above argument has three problems that overstate the attraction of the shutdown:

  1. The argument is based on the implicit and the unrealistic assumption that the economy will reinvent itself in the image of the productive capitalist economy that it was before the complete shutdown, and will do so as soon as the shutdown has been lifted.
  2. The argument neglects the fact that the virus disproportionately hits the old, who have fewer and less healthy years left to live.
  3. The argument neglects the fact that shutting down an economy costs lives. The months of the shutdown are lost months of life. Spending a year in a shutdown robs an American of a year out of the 80 years that he can be expected to live. This is a 1/80=%1.25 mortality rate, which the society pays in exchange for averting the 1% mortality rate from coronavirus.

It is hard to believe that individuals would be willing to stop the world and get off in order to avert a 1% death rate. Individuals naturally engage in risky activities such as driving, working (and suffering on-the-job accidents), and, more importantly, breathing. Allegedly, 200,000 Americans die from pollution every year. Halting an economy for a year would save all those people. Stopping the economy for 15 years would be even better, and save all the lives that coronavirus would take. Indeed, stopping the economy is a gift that keeps giving, every year, while coronavirus deaths can be averted only once. Yet, with the exception of some climate change fundamentalists, there were no calls for stopping the economy before the pandemic.

The economy shutdown due to coronavirus seems to be motivated by the same lack of faith in progress and society’s ability to mobilise to find technological solutions (if not for this strain of the virus then for the future ones), and by the Catholic belief in the virtue of self-flagellation of the kind sported by climate-change fundamentalists of Greta’s persuasion. This lack of faith is not wholly the responsibility of governments and is shared by the citizens.

Continue reading ‘Is It A Crime to Stop the Economy?’

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The Value of Life — What’s Wrong With This Picture?

Trapeze Artist

Edited to add: As Salim suggests in comments, the entire problem is that I assumed an implausible value for wealth (which should be interpreted as lifetime consumption). With a more plausible number, everything makes sense. Mea culpa for not realizing this right away. I will leave this post up as a monument to my rashness, but have inserted boldfaced comments in appropriate places to update for my new understanding.

This is bugging me. It’s a perfectly simple exercise in valuing lives for the purposes of cost-benefit analysis. I would not hesitate to assign it to my undergraduates. But it leads me to a very unsettling and unexpected place, and I want to know how to avoid that place.

It’s also a little geeky, so I hope someone geeky will answer — ideally, someone geeky who thinks about this stuff for a living.

Start here: You’re a trapeze artist who currently works without a net. There’s a small probability p that you’ll fall someday, and if you fall you’ll die. You have the opportunity to buy a net that is sure to save you. What are you willing to pay for that net?

Well, let’s take U to be your utility function and W your existing wealth. If you don’t buy the net, your expected utility is

p U(death)+(1-p) U(W)

But we can simplify this by adding a constant to your utility function so that U(death)=0. So if you don’t buy the net, your expected utility is just

(1-p )U(W)

If you do buy a net at price C, then you’re sure to live, with utility

U(W-C) = U(W) – C U′ (W)

where the equal sign means “approximately equal” and the approximation is justified by the assumption that the probability of falling (p) is small, so your willingness to pay (C) is presumably also small.

Equating these two expected utilities gives me C = p U(W)/U′ (W). If we set V = U(W)/U′ (W), then C = pV. That is, you’re willing to pay pV to protect yourself from a p-chance of death. This justifies calling V the “value of your life” and using this value in cost-benefit calculatios regarding public projects that have some small chance of saving your life (guard rails, fire protection, etc.)

So far, so good, I think. But now let’s see what happens when we posit a particular utility function.

I will posit U(W) = log (W), which is a perfectly standard choice for this sort of toy exercise, though actual real-world people are probably a bit more risk-averse than this. Except I can’t just leave it at U(W) = log(W), because my analysis requires me to add some constant T to make the utility of death equal to zero.

So let’s take E to be the income-equivalent of death; that is, living with E dollars is exactly as attractive as not living at all. Then I have to choose T so that log(E) + T = 0. In other words, T = -log(E).

Now I know that, with your current wealth equal to W, the value of your life is U(W)/U'(W) = W log(W/E) .

Now as a youngish but promising trapeze artist, you’ve probably got some modest savings, so lets make your current wealth W=50,000 (with everything measured in dollars). (Edited to add: This was the source of all the difficulty. W represents something like lifetime consumption, so 50,000 is a ridiculously small number. Let’s go with 5 million instead.) Then here is the value of your life, as a function of E, the income-equivalent of death.

If E = .0001 (that is, if dying seems just as attractive to you as living with your wealth equal one-one-hundredth of a penny), then the value of your life is $1 million. (Edited to add: This should actually be E= 4.1 million dollars, which is considerably more than one-one-hundredth of a penny.)

If E = 6.92 x 10-82, then the value of your life is $10 million. (Edited to add: This should be E = $677,000 which might be a plausible figure.)

If E = 1.29 x 10-864, then the value of your life is $100 million. (Edited to add: This should be E equal to about one cent, which is of course implausible, but that’s fine, because a $100 million value of life is also implausible.)

Edited to add: I won’t continue to edit the details in the rest of this post, but I think this is all straightened out now. Thanks to those who chimed in, and sorry to have taken your time on this!

Now I am extremely skeptical that you, I, or anyone else is capable of envisioning the difference between living on 10-82 dollars and living on 10-864 dollars. Yet the decision of whether to value your life at $10 million or at $100 million hinges entirely on which of these seems more to you to be the utility-equivalent of death.

There is some purely theoretical level at which this is no problem. It is possible that you’d rather die than live on 10-864 dollars and would rather live on 10-863 dollars than die. But I am extremely skeptical of any real-world cost-benefit analysis that hinges on this distinction.

(And this is the range in which we have to be worried, since empirical estimates of the value of life tend to come in somewhere around $10 million.)

If I make you less risk-averse — say with a relative risk aversion coefficient of 4 — almost the entire problem disappears. But the tiny part that remains is still plenty disturbing. Then I get:

If E = .007 (that is, about 2/3 of a penny), the value of your life is $1 million.

If E = .003 (about 1/3 of a penny), your life is worth $10 million.

If E = .0015 (a sixth of a penny), your life is worth $100 million.

So we need to tell the folks in accounting to value your life at either $1 million or $100 million, depending on where you draw the suicide line between having two thirds of a penny and having one sixth of a penny.

This is nuts, right? And how squeamish should it make me about the whole value-of-life literature? And what, if anything, am I missing?

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Oxycontin: Yea or Nay

Should oxycontin be legal? Here’s what the back of my envelope says:

oxycontinIn the U.S., there are about 50 million prescriptions a year for oxycontin, most of them legitimate and for the purpose of alleviating severe pain. I’m going to take a stab in the dark and guess that the average prescription is for a two-week supply.

There are also (at least if you believe what’s on the Internet) about 20,000 deaths a year in the U.S. related to oxycontin abuse. If we value a life at $10,000,000 (which is a standard estimate based on observed willingness-to-pay for life-preserving safety measures), that’s a cost of 200 billion dollars a year, or $4000 per prescription.

If those were all the costs and benefits, the conclusion would be that oxycontin should be legal if (and only if) the average American is willing to pay $4000 to avoid two weeks of severe pain. I’m guessing that might be true in some cases (particularly when the pain is excruciating) but not on average. So by that (incomplete) reckoning, oxycontin should either be off the market entirely or regulated in some entirely new way that will dramatically reduce those overdose deaths.

But of course what this overlooks on the benefit side is all the “abusers” whose lives have been enriched by oxycontin. This includes the vast majority who use and live to tell the tale, and also some of the OD’ers, for whom a few years of oxycontin highs might well have been preferable to a longer lifetime with no highs at all. Relatedly, what this overlooks on the cost side is that the average “abuser” is likely to value his life at considerably less than the typical $10 million — as evidenced by the fact that he’s electing to take these risks in the first place. Also relatedly, it overlooks the likelihood that many of those who overdose on oxycontin would, in its absence, be killing themselves some other way.

If the back of your envelope is larger than mine and you make those corrections, I’m reasonably confident that your bottom line will come out pro-oxycontin. (Please share that bottom line!) I am however, mildly surprised (and — both as a blogger who prefers slam-dunk arguments and as a libertarian who prefers to come down on the side of freedom — mildly disappointed) that the first quick-and-dirty calculation comes out the other way.

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Quadratic Voting: A Pre-Primer

In honor of the forthcoming visit of Glen Weyl to the University of Rochester, I thought I’d offer a post explaining the idea behind one of Glen’s signature policy reforms: quadratic voting.

Suppose we’re going to hold a referendum on, say, whether to build a street light in our neighborhood.

The problem with giving everybody one vote is that (on both sides of the issue) some people care a lot more about that street light than others do. We’d like those who care more to get more votes.

In fact, we’d like to allocate votes proportional to each voter’s willingness to pay to influence the outcome. There are excellent reasons to think that willingness-to-pay is the right measure of “caring”. Those reasons will be evident to readers with some knowledge of welfare economics and opaque to others, but it would take us to far afield for me to get into them here. (For the record, if you’re encountering this measure for the first time, you’re almost surely raising “obvious” objections to which there are non-obvious but excellent rejoinders.) For this discussion, I’m going to take it as given that this is the right way to allocate votes.

Here’s the problem: If I allocate votes based on willingness to pay, people will simply lie. If you’re willing to pay up to $1 to prevent the street light, but know that you can get more votes by exaggerating your passion, that’s what you’ll probably do.

Okay, then. If we want to allocate votes based on willingness to pay, then we have to make people actually put some money on the table and buy their votes, thereby proving that they care. We could, for example, sell votes for $1 each. That way, people who care more will buy more votes and have more influence, as they should.

Unfortunately, that’s not good enough. If you care more about the issue than I do, you might buy more votes than I do — but there’s no reason to think you’ll buy more votes in direct proportion to your willingness to pay. Let’s suppose, for example, that the ability to cast a vote is worth $2 to you and $4 to me. Then I should get twice as many votes as you. But if votes sell for $3, I might buy quite a few, whereas you’ll buy none at all. That’s a lot more than twice as many.

So let’s try again: Instead of selling votes for a fixed dollar amount, we sell them on an increasing scale. You can buy one vote for a dollar, or two votes for four dollars, or three votes for nine dollars — and we’ll even let you buy in tiny fractions, like 1/10 of a vote for a penny. The price you pay is the square of the number of votes you buy. That’s the definition of quadratic voting.

Why the square, as opposed to the cube or the square root or the exponential? There really is something special about the square. To appreciate it, try an example: If a vote is worth, say, $8 to you, you’ll keep buying additional votes as long as you can get them for less than $8 each, and then stop. With quadratic voting, one vote costs you a dollar. You’ll take it! A second vote costs you an extra $3 (bringing the total to $4). You’ll take that too! A third vote costs you an extra $5, a fourth costs you an extra $7, and a fifth costs you an extra $9. So you’ll buy 4 votes and then stop. You can similarly check that if a vote is worth $24 to your cousin Jeter, Jeter will buy twelve votes and then stop. Jeter cares three times as much as you do, and he buys three times as many votes. And with a little calculus, you can check that if Aunt Murgatroyd’s vote is worth four or five or nine or twenty times more to her than your vote is to you, she’ll buy exactly four or five or nine or twenty times as many votes as you do. That’s exactly what we wanted. In that sense, this voting scheme works — and, except for minor variations, it’s the only scheme that works.

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Efficient Tariffs

You’re a policymaker in a country where people buy widgets that are produced both at home and abroad. You can set (separate) excise tax rates on domestic production and imports. (The tax on imports is, of course, what we usually call a tariff.) What tax rates should you set?

The Economics 101 answer makes two assumptions:

1. You care only about the economic welfare of your citizens (and not at all about foreigners).

2. You can’t affect foreign prices (i.e. your country is a negligible portion of the world market for widgets). The fancy way to say this is that the supply of imports is perfectly elastic.

From these assumptions, it follows that both tax rates should be zero. In fact, we can relax assumption 1) and allow you to care as much as you want about the welfare of foreigners; the conclusion doesn’t change.

But suppose we relax these assumptions in a different way:

1A. You care about both the economic welfare of your citizens and (separately) about the tax revenue earned by your government. (I continue to assume, however, that you don’t care about foreigners.)

2A. The foreign supply curve might not be perfectly elastic. Contrary to the Economics 101 assumption, this gives you some market power that you might want to exploit. (I continue to assume, though, that you take the foreign supply curve as given. In particular, this means that your policies do not affect foreign tax rates, so I am assuming away things like retaliatory tariffs.)

Now what’s your best policy? I can’t answer that because you have two competing goals (economic welfare and tax revenue) and I don’t know how much weight you put on one versus the other. But surely if I can show you that Policy A delivers on both goals better than Policy B, you’ll want to reject Policy B. The existence of Policy A leads me to call Policy B inefficient, and surely you’ll want to reject any inefficient policy.

So which pairs of tax rates are efficient?

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Down on the Farms

Suppose there’s a guy in your neighborhood who routinely harasses strangers on the street, calling them ugly names, maybe threatening them with violence, but always stopping short of anything that’s actually illegal.

You consider this bad behavior, so you work to pass some laws that will discourage it. Maybe you criminalize the behavior; maybe you tax it.

The new laws turn out to be somewhat effective. The guy tones it down. He still harasses people, but only half as much.

Question: Do we owe this guy something? Should the taxpayers cut him a check so he won’t feel so bad about having to rein himself in?

I’m going to go out on a limb and guess that most of you will answer “no”.

Here’s why I ask:

The President of the United States believes that under current circumstances, much international trade is a bad thing and ought to be discouraged. Unfortunately, there’s a bunch of farmers out there who have been behaving very badly (i.e. trading with foreigners) and the law hasn’t done much to stop them. So the President has expanded the scope of the law to punish this bad behavior via tariffs. And then he’s turned right around and announced a plan to compensate the bad guys.

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Good Intentions; Bad Policy

I learn from Scott Sumner’s blog that in many California cities, residents with past marijuana convictions will jump to the head of the line for licenses to sell the drug legally — this by way of compensating them for past persecution.

Scott approves. I don’t, for two reasons:

First, if you want to compensate people for past persecution, the right way to do it is with cash, not by misallocating productive resources. If there must be licenses, they should be allocated to those who can use them most efficiently, regardless of any past history.

Second, drug dealers have never been the primary victims of anti-drug laws. They can’t be, because there is free entry and exit from that industry. Anti-drug enforcement leads to exit, which in turn leads to higher profits for those who remain — and the exit continues until the profits are high enough to compensate for the risks. One way to think about this: All those “persecuted” drug dealers were, in effect, employing the government to stifle their competition, and paying a fair price for that privilege in the form of occasionally being convicted and punished themselves.

The primary victims of anti-drug legislation are potential consumers who were deterred by artificially high prices. How do you compensate those victims? You can’t. In a population of 1000 people who have never used drugs, it’s quite impossible to identify the 200 or 300 or 400 who would have happily indulged if only the price had been lower.

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The Tax Bill

Compared to an ideal tax code, it’s awful.

Compared to the pre-existing tax code, it’s a vast improvement.

Compared to my expectations going in, it’s a pleasant surprise. It required some real political courage to pass this thing, and political courage always surprises me. There’s also a lot of good sense in it, which sometimes surprises me even more.

Compared to what I suspect we could have had, if only that same good sense and political courage had been harnessed by a president who was capable of understanding the bill’s content, participating in its formulation, and selling it to the public, it’s something of a disappointment.

Scott Sumner does a superb job of summarizing the good, the bad and the neutral. Instead of quoting him extensively, I’ll (strongly) encourage you to go read the original. A few additional remarks:

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It’s All About the Rectangles

Greg Mankiw has a provocative post on how wages are affected by a cut in the tax rate on capital income. The short version: The effect is huge. If the government commits to a permanent tax cut that costs it $1 in revenue this year, then in the long run, annual wage payments will rise by $1.50 (and the annual revenue shortfall will be even less than $1).
.

That strikes me as huge. Wages grow by more than government revenue falls — in fact, by a factor of about 1/(1-t), where t is the initial tax rate. Mankiw’s $1.50 comes from plugging in an initial tax rate of 1/3.

Although Mankiw’s calculation is simple, straightforward and convincing, it managed to drive me crazy for a substantial chunk of a day, because I didn’t really understand what was driving it. Now I do. So let me explain.

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Unhealthy

I have not read the Senate “health care” bill, but from the various summaries around the web, I am confident that Barack Obama is exactly correct in his pronouncement that this is not a health care bill. Republicans seem to be supporting the bill because it stems the tide of income redistribution and Democrats seem to be opposing it for the same reason.

But a health care bill that does nothing but change the distribution of income is (again in Obama’s words) not a health care bill. It’s an income redistribution bill, and a fairly stupid one at that. If you want either more or less redistribution, the way to do that is to adjust taxes on rich people and payments to poor people, not to muck around with the health care system.

On the other hand, if your goal is to make the health care system more efficient, then you’ll want a health care bill. What would it take to make the health care system more efficient? For one thing, it would require making people less reliant on insurance and more reliant on their own savings (probably in the form of Flexible Saving Accounts and Health Saving Accounts) so that their choices are constrained by an awareness of costs. This Senate bill, it seems, does absolutely nothing to address those issues. In fact, from what I’ve read, it leaves in place the tax deduction for employer-provided insurance (thereby continuing to incentivize people to buy too much insurance) and (at least according to some news articles) adds new taxes on Health Savings Accounts (thereby incentivizing people to rely even more on insurance). If we’re supposed to be marching toward more efficient health care, this sounds like a step backward, not forward.

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Information, Please

Why do we need a national health policy, any more than we need a national grocery policy or a national automobile policy or a national matchmaking policy?

Over on another recent thread, one of our commenters keeps pointing to allegedly unique “information issues” in the market for health care. So let’s see how unique those issues really are.

First, there are issues like adverse selection. The very fact that you’re buying insurance makes sellers suspect you’re sick, and they charge accordingly. Therefore if you’re not sick you overpay, and because you overpay you’re likely to underinsure.

That issue is not unique to health insurance. It also plagues the markets for car insurance and homeowner’s insurance, along with plenty of other markets. The very fact that you’re selling a used air conditioner makes buyers suspect there’s something wrong with it, and they lowball their offers accordingly. Therefore, you can’t get a good price even for a perfectly good air conditioner, and because you can’t get a good price you’re less likely to list it for sale in the first place. That’s exactly the same adverse selection problem (with buyers and sellers reversed), but there’s no general clamor for a national used-air-conditioner policy.

That’s not to say that adverse selection is unimportant, or that we shouldn’t try to address it, and it’s not deny that it might loom larger in some markets than others. But it’s far from unique to the market for health insurance.

Another information issue — one being flogged endlessly by a persistent commenter in that other thread — is that providers generally know a lot more than their customers do about the merits of various medical procedures. This is presented as if it were a reason for providers (e.g. doctors, insurance companies, or federal program administrators) to make key decisions, as opposed to presenting the customer with a price list from which to choose — the same method that seems to work perfectly well in restaurants, auto repair shops and lawyers’ offices.

But all of this overlooks the biggest information issue of all which is this: Only the customer knows whether he’d prefer, say, three weeks of pain relief to, say, a new car stereo, or whether he’d prefer, say, a slight lifelong reduction in heart attack risk to, say, an extra five restaurant meals every year.

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The Dire Prognosis

Here is what I wrote on this blog the day after the election:

The big loss is that there will be no unified right-of-center voice in American politics. Toomey, Portman and the rest of them will do what they can, but it’s Trump who will be taken to define Republicanism, which is to say that Republicanism will henceforth be pretty much the same thing as Democratism.

It gives me no pleasure to observe that with the new Trump-endorsed Republican health care plan, I stand vindicated.

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Missed Opportunities

I haven’t seen any of the details, but it looks like the Republican health care plan suffers from many of the same defects as Obamacare, and is in some ways worse.

Mainly: As far as I am currently aware, the plan pretty much leaves in place the main ongoing problem with health care, which is that most people are grossly overinsured, so that health care choices are too frequently made by insurance companies instead of by (cost-aware) consumers and providers. The solution, in broad terms, is to replace insurance with individual health savings accounts (which, if you’re worried about this sort of thing, can be just as heavily subsidized as insurance is). Plenty of Republicans know this, and have been saying it for a long time. But — at least according to what’s in the early news reports — they seem to have come up with a bill that ignores it.

In fact, the Republican bill makes things worse in at least one way, by lifting the Cadillac tax on employer-provided health care plans, thereby encouraging even more overinsurance.

Presumably this was the compromise among feuding factions that the Republican caucus was able to hammer out. Presumably, too, a little leadership from the one person with veto power could have yielded a much better outcome. Too bad the one person with veto power is a self-obsessed loonybird. I do believe a President Bush or a President Cruz — or even, perhaps, a President Clinton — would have insisted on something far far better.

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Doing Right by Veterans

There are approximately 22 million veterans of the United States Armed Forces. They are served — not always well — by the Veterans Administration, with a budget of about $182 billion a year. That’s almost $8300 per veteran per year.

Which raises the question: Why, exactly, do we have a Veterans Administration? My guess (and admittedly it’s only a guess) is that an overwhelming majority of those veterans would much prefer to lose the VA and get a check for $8300 every year instead.

Of course some veterans get end up claiming a lot more than $8300 a year in VA services due, for example, to combat-related trauma that manifests itself only years after leaving the service. But with $8300 a year, you can buy a lot of insurance against such contingencies (and with 22 million veterans each having $8300 a year to spend, there are sure to be a lot of new insurance products available).

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The Dilbert View

scottadamsThroughout this election season, Scott Adams (the Dilbert guy) has been right when I (and a whole lot of others) have been wrong. On his blog, Adams kept patiently explaining why Donald Trump would be a strong contender, while I and a great many others believed (or maybe just hoped and therefore believed we believed?) that Trump was a flash in the pan. Each of the many times that Trump seemed to take himself out of contention, Adams predicted he’d survive and even thrive — and each time, Adams was right.

Now, however, Adams has turned his attention from Trump’s merits as a candidate (where Adams seems to have had a great deal of insight) to Trump’s merits as a potential president. And here, despite all his past successes, I am quite sure that Adams has outrun his expertise. Policy analysis and political analysis are, after all, two very different things.

From Adams’s most recent blog post:

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Homer Nods

mankiwBetween his blog, his New York Times columns and his textbooks, Greg Mankiw has probably contributed more than anyone else alive to the cause of economic literacy. But his most recent column is, I think, a rare miss.

The thrust of the column is that the estate tax is a bad idea because it violates the principle of horizontal equity by imposing substantially different tax burdens on substantially similar people:

Consider the story of two couples. Both start family businesses when they are young. They work hard, and their businesses prosper beyond anything they expected. When they reach retirement age, both couples sell their businesses. After paying taxes on the sale, they are each left with a sizable nest egg of, say, $20 million, which they plan to enjoy during their golden years.

Then the stories diverge. One couple, whom I’ll call the Frugals, live modestly. Mr. and Mrs. Frugal don’t scrimp, but they watch their spending. They recognize how lucky they have been, and they want to share their success with their children, grandchildren, nephews and nieces.

The other couple, whom I’ll call the Profligates, have a different view of their wealth. They earned it, and they want to enjoy every penny of it themselves. Mr. and Mrs. Profligate eat at top restaurants, drink rare wines, drive flashy cars and maintain several homes. They spend their time sailing the Caribbean in their opulent yacht and flying their private jet from one luxury resort to the next.

So here’s the question: How should the tax burdens of the two couples compare? Under an income tax, the couples would pay the same, because they earned the same income. Under a consumption tax, Mr. and Mrs. Profligate would pay more because of their lavish living (though the Frugals’ descendants would also pay when they spend their inheritance). But under our current system, which combines an income tax and an estate tax, the Frugal family has the higher tax burden. To me, this does not seem right.

The problem with this argument is that it’s not an argument against the estate tax. It’s an argument against any tax (other than a pure $X-per-person-per-year head tax). Try it:

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The All-Purpose Defense

President Obama, defending the Trans-Pacific Partnership, just said something very like the following (I heard this on the radio and am quoting from memory):

And another thing: You’ve got to compare this to the realistic alternatives. It’s not fair to compare it to some ideal, unachievable arrangement where we get to sell things all over the world and never buy anything.

Oh. I assume, then, that he’ll be defending his jobs program in terms something like this:

And another thing: You’ve got to compare this to the realistic alternatives. It’s not fair to compare it to some ideal, unachievable arrangement where we get to work all day and never get paid.

For that matter, this also works as a defense of Obamacare:

And another thing: You’ve got to compare this to the realistic alternatives. It’s not fair to compare it to some ideal, unachievable arrangement where get to spend all our time in hospitals and never get well.

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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.

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