How many people have lost their jobs?

According to Barack Obama, 600 thousand Americans have lost their jobs since January. Actually, he's wrong: something like 20 million Americans have lost their jobs since January. It's just that most of them found new jobs. Probably the new jobs generally weren't as good as the ones they lost. And almost certainly, more than 600 thousand of them were unable to find new jobs, because many of the new jobs created were filled by new entrants to the labor force or by people who were already unemployed when the year began.

Like almost everyone else I've ever heard, Senator Obama is making the mistake of using a net job loss figure with language that, if taken in its plain sense, clearly implies he is talking about gross job loss. And it seems to me that gross job loss is the appropriate concept: losing your job is a pretty serious bummer, even if you are able to find a new one after a few months.

There has been a lot of talk about Senator McCain and how he has been saying things that aren't true in order benefit himself politically. It turns out that Senator Obama is also (obviously unintentionally) saying things that aren't true, but in this case they benefit his opponent.

The Race Card

There’s a popular theory now (see for example Mark Kleiman here and here) that Clinton’s strategy is in South Carolina is essentially to lose and to blame the loss on near-universal black support for Obama, thus making Obama the black candidate – the one representing black people – and thereby making him unattractive to white voters in future primaries. I must say, the logic makes sense, but I just don’t understand the premise; it doesn’t ring true for me. Let me say that I am, as I avowed in an earlier post, an Obama supporter, certainly not an apologist for Clinton. And let me also say that I’m probably wrong: I’m no expert in political strategy, and when I say I don’t understand, I’m not trying to play Socrates; I’m genuinely curious. (Now that I think about it, if Socrates hadn’t actually been Socrates, he probably would have denied that he was trying to play Socrates too. But Socrates must have developed a reputation of being wise in philosophical matters, whereas I’m fairly safe from being considered wise in political matters.)

I just find it really hard to believe that the average Democrat – well, let’s say the average undecided Democrat – is enough of a racist to vote against a candidate just because that candidate is a black man with near-universal black support. I’m white, myself, and I don’t think I’m a racist, but I’m hardly the exemplar of politically correct non-racism, and I don’t have the sense that my attitude toward people of other races is much different from that of the average white Democrat. (I’m taking into account, of course, the way I imagine party alignments have changed, or in some cases even reversed, since 1965, but perhaps they haven’t changed as much as I thought?) Certainly, as much as the next white guy, I don’t want Willie Horton anywhere near me or my family. (For the record, though, I did vote for Dukakis.)

But I surely cannot imagine myself, assuming I were still on the fence, deciding to vote for Clinton because Obama looked too much like the representative of black people. If anything, for a perhaps slightly racist person like me who naturally doesn’t like to think of himself as being slightly racist, if I have other reasons to like a candidate, then the blacker he is, the better. After all, voting for Obama, the black candidate and the candidate of black people, shows that I’m not a racist, and gives the lie to all those bleedingheart liberals who might want to claim that I am. If Obama were just some candidate who technically happened to be black, there wouldn’t be nearly as much advantage in voting for him. And if I were the exemplar of politically correct non-racism, the advantage wouldn’t be there, because I would have no need to prove that I’m not a racist.

The comparison is made with Jesse Jackson, who was the black candidate when he ran and was not well-liked by white Democrats, particularly moderate white Democrats. But surely (am I being naïve here?) it was Jesse Jackson’s political opinions, not his race or his racial support, that turned off so many white voters. Clearly, Barrack Obama’s opinions are quite different from Jesse Jackson’s – if anything, to hear many of the liberal pundits tell it, the problem with Obama’s opinions is that they are too far from those of Jesse Jackson. Am I being naïve here? I knew some white people who supported Jesse Jackson, and I’m pretty sure it was because of his positions, not because of his race. And I knew some white people who opposed Jesse Jackson, and it sure seemed to me that they opposed him for the same reason that the others supported him.

Obama and Abortion

I’m a Democrat, and as of Saturday, I am no longer “leaning toward Obama”; I am an Obama supporter. (Unfortunately, I’ll be out of town on primary night.)

I’m also pro-abortion. Not pro-choice: I’m one of those people that Hilary Clinton hasn’t met, who is actually pro-abortion. (I don’t think I’ll try to explain this any further, because my opinions are probably extreme enough to offend even the feminists and civil libertarians with whom I find common cause.)

You might wonder, given that I’m pro-abortion, why I would support Obama. After all, as Clinton’s campaign informed New Hampshire voters,

Obama refuses to stand up for a woman's right to choose and repeatedly voted `present' on important legislation. As a State Senator, Obama voted `present' on seven abortion bills, including critical late term abortion procedure, two parental notification laws and three 'born alive' bills.

You may recall that Bill Clinton once “did not volunteer” certain relevant information with respect to an answer he gave in deposition. (Coincidentally, the information he did not volunteer also concerned something could be considered a form of birth control.) In this case, Hilary did not volunteer certain relevant information.

The information she (or her campaign) did not volunteer is that, in the Illinois legislature, voting “present” is equivalent to voting “no,” because a majority of “yes” votes are required for a measure to pass. Granted, “present” and “no” are not exactly the same, but the difference in this case is not a substantive one. The Clinton campaign said that it decided to put out the information in the quotation above because “as Senator Obama has said, ‘voting records matter.’” Of course, when Senator Obama said that voting records matter, his point was that, if you want to ascertain a candidate’s position on specific issues, you should watch what the candidate does rather than just listening to what he says. Apparently, the Clinton campaign’s response to Obama’s suggestion to look at substance rather than just rhetoric was to exploit a non-substantive aspect of Obama’s record in such a way as to blatantly mislead the reader as to its substance.

When politicians lie about something I don’t have strong opinions about (like with whom Bill Clinton did or did not have sexual relations) it doesn’t bother me that much. When they make blatantly misleading statements about something that I do have a strong opinion about, that pisses me off.

I wonder if it’s too late to get an absentee ballot.

Obama and the Progressives

I'm just wondering if Senator Obama is pursuing a calculated strategy of saying things that get pundits on the left pissed at him. It probably won't help him win the nomination, but when and if he does win, it could help in the general election, and it could help even more in the process of governing. What better way, for example, to get the 8 or so Republican votes he will need to close debate on his health care plan in the Senate than by saying, "Paul Krugman hated this idea."

The Economics and Politics of Trade

Paul Krugman (hat tip: Mark Thoma, as usual) says:

…I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Greg Mankiw asks:

But what if those who are worried about trade are protectionists? Should we still respect them?

Until Paul Krugman gives his own answer, I think we can presume that the answer is yes. Respecting protectionists doesn’t mean we are willing to give in to their protectionist demands, but it does mean that we appreciate their concerns and presumably that we are interested in finding some way of accommodating those concerns, short of actual protectionist policies.

It helps, I think, to separate the positive question from the normative question. The positive question is, “Who is helped by trade, and who is harmed?” The normative question, in the abstract, is, “How much weight should we give to the interests of the various parties that are helped and harmed by trade?” Twenty years ago, there was an easy answer to the first question: “Nearly everyone is helped in the long run, and in the short run, only people in a few specific industries are harmed.” That made the answer to the normative question irrelevant. Unless one wanted to give a ridiculously high weight to the short run interests of industries that were hurt by trade, the conclusion was always that trade was good, and protectionism was bad. And anyone who disagreed could be written off as either representing a special interest or misunderstanding the positive economics, thus not deserving our respect.

The answer to the positive question is no longer easy, and Prof. Krugman suggests that the answer now may be something like this: “Rich Americans and poor foreigners are helped, while typical Americans are harmed.” I think most American economists, including both Greg Mankiw and Paul Krugman, will agree with my answer to the normative question: “Since poor foreigners are much, much, much, much poorer than typical Americans, any reasonable notion of distributive justice, utilitarian optimization, or human charity requires that we give more weight to the interests of poor foreigners.” But that answer is unattractively convenient for American economists, since, whether or not they are personally rich, they fall into the functionally defined category of “rich Americans” that benefit from trade. As Archie Bunker once said, “It’s always good to be generous when it don’t cost you nothing.”

The ultimate answer may be even more convenient for Paul Krugman, because it justifies his prior political preferences. He advocates addressing the concerns of protectionists by means of (broadly speaking) redistributionist policies that benefit typical Americans (trade losers) at the expense of rich Americans (trade winners). That answer is convenient, but nonetheless, provided that Prof. Krugman can substantiate his positive conclusions, pretty convincing (though perhaps I’m not one to judge, since I tend to agree with his prior political preferences anyhow). Whatever ones initial preferences regarding equity-efficiency tradeoffs, a recognition of the politics of trade should shift them a bit to the equity side. Or, more precisely, if the marginal efficiency gains (and equity gains at the global level) from trade are first order and you are already at your domestic optimum for the equity-efficiency tradeoff, then, with the introduction of the political constraint, the envelope theorem requires that you revise that domestic optimum.

Compulsory vs. Voluntary Voting

Apropos of a recent post on Economist’s View, I was going to explain that voter turnout has nothing to do with the free rider problem and that basic economic logic suggests that smaller turnouts are better than larger ones, but Radek (a.k.a. YouNotSneaky!) beat me to it.

In the end, though, I think Radek is wrong, because we need some political logic to supplement the economic logic. To begin with, economic logic will indicate that voting is, for the individual, irrational, unless it is mandatory. Therefore (here’s the political part), under a voluntary voting regime, only irrational people will vote. Do we really want government by the irrational, for the irrational, and of the irrational?

This may sound like a bit of sophistry, but I really think it has some relevance to the real world. Generally, people with strong opinions – opinions that are strong enough to make people do something irrational – will vote (plus maybe a few people whose only strong opinion is about their own civic duty). Radek seems to think this is good, because the people with strong opinions will be better informed and will have thought more about the choices. I’m willing to concede that point in some contexts – in particular, when we’re operating, as it were, close to the center of the distribution of policy possibilities. But when we get into the tails of the distribution, things get weird. The people with really crazy opinions – that Aryans are a master race, that Muslims must conquer the world and establish a Caliphate with worldwide dominion, etc. – are the ones who can most be counted on to do irrational things, like voting, to further their cause. If you have 60% voter turnout, one group of crazies can take over by converting 31% of the population. That’s a difficult task, but history suggests it’s sometimes possible. If you have compulsory voting, the crazies have the significantly more difficult (but, again, history suggests, not impossible) task of converting 51% (well, OK, maybe 48%, since there won’t be perfect compliance) of the population. Under normal circumstances, compulsory voting isn’t going to have a dramatic effect on election outcomes, because, let’s face it, the candidates usually aren’t all that different in the grand scheme of things. But in the occasional weird case where the election really matters a whole hell of a lot, compulsory voting reduces the chance that dangerously insane people can take over the country. That might be worth all the extra shoe leather.

Mark Thoma has a different take. He does seem to think that 100% voter turnout would be a good thing, but he thinks that compulsory voting would be too much of an imposition on people’s liberty. But I have a suggestion: Start with a compulsory voting regime. Enforce it by using fines. Rename the fines, and call them taxes. In the case of people who do vote, rename the absence of a fine, and call it a tax with an offsetting transfer, actually not so much a transfer as a payment for the service of voting. So now we have a lump sum tax offset in most cases by a payment for a public service performed by the individual. The individual is free to pay the tax and not do the service, but presumably we set the payment high enough that only a few people will choose that option. Does Mark still object?


[Update: Thinking about my last paragraph, I realize it has an obvious implication about whose political interests are served by compulsory voting: the interests of those whose shadow price of time is low – which is to say, poorer people (and perhaps retirees). If your shadow price of time is high, the penalty for not voting will be outweighed by the value of your time, so the voting requirement won’t change your behavior. If your shadow price of time is low, the penalty will outweigh the value of your time, and you’ll definitely vote. So the voting requirement will shift election outcomes toward the side of the these low-shadow-price people – presumably people who can’t get well-paid employment on the margin, which is to say, typically, poor people. Voluntary voting, on the other hand, is, relatively speaking, good for the political interests of corporate lawyers and investment bankers.]

Social Security

According to Greg Mankiw,

Concern about social security's future comes not from decades of scare-mongering by conservative ideologues but from decades of dispassionate analysis by some of the best policy economists.

He cites a 1998 statement by Bill Clinton and another by President Clinton’s Advisory Council on Social Security. Greg certainly has a point that Paul Krugman is stretching by using the word “decades,” since 1998 was less than a decade ago, and there were, at the time, clearly many relatively liberal policy analysts who were concerned about the future of Social Security (though I think the most vocal expressions of concern came from conservatives). But I think Greg is also being a bit disingenuous here.

Though I know little about the details of Social Security projections, I know something about the assumptions that go into them, and those assumptions, I’m pretty sure, have changed dramatically between 1997 (when the Advisory Council published its report) and 2007. The title of the report is “Report of the 1994-1996 Advisory Council on Social Security,” which suggests that the analysis was done before 1997, at a time when the US productivity slowdown that began in the 1970s still appeared to be an ongoing process. When productivity grows slowly, the outlook for Social Security looks bad.

Starting in the mid-1990s, but not fully apparent in available statistics until the decade was drawing to a close, US productivity accelerated to growth rates not seen since the 1960s. Productivity in the early 2000s appeared to accelerate even further. Over the past couple of years, productivity has appeared to decelerate again, but this deceleration is at least partly a cyclical phenomenon that is not expected to last (and, for the last two quarters, I might add, productivity has accelerated again, although that acceleration is also suspect). Certainly the average expectation of economists today would call for much faster productivity growth in the future than did the average expectation in 1996. When productivity grows quickly, the outlook for Social Security looks fine.

One could, however, make the point that, if we want to be honest with ourselves, we really don’t have much of a clue whether the Social Security system is in trouble or not. Any expectation – high, low, or in between – about the future rate of productivity growth is scarcely more than a slightly educated guess. To be truly conservative, we should make the worst reasonable assumption (based still on only a slightly educated guess as to what range of assumptions is reasonable), and use that assumption in the analysis, which will then tell us that Social Security is in trouble. So on this issue at least, the conservatives (and Barrack Obama) really are being conservative.

But I still have a problem with Senator Obama’s conservative position. As I understand it, the Medicare system fails even under fairly optimistic assumptions about productivity. If you make the assumptions bad enough to make Social Security require significant changes, you’ve made them so bad that the Medicare system requires a complete overhaul and damn near goes broke anyway. Given our limited analytic and political resources in coming up with and implementing solutions to these problems, doesn’t it make sense to spend those resources in such a way that we at least have a chance of coming out OK – that is, spend them on a Medicare overhaul that is almost surely necessary, rather than on a Social Security overhaul that may or may not be necessary?

More about Morality and Global Warming

In response to my previous post it has been suggested, as I expected it would be, that global warming is a moral issue because it concerns our moral obligation to future generations. I disagree, because I don’t think that those who oppose action on global warming are any less concerned about future generations. They just disagree about the best way to serve those generations. The disagreement is an economic/scientific/technological one and not a moral one. As usual, each side has tried to make the issue into a moral one by claiming that the other side has ulterior motives. For some interested parties, no doubt, there are ulterior motives, but the same is true of almost any political disagreement.

There is almost certainly a tradeoff between economic growth and action to reduce global warming. There is room for considerable disagreement about the terms of that tradeoff, but it would be foolish to deny that a tradeoff exists. Future generations are the ones who will benefit most from economic growth. People who oppose action on global warming argue that the negative impact of such action on future generations by reducing economic growth will exceed the positive impact by reducing global warming.*

On the margin, of course, they are clearly wrong, provided that all the relevant functions are continuously differentiable. If there is some positive chance of harm from global warming, then there is some cost that is worth paying in order to reduce global warming. The optimal Pigovian tax is nonzero. It is, however, reasonably argued that some of the relevant functions are not well-behaved. If there is a “critical mass” involved in reducing global warming, the cost of attaining that critical mass may not be worth paying. Or if there is a cost to the precedent of, for example, instituting a Pigovian tax, then even a small tax may be detrimental. I don’t find these arguments convincing, mostly because I think that the expected benefits of effective action against global warming (averaging over the entire range of possibilities) are extremely high, but it is a reasonable matter for dispute (at least theoretically).

The big problem with viewing any issue as a moral one is that it more or less ends the discussion. Those who disagree with you will never be convinced, because their morality is different from yours.

*Another way to put this discussion is that economic growth, properly measured, is by definition the only thing that benefits future generations. Proper measurement would require subtracting the harmful impact of global warming. The question, then, is whether action on global warming would ultimately increase or reduce properly measured economic growth.

Not a Moral Issue

According to Al Gore, speaking at the Oscars a few hours ago, global warming is “not a political issue; it’s a moral issue.” He’s wrong.

Viewing global warming as a moral issue is like viewing inflation as a moral issue. Telling people it’s immoral to overuse carbon-based fuels is like telling people it’s immoral to raise prices. WIN buttons didn’t help with the inflation problem in the 1970s, and the environmental equivalent of WIN buttons won’t help with the global warming problem. The problem in responding to global warming is one of coordinating our response, and that is precisely a political problem.

Unfortunately it’s a very difficult political problem. President Carter was ultimately able to solve the US inflation problem relatively easily by appointing Paul Volcker as Fed Chairman and letting Volcker take the heat for the necessary adjustments. By making money scarcer, Volcker’s Fed provided the incentives that induced businesses (and labor unions) to coordinate their pricing policies. Dealing with global warming will require much wider coordination (it can’t be done one nation at a time), and there is no existing mechanism to provide an independent scapegoat for the pain that may be involved.

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.

Miscellaneous Political Thoughts

John Kerry’s “stuck in Iraq” gaffe probably helped the Democrats – by narrowing the field of 2008 contenders.

It’s appropriate that McCain is the perceived Republican front-runner, since he represents probably the only literally red state in the country. (Ever flown over Arizona?)

Obama’s stock has got to be rising now that the “charismatic black guy” formula tested so well in the Massachusetts governor’s race. (Deval Patrick shot way ahead in the primaries and then trounced the current lieutenant governor despite some significant negatives.) But…

Romney is positioning himself as the real conservative in the Presidential race? The current governor of Massachusetts? Yes, I said Massachusetts. Hello?

Energy Independence?

The issue of energy independence has come into the US political limelight recently. But the whole project seems pretty hopeless to me. A policy to move toward energy independence requires 3 components:

1. Reduce domestic energy consumption.


2. Conserve domestic energy resources.


3. Maintain and improve domestic energy production infrastructure.

To do any one of these 3 things on a significant scale would be rather a tall order. But to do all 3 of them at once without violating international trade rules? Anyone who can figure out a set of policies that achieves that deserves some kind of prize. But I’m not sure she deserves many votes, and I expect she will get even fewer votes than she deserves. “Energy independence” is a nice buzzphrase, but when it comes to actual policies, even any 2 out of 3 would be a tough sell.

The toughest part, logistically speaking, is combining components 2 and 3. The less of our domestic resources we use up, the more our energy production infrastructure is likely to deteriorate. The one way out is to develop new, renewable energy resources. But can we do that on a large enough scale? And can we do it on a large enough scale while at the same time reducing our overall consumption? And can we do it on a large enough scale while at the same time reducing our overall consumption without violating trade rules? And if we can do all that, can it possibly be worth the cost?

Join the Club

In reaction to this, I’m ready to join Greg Mankiw’s Pigou Club (people who support Pigovian taxes on carbon-based energy to deal with global warming – or other detrimental external effects of energy consumption – in an efficient way). There are a few reasons I might not be accepted, though:

1. I’m not sure that anonymous bloggers are qualified for admission.


2. I have to confess that my rationale is not 100% Pigovian. It seems clear to me that, even if Al Gore is only a little bit right about the causes and consequences of global warming, the optimal Pigovian tax is extremely high – much higher than what would be politically feasible (in the US) even in my wildest dreams. Energy demand is just not elastic enough, even in the long run, and the social costs of global warming are too high. So, for practical purposes, I see any increase in energy taxes more as a nondistortionary tax than as a Pigovian tax. There is a standard argument that taxes don’t do any harm if they don’t change behavior; in this case, changing behavior is gravy. (As for global warming, well, I’m just glad I’m going to die in another 40 years or so.)


3. I’m not sure Greg Mankiw reads my blog regularly enough to catch this post.

The argument commonly advanced against Pigovian taxes is that we cannot measure the relevant quantities well enough to ascertain the optimal tax. For example, in the (Toronto) National Post article linked at the beginning of this post:

The problem with a Pigovian gasoline tax is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in gasoline consumption? And what's the price to be set at? How high will the tax have to go before it changes behaviour enough to reduce demand? Will the government just wing it and see what happens? Will the alternative behaviour be any better or create new externalities and unintended consequences? What does government do with the money collected -- except launch a program of subsidies and spending to run alternative economic initiatives?

Since I’m convinced that the optimal tax is much higher than what is politically feasible, the uncertainty about the exact number is not a problem for me: I just advocate the highest tax possible. More generally, though, one might always set some reasonable lower bound and argue that the tax should be at least that high. The Post’s argument, as I commented in Greg Mankiw’s blog post (linked at the top), is essentially saying that government is generally incompetent, so whenever there’s a problem that the private sector can’t fix, the only reasonable approach is to ignore the problem. And then I proceeded to apply the same logic elsewhere:

The problem with using government-supplied police officers to protect citizens from crime is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in crime? And what are the wages of police officers to be set at? How much of this so-called police protection will have to be supplied before crime is sufficiently reduced? Will the government just wing it and see what happens? Will the police forces be any better than criminals, or will they create new externalities and unintended consequences? Where will the government get the money to pay these police officers?

I realize that a few anarchists won’t regard this as a reductio ad absurdum, but I’m not an anarchist myself. The debate does continue, however, and you can read it in the subsequent comments to Greg Mankiw’s post.

To Wage War

According to Paul Krugman in today’s New York Times (by way of Mark Thoma and of jurassicpark at Welcome to Pottersville, and thanks to Google Blog Search, since I’m not a Times subscriber right now):

The Dow is doing well largely because American employers are waging a successful war against wages. Economic growth since early 2000, when the Dow reached its previous peak, hasn’t been exceptional. But after-tax corporate profits have more than doubled, because workers’ productivity is up, but their wages aren’t — and because companies have dealt with rising health insurance premiums by denying insurance to ever more workers.

If you want to see how the war against wages is being fought, and what it’s doing to working Americans and their families, consider the latest news from Wal-Mart....

I have an immediate problem with this explanation for the rising stock market (which is not to say that I have a better explanation). If wages (and total compensation) are being kept down in the face of rising productivity, why isn’t competition keeping prices down as well? It seems to me that, to make his explanation complete, Prof. Krugman needs a story about reduced competition in product markets. Otherwise, there is no reason to expect that the markup of prices over wages should rise as wage bills decline. If wages are the only story, then at best the stock market is being short-sighted in not seeing the eventual effects of competition.

Prof. Krugman’s example, Wal-Mart, is an excellent case in point. Historically, Wal-Mart has reaped the benefit of reduced costs not by raising its margins but by cutting its prices and thereby increasing its market share. Wal-Mart’s profits have gone up, but its competitors’ profits have gone down. (More precisely, some of the competitors’ profits have gone up, but more slowly than they would have in the absence of Wal-Mart’s cost-cutting, whereas other competitors have stopped earning profits altogether and, in many cases, gone out of business.) Historically, Wal-Mart’s cost cutting has not obviously resulted in increased profits for the retailing business in general. Things may have changed now – Wal-Mart may now have such a large market share that it plans to grow by raising margins rather than cutting prices – but in that case, the story is not really a story about costs but a story about monopoly power.

As I said parenthetically above, I don’t have a good explanation for the rising stock market. My best guess as to why profits are so high has been that economic rents in certain industries (oil and software, for example) are puffing up aggregate profits. But this wouldn’t explain why the stock market is still going up. Of course, one doesn’t really need an explanation because we can always attribute stock price movements to changes in the required equity risk premium.

Jane Galt is Right

I may disagree with Jane Galt about controversial topics like taxes and income distribution, but when it comes to basic issues like public whipping, we’re in full agreement:

…deterrence and retribution are legitimate questions of justice--but I also think that jail is lousy, immoral, and highly inefficient way to achieve them.

Lousy because jail makes the criminals cost us money. Yes, courts cost money . . . but what costs money is the troublesome process of sorting the innocent from the guilty. We're spending money on the blameless, not the perpetrators. Once they're convicted, we know (as well as frail humans can) that they're guilty. Why should we spend money to punish them, when they could be making money, or hey, just entertainment, for the society they've wronged? Fastow's skills may not be much, but stick an ankle bracelet on him and set him to painting overpasses or something.

Inefficient because criminals are very bad discounters of time, or they wouldn't be criminals. Expensive, long prison terms aren't very effective deterrants. Optimal punishments are short, extremely harsh, and immediate.

Immoral because the great tragedy of human life is the finiteness of time; I'm not sure we ever have a right to take away someone else's pitifully few moments simply to punish them. Locking people up because they are a danger to others is a necessary evil; locking them up because we can't think of anything else to do to them is not. Morally, I should think a public whipping post vastly preferable--and more effective--than a one-year jail term.

My readers, particularly my more sensitive liberal ones, are even now recoiling in horror at my barbaric suggestion. But we all know that in fact the real punishment offered by prison is that meted out by other prisoners--that for many or most people, a prison sentence is a long and barbaric series of beatings and rapes. We know that this is true; we do almost nothing to prevent it; and we send people there anyway. Indeed, this is the aspect of prison--not the incarceration away from families, friends, and good takeout--with which cops threaten suspects. I should think a clean, quick beating from a government official would be more to anyone's taste--except the of course the animals who rule the prison dominance hierarchy.

Tucking criminals off in prison simply allows us to pretend to ourselves that we are doing something not-so-bad, when what we really intend is full-blown evil. If jail really were merely a dull spell of menial service jobs and mediocre food, I suspect many Americans would think it wholly inadequate to the demands of justice.

Yes. I made the same suggestion about 20 years ago, for essentially the same reasons. Suffice it to say, the suggestion was not well received by my lunchmates. (“Wouldn’t the state be liable for welts?”)

But think about it. Our current system essentially outsources punishment the same way the CIA outsources torture. (“We’re not being inhumane. The inmates promised not to rape anybody.”) And the worst criminals end up getting the least punishment, because the worst criminals are exactly the ones to whom the punishment function is outsourced.

If I have come to have reservations about public whipping, it is only because I have become more of a fascist over the past 20 years. As a utilitarian, I tend not to buy into the whole concept of “justice.” The purpose of prisons, as I see it, is to prevent crime. The best way to prevent crime (so the empirical evidence indicates) is to put people in jail before they commit crimes. Unfortunately, the justice advocates generally object, because they say it’s unjust to punish people who haven’t yet committed crimes, and of course there is also the practical problem that we can’t predict with much accuracy who is going to commit a crime. But when someone does commit a crime, it provides both (1) a fairly good predictor of future criminality, and (2) a good excuse to get around these silly “justice” concerns. So there is a good case, it seems to me, for putting criminals in jail.

Nonetheless, whipping would be cheaper, and it might provide good entertainment for some people. We’d have to weigh the costs and benefits. And for white-collar criminals, who are unlikely to have criminal opportunities in the future, the case for whipping over prison time is pretty much a slam dunk. OK, Mr. Fastow!


UPDATE: Chris Dillow made the same suggestion in June (as he notes in the comments here). Interestingly, he doesn’t make the argument (our trump card, as I see it) that prison life is already at least as brutal as state-inflicted corporal punishment. Perhaps that’s not so true in the UK. If we have 3 bloggers on board already, perhaps we should start a club, analogous to Greg Mankiw’s “Pigou Club”. Call it “the Corporal Punishment Club”? But that sounds slightly perverted. How about “the Effective Deterrence Club”?

Why Jane Galt is Still Wrong

I'm willing to bet a fairly hefty sum of money that almost none of the lefty bloggers who linked to it originally will link to my attempts to rectify their misunderstanding.

So writes Jane Galt. I don’t think I’m one of those she had in mind, since I didn’t deal directly with Ms. Galt’s arguments in my earlier posts (and I wouldn’t willingly accept the term “lefty,” though it’s possible that the shoe fits, or that it appears to fit). Nonetheless, I can’t resist the challenge.

Her words again:

…my metaphor was aimed at a specific kind of redistribution: that which is less interested in making the poor better off, than in making the rich worse off, so that they don't make the rest of us look bad. Or as Brad Delong said:

Surely public policy should weigh the spite-generated utility the rich gain from their conspicuous consumption as worth less than nothing?

And in that case, the wealth hierarchy is precisely equivalent to the beauty hierarchy, morally speaking: it is a zero sum game in which a lucky few feel better only when the others feel worse. So to my mind, anything that applies to the enjoyment of wealth by the lucky few applies equally well to the enjoyment of endowments like beauty, athleticism, and intelligence. I am unable to construct a moral argument for cutting down the tall poppies of the income distribution that doesn't apply equally well to conspicuous flaunting of one's pulchritude, physical prowess, or brains.

But how is it that she misses the critical point? To wit: the creation of conspicuous wealth, by its very nature, uses up resources that could be used for other purposes. Indeed, wealth might be defined as the ability to command resources, and therefore, the more resources that are used to produce conspicuous wealth, the more effective it is. By contrast, the process of flaunting one’s pulchritude, etc., while it may use up some resources, is not inherently resource-intensive. And certainly, such endowments, to the extent that they are truly endowments, don’t require resources to create.

The beauty hierarchy is, as Ms. Galt states, a zero-sum game (roughly), but – because of the resources used up – the wealth hierarchy could very well be a negative-sum game. Using up resources is fine as long as the full social benefit of the product exceeds the cost of the resources. But with conspicuous consumption that is not necessarily the case. Because there are negative externalities – namely the unhappiness (mistakenly labeled as envy) generated among inferiors – associated with that consumption, there is no mechanism to insure that the social benefit from the resources used is at least as great as the cost.

Of course there are counterarguments. For example, as Ms. Galt points out, there are also positive externalities associated with the pursuit of wealth. But those positive externalities have had their day in court. It is not at all fair to brush aside the negative externalities that may be associated with the pursuit of wealth (even if they are more difficult to measure).

Enough with the Envy and Spite Rhetoric

(See my last post, and its many links, for background.)

The terms “envy” and “spite,” it now occurs to me, not only frame the debate in an unpleasant light: they are also fundamentally inaccurate characterizations of the issue involved. Envy and spite are emotions directed at people: “I am envious of Peter”; “I am spiteful toward Paul”. These emotions imply hostility, which in fact has nothing to do with the argument that people derive utility from relative wealth. Thus Tyler Cowen Alex Tabarrok can complain that he doesn’t like being envied, but here he is talking about the actual emotion of envy (with all the attendant hostility), not about the property of certain utility functions that has been labeled as “envy.”

To say that I get utility from my relative wealth is not to say that I have any particular feeling about those against whom I compare myself. The word “envy” (and similarly the word “spite”) exaggerates the degree of other-regard that is present. The “others” in this case are not concrete people about whom I have feelings, but abstract reference points against which I compare myself. It’s not that the poor are envious of the rich; it’s that the poor feel bad about themselves when they compare themselves to the rich (or more likely to a social average in which the rich are only one element). Similarly, it’s not that the rich are spiteful toward the poor, it’s that they feel good about themselves when they compare themselves to the poor (or to the social average).

I doubt that Tyler Cowen Alex Tabarrok really gets significant disutility from being part of such an abstract reference point, but if he does, he seriously needs to chill. And his comparison of envy to homophobia is also “fruit of the poison tree,” since it derives from the original misuse of the word “envy.” The hatred that homophobes feel toward homosexuals is entirely other-regarding. Very much in contrast to relative wealth feelings, it has nothing (except at a deep psychological level) to do with what the homophobe feels about himself. Homosexuals have a legitimate complaint about being the objects of actual hate, rather than imagined envy.

In fact, when Brad DeLong brought the word “spite” into this discussion, he was conceding a point that he never should have conceded. The phrase “politics of envy” is used, by those who oppose redistribution, to frame the debate in emotional terms. The phrase may perhaps be a reasonably accurate characterization of the politics. To get people excited about redistribution – to get them to vote on that basis – you may have to make them emotional, literally “envious.” Rational arguments about their underlying preferences probably won’t do the trick. But Greg Mankiw let the term “envy” slip from the political argument into the economic one, where it becomes quite misleading. That, in my opinion, was a mistake that needs to be corrected before the discussion can proceed.

UPDATE: Oops, I referenced the wrong Marginal Revolution blogger (for this post).

Inequality, Spite, and the Game of Love

The debate du jour in the economic blogosphere seems to be about relative wealth – whether it affects welfare and whether public policy should take this possible effect into account. We have the usual dramatis personae, with Brad DeLong and Greg Mankiw in the leading roles, Jane Galt as the female lead, a cameo appearance by Chris Dillow, and Mark Thoma in the role of messenger (and let’s not forget Tyler Cowen…and now Gabriel Mihalache...and...and...and...never mind, I'm going to have to post this before I read every single blog). Most of the discussion concerns “envy” and “spite” – the supposed emotions of the poor and rich, respectively, which mediate the welfare effect of relative wealth.

I have a couple of points to bring up. First, from a utilitarian point of view, it doesn’t help Brad’s case that he points particularly to the spiteful rich rather than the envious poor. If the rich get pleasure from knowing they are better off than the poor, that, by itself, is a good reason to keep the income distribution unequal. Why not give the rich that extra pleasure of being relatively, rather than just absolutely, rich? The only utilitarian reason is that it (ostensibly) harms the poor, which is to say, in the terms of the discussion, that the poor are envious. Yes, I do understand that Brad is countering Greg’s comment about “making envy a basis for public policy,” but it seems to me that Greg's whole line of thought brings us into the realm of emotional, rather than rational, policy analysis. Greg casts redistribution in an unpleasant light by using the word “envy,” and instead of trying to cast it in a pleasanter light (“people like being equal”), Brad reflects back the bad light by using the word “spite.” In any case, it’s all mood music.

But I wonder why everyone (except Chris Dillow) thinks that the effect of relative wealth is merely subjective. As Chris points out, there are objective ways in which consumption by the rich may hurt the not-so-rich. I wonder why nobody has brought up what seems to me to be the obvious example: sexual competition. (For example, suppose you like tall redheads and you’re into spanking….OK, never mind.) I think particularly of competition among men, although arguments can also be made about competition among women. (My example also assumes, without loss of generality, that the men are heterosexual. And, oh, yes, back in the 80s I used to believe that stuff about men and women being roughly equal, so it didn’t matter who was chasing whom…but the 80s ended back in 1989, if I recall.)

In the area of beauty, evolution somehow seems to have failed the human male (well, most human males, anyhow: men are no plums, but they do contain the occasional Pitt). So men tend to compete for the attention of women not (like peacocks) on the basis of their natural endowment but on the basis of other things, which are often expensive. If I own a BMW and you buy a Jaguar, it hurts me objectively, because all the chicks that used to ride in my BMW will want to ride in your Jaguar instead. (In reality, it’s probably just as well that I drive a Saturn; my wife wouldn’t be too happy if I used the car to go cruising for chicks.) There’s no envy or spite involved here: just men who are competing rationally and women who like men with fancy cars. Although the competition has some benefit for the women involved, it’s easy to see that there’s also a deadweight loss. It’s a multi-player prisoner’s dilemma, and there is no mechanism to produce a cooperative solution.

UPDATE: Steve Waldman brings up another, much more important (but less sexy!) area in which objective competition causes relative wealth to have an impact: politics.

UPDATE2: I missed Alex Tabarrok’s important post, which might sort of provide a justification for Brad’s focus on spite. Also this other one by Gabriel Mihalache.

Taxes, Housing, Growth, and War

The following seem to be a standard set of tenets for anti-Bush crowd:

• The Bush tax cuts were irresponsible.


• The housing boom was unhealthy.


• Employment growth over the past five years has been inadequate.

I’m no fan of W myself, but I’m puzzled by this triplethink. What macroeconomic policies were people hoping for? What policies would have increased employment without exacerbating either the budget deficit or the housing boom?

Let’s look at an alternative path in which the tax cuts hadn’t taken place. The tech bubble would have burst anyhow. (It started to burst long before the first tax cut.) Without the 2001 tax cut, the recession would have been deeper and lasted longer. Without the 2001 and 2003 tax cuts, the painfully slow recovery would have been even slower. Quite possibly the Fed would have cut rates all the way down to zero. (That’s only one percentage point away from what actually happened.) The housing boom – as the only major source of demand facilitating a recovery – would have been pushed to an extreme that would make last year’s experience look mild. (Exercise for the reader: calculate the present value of a perpetual stream of housing services discounted at 0%.)

If anything, the tax cuts were not irresponsible enough. Instead of tax cuts on capital income, designed to encourage virtuous activities like saving and investment, what we needed were sleazy, Keynesian tax cuts to encourage Joe Sixpack to switch to high-quality microbrews. (Fortunately, the tax cuts were entirely ineffective at encouraging saving.) Or perhaps, instead of tax cuts, we should have built a lot more bridges to nowhere back when we were facing an excess of unbroken windows.

The only alternative economic stimulus would have been a weaker dollar. You may recall, though, that Europe and Japan were facing inadequate growth at the same time, and the other Asian countries had plenty of unexploited potential. A deliberate weak dollar policy, back in 2001-2004, would have fallen into the classic “beggar thy neighbor” category. And with the rest of the world playing the same game, it’s implausible that ordinary fiscal, monetary, and “talking down” policies could have made the dollar so weak as to substitute for the stimulus of the tax cuts. That would have required dramatic intervention against the dollar, on a scale never even imagined, and with the explicitly aggressive intent of forcing the Asians (under threat of bankruptcy) to give up their own intervention policies. I don’t recall anyone advocating such actions at the time.

If you want to blame Bush for the economic problems of this decade, don’t blame his economic policies; blame his foreign policy. Whatever its ex ante merits may have been, the Iraq war, along with the atmosphere of tension it induces in the region, has clearly been partly responsible for the rising price of oil, which is exactly what has placed such a tight limit on the current recovery. (Try this thought experiment: assume the actual path for the cost of non-energy value added in the US, and suppose that the price of oil had risen much less. What would the inflation rate be? Would the Fed have kept tightening so long?)

That Which We Call a Rose

In a TCS Daily article, Jeff Miron proposes a set of budget cuts that “every economist should endorse, regardless of party affiliation…Democratic economists, and all other economists, should use their blogs, and their op-eds to highlight the enormous scope for welfare-enhancing cuts in government expenditure.” As a Democratic economist (albeit not an influential one), I hereby do use my blog to endorse Jeff Miron’s proposals. (I’m not so sure about some of the stuff he identifies as “pork”, but I’d go along with those cuts if his proposed farm subsidy cuts were also part of the package.) I make this endorsement specifically as an economist with the “Democratic” tendency to be skeptical about the importance of the disincentive effects associated with high marginal tax rates.

What puzzles me, though, is why Republican economists – who typically argue against high marginal tax rates – would support Miron’s proposals (except perhaps because they are sensible deficit hawks and would support any reasonable proposal to reduce the deficit). The heavy lifting in his list of cuts is done through means testing of government benefit programs – Social Security, Medicare, and higher education subsidies. Economically, this is precisely equivalent to increasing marginal tax rates. Think about it: if richer people were to get the same benefits as they get now but pay those benefits back to the government in the form of higher taxes, wouldn’t that be just like not getting the benefits in the first place? If higher marginal taxes discourage people from saving and investing, won’t they also be discouraged by the prospect that their future income will reduce their Social Security benefits?

Politically, “getting the rich off welfare” may be an easier sell with both parties than “raising taxes.” And there may be some substantive sense in which decreasing the amount of money that passes through government programs constitutes “reducing the size of government.” But as far as economics goes, this proposal looks like a tax increase, walks like a tax increase, and quacks like a tax increase. As I said, I support it.