Conflicting Opinions

I know I should have been done with this last year, but after coming across this piece of Fedspeak reported by Mark Thoma, I couldn't resist.

You'd have to dig pretty far down in the duffle bag of economists to find one who actually believes in the Philips Curve...

--Arthur Laffer, Founder and Chairman, Laffer Associates, Wall Street Journal, August 24, 2006

The Phillips curve is a core component of every realistic macroeconomic model.

--Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco, speech, Boston Fed Conference on Behavioral Economics, September 28, 2007


(Perhaps they keep the realists at the bottom of the duffle bag?)

Behavioral Economics and Economies of Scale

Via Greg Mankiw, we have this from Jane Galt:

....behavioural economics, which the left seems to believe is a magical proof of the benevolence of government intervention, because after all, people are stupid, so they need the government to protect them from themselves. My take is a little subtler than that:

1. People are often stupid.
   
2. Bureaucrats are the same stupid people, with bad incentives.

I think Jane is wrong, partly anyway. The arguments about bad bureaucratic incentives are as strong as ever, but behavioral economics does provide a significant shift in the overall balance toward the side of government intervention. As raw material, bureaucrats are the same stupid people as the general population, but unlike the general population, they can be trained, at relatively little cost, to be less stupid.

Bureaucrats can be trained to make rational decisions in their particular areas of responsibility. Since only a fraction of the population are bureaucrats, and since the training for each bureaucrat can be limited, this training is feasible, whereas it would be prohibitively expensive to train the general population to make rational decisions in every area of their lives. In actual practice, I believe, most bureaucrats – well, many bureaucrats, anyhow – have been trained to do cost-benefit analyses and to recognize and judge the relevant costs and benefits. The average person standing in a drugstore or a grocery store has not had – and should not be required to have – the education needed to be an FDA administrator.

I see training as a special case of economies of scale that are involved in rational decision making. Even for a highly rational person, it is simply impractical – indeed, irrational – to make every decision rationally, or even to make most decisions rationally. It is costly to counter the brain’s natural irrational tendencies, and there are too many decisions to make; most of them have to be made by the not-so-intelligently designed autopilot. But when one person can make a decision for a large group, it becomes efficient to invest the resources required to produce a rational decision, even if the decision is one that a rational individual would not decide to decide rationally for herself.