How competitive is the payday loan market? This is a question that as far as I know is unanswered. You would think that competition would stimulate innovation in the sense that as more payday lenders enter the market you would see firms starting to bundle financial products and offering lower fees or interest rates. Is this the case in Missouri or any other state? I don’t know, but it seems to me that these are all questions worth answering.
Ducks and Economics
A blog by Eapen Thampy
Category Archives: Economics
Chaos theory and economics
I’m working on a long post on extending the implications of work done by Edward Lorenz (1963) on chaotic outcomes from deterministic systems to economics. For those of you unfamiliar with the subject (and who have an idea of fun that doesn’t include reading academic mathematical papers) Lorenz examines a simple system of 3 deterministic equations that describe convection in the atmosphere. His key insight in this examination is that changes in the parameters generate vastly different systemic behaviors, some of which are chaotic and unpredictable.
The general lesson for meteorologists that Lorenz isolates is that you can’t predict some of these weather systems past some specific time frame (I think a week or so). More generally, Lorenz’s work is foundational in chaos theory, fractal dynamics, and nonlinear systems.
Where I propose to extend this work is in following Benoit Mandelbrot (1963) who finds evidence of chaotic behavior in cotton prices. Mandelbrot was also Eugene Fama’s instructor at the University of Chicago and this work plays a key role in the development of the efficient market hypothesis. I also am inspired by Stephen Wolfram (2002, A New Kind of Science) who suggests that there are extensive applications for the tools used by nonlinear dynamical studies of cellular automata in modeling economies and interactions. I won’t delve into it here, but Douglas Hofstadter’s seminal text on Godellian incompleteness (1977, Godel, Escher, Bach) is also worth reading for the deep and rich insights into cognition and systems theory.
My interest in this subject was triggered from the notion that institutions are fundamental parameters in describing and understanding economic interactions. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (LLSV) are foundational in the study of legal origins and economic development but I am hard pressed to think of work outside of that literature that engages institutional interactions, development, and outcomes.
I suggest that properly understand the dynamics of interactions and change are key in understanding the nuances that make political ideologies untenable at the margin (and this is a statement that I want to make in context specifically of the 3 major strains of thought competing for space today: liberalism, conservativism, and libertarianism). There are many places where these ideologies allow for computationally equivalent outcomes but this is poorly understood.
Stay tuned. Oh and here’s the famous Lorenz Butterfly, which is the phase space portrait of the dynamical system that Lorenz (1963) analyzes:
Great moments in quota history, rubber edition
From History of the United States Rubber Company by Glenn Babcock, p 359:
Although the International Rubber Regulation Committee (IRRC) increased the exportable limit for the last quarter of 1941 to 120% of the production quotas, complaint was made that the production was still being arbitrarily limited. It was contended that the ‘smallholders’ of rubber plantations in Malaya had not been permitted to equal the production rate they had had in the early days of 1934, immediately before the IRRC became oeprative; on the other hand, production quotas assigned to estates (holdings of 100 acres or more) were more than 45% above their 1934 rate of production. It was believed that a similar situation prevailed in the Netherland East Indies and Ceylon.
However, native ingenuity appears to have been more than a match for governmental restrictions. Claims have been made that the IRRC “favored the planters and was definitely unfavorable to Asiatic peasants, with the result that the trend toward natural rubber’s becoming more and more a peasant crop was stopped.” By exports of natural rubber that represented production of Indonesian natives increased from 40% of that total in 1933 to 48% in 1938 and to 50% in 1940. Conversely, exports from Indonesia that represented production by “Europeans” declined from 60% in 1933 to only 50% in 1940. Rubber was perhaps the only agricultural commodity that did not reflect increased production by the Western owners of estates, at the expense of Indonesian natives, during those years. With the overrunning of southeastern Asian and the East Indies by the Japanese army in the early months of 1942, the International Rubber Regulation Committee passed out of existence, but lasted officially until 1944.
Great moments in political economy, China salt edition
From Salt and State: An Annotated Translation of the Songshi Salt Monopoly Treatise, by Cecila Lee-fang Chien, p. 3-4:
The Guanzi, one of the first great works on political economy in China, provided an ideological basis for monopoly that persisted for two thousand years, from the Han dynasty to the end of the Qing. This treatise, probably collated by adherents of GuanZhong (?-645 BC) a major figure inthe establishment of Qi as the first hegemon among the Chinese states, asserted that because everyone needed salt, increasing its price even incrementally would reap huge returns.
If you were to announce a head tax on all adults and children, everyone would certainly complain and oppose it. But if you implement a salt tax policy, one hundred times the profits will accrue to you, the ruler, while the people will be unable to escape it. This is what is meant by managing finances.
According to the Guanzi’s logic, thecost of salt to consumers would effectively include a tax, yet spare them a separate payment. By controlling both the production and distribution of salt, the state could prevent disparities between rich and poor, as well as increase state revenues.
While statesmen before the Qin unification (221-206 BC) recognized the fiscal value of sale, the nature of China’s monopoly came to be premeditated on a united empire. In contrast to other powers across Asia and Europe at other periods, where governments had to content themselves with charging transit tolls (France) or merely regulating the sale or some other stage of the industry (Venice), China’s centralized bureaucracy could tightly monitor the sources of salt as well as the stages of production and distribution.
Great moments in rent-seeking, the geopolitics of oil edition
From The Politics of Oil by Robert Engler, p. 265-6:
Despite these setbacks, the vacuity and fumbling of American foreign policy and its application to oil still promote the propping up of regimes whose days are numbered and who are prepare to trade their people’s physical heritage for dollars and military support. All this takes pace with the active participation of oil corporations that seek to integrate the raw material producing countries of the world into the processes of their private government. Late in 1958 the United Nations General Assembly received Soviet-backed resolutions, first proposing that the UN provide aid for nations wishing to develop their own petroleum resources and then one more simply suggesting a study of internatioanl cooperation in such development. The Americans simply responded to the bait of this blunt threat to the international companies and clear provocation to the producing countries of Latin America and the Middle East. “In no time at all the oil lobbyists were swarming around the United Nations,'” the St. Louis Post-Dispatch reported. “There were so many conference between the oil men and members of the United States delegation that one American diplomat said he told the oil people to ‘let us alone so we can protect your interests.'” One oilman, a member of the delegation, “was warned to lie low.” Speaking for the United States, Senator Mike Mansfield rose to defend private enterprise and national sovereignty:
If the General Assembly starts with the oil industry today, where shall we stop? Will there be a separate resolution on the steel industry, the flour milling industry, poultry raising, cement manufacturing, automobiles, synthetic fibers or the hula hoop business?
In a setting where we know not where we are going, the quest for oil looms as one clear goal.
Rex Sinquefield on taxes
Patrick Tuohey at the Missouri Record has generously agreed to publish a piece I wrote on Rex Sinquefield and his political agenda in Missouri. The piece should come out tomorrow, but here is a selection of excerpts from the Show-Me Institute Quarterly clarifying Sinquefield’s advocacy on taxation. The excerpts are taken from the Fall 2008, Fall 2009, and the Winter 2010 issues of the Show-Me Quarterly.
On why a re-evaluation of Missouri tax policy is in order:
Missouri is chronically below average for economic development and growth. During the past 10 years, employment has grown 8.8 percent nationally, while Missouri has boosted jobs by a barely perceptible 0.23 percent. In their study for the American Legislative Exchange Council, titled “Rich States, Poor States,” Laffer and Moore offer one explanation for the state’s poor performance: Missouri’s personal income tax rates. The highest rate of 7 percent — which includes the state’s top marginal rate of 6 percent, plus a 1-percent earnings tax imposed in Kansas City and Saint Louis — places the Show-Me State at 32nd in the nation.
On the deficiencies of Missouri’s income tax:
We side with economists who say that an income tax is a huge drag on growth in two ways: First, an income tax lowers the net pay of workers, providing them with less of an incentive to work. The flip side of this argument is that Missouri workers are likely to demand higher pay in order to offset the higher after-tax income in other states. Second, the income tax is inherently unwise, because it’s relatively narrow in scope and cannot be avoided except by leaving the state. This is hardly the type of tax that makes sense in the face of cutthroat competition among states. Missouri needs business and job creation. We’re also impressed by another set of significant economic numbers. States with no income taxes have the lowest overall tax burdens, according to data compiled by the Tax Foundation. Indeed, the correlation is virtually one to one.
On the link between taxation, jobs, and economic growth:
We show that the state’s economic growth has been sluggish by national standards, but that the nine states without an income tax have added more than twice as many jobs as the national average. Not all of this extra growth can be attributed to differing tax systems, but some of it certainly stems from the fact that the lack of an income tax lowers business costs. States without an income tax also have lower overall rates of taxation; the eight states with the lowest taxation rates in the country are eight of the nine states with no income tax. Multiple studies have shown that lower levels of taxation also boost economic growth, so implementing a sales tax to replace the income tax could boost growth in more than one way.
It’s true that a sales tax can be regressive, which is why it’s important to exempt low-income families from paying such increased taxes. If Missouri were to eliminate the income tax in favor of a slightly higher and more comprehensive sales tax, we could eliminate the penalty that the state’s tax policy imposes on business investment, and instead spur economic growth while simultaneously providing a more stable source of revenue for essential government functions.
And replacing the income tax with a sales tax can be revenue-neutral:
n 2007, Missouri’s sales tax generated nearly $2 billion. To replace the income tax fully, the sales tax would have to produce another $4.9 billion, according to Joseph Haslag, executive vice president of the Show-Me Institute. (I would like to point out that because repeal of the income tax would stimulate growth, ultimately, a dollar-for-dollar increase in the sales tax won’t be necessary. But I’m willing to adopt a revenue-neutral approach for argument’s sake.) However, Missouri lawmakers over the years have voted to exempt more than 140 other items from the sales tax, according to research conducted for the Show-Me Institute. In addition, Missouri does not tax consumer services. If Missouri included in the sales tax all products and services purchased by individuals — which would exclude business-to-business transactions and capital acquisitions by businesses — a general sales tax rate of about 5.7 percent would suffice, according to Haslag’s estimates.
Levine on patents
Over at Huffpo, David Levine, an economist at Washington University in St. Louis, writes:
There are many solutions to the problem of global warming — ignoring it is popular with the extreme right, and moving back to the stone age is of equal interest to the extreme left. For the rest of us improving technology seems like a good place to start. Even if dumping carbon dioxide in the atmosphere turns out not to lead to global warming, the ill-health effects of pollution aren’t controversial.
So “green” patents seem to be a no-brainer. Want to encourage technology? Give people monopolies for inventing things. If you think that way, a headline here on the Huffington Post “China Surprising Leader In Green-Technology” may surprise you as much as it does the author. After all China isn’t famous for the strong enforcement of patent laws. It isn’t a surprise to Michele and me — we’ve been beaten over the head time and again by empirical economists discovering that patents do not encourage innovation.
Patents do not lead to more innovation? In chapter 8 of our book Against Intellectual Monopoly we went through all the economic studies we could find: 22 studies by authors ranging from Arora to Zoz. We can sum them up by quoting Lerner’s study of 150 years worth of evidence: “Consider, for instance, policy changes that strengthen patent protection…this evidence suggests that these policy changes did not spur innovation.”
He continues:
In the case of carbon emissions, the problem is worse. Rich countries produce a lot, and big countries such as China and India are quickly becoming richer. Carbon pollution, however, does not respect international boundaries. So you would think that the goal of countries — such as ours — that are already rich, would be to make it as easy as possible for poorer countries to reduce their carbon emissions. Are you surprised then that on June 10, 2009 the United States House of Representatives “voted overwhelmingly to establish new U.S. policy that will oppose any global climate change treaty that weakens the IP rights of American ‘green technology'”? That Jonathan Pershing – deputy special envoy for climate change at the US Department of State – says unequivocally that we will will charge poor countries like Bolivia all the market can bear for our green patents?
We can put this “beggar they neighbor” policy into perspective by describing a study published in the prestigious American Economic Review by Chaudhuri, Goldberg and Jia about the antibiotic quinolones. They estimate that every dollar we squeeze out of impoverished Indian consumers by forcing our patent system on them and driving up the price of drugs costs them seven dollars. Think of this in the context of global warming. Who pays the seven dollars then? The cost of global warming isn’t just paid by the Indians — it’s paid by all of us. If we have to pay inventors seven dollars for every dollar worth of global warming reduction…I’m sure Siberia will be a nice place to live some day.
Some data on the earning tax
I was curious about the debate over the earnings tax in St. Louis and Kansas City, so I did what people naturally do when they don’t know things; I looked at the data. More particularly, I looked at census data on metropolitican statistical areas (MSA) for the change in population between 2008 and 2009 and matched it to this data set on American cities with an earnings tax of some kind. I didn’t have time to do anything sophisticated here, but the cities with earnings taxes seem to be at the lower end of population growth across the country. I coded for all the MSAs listed in the TaxFoundation data, excluding the larger multi-state MSAs like NYC or DC that have differing income tax restrictions depending on where you are. I also selected all the MSAs listed in states that have some earnings tax wherever you live.
There ended up being 57 MSAs listed in the population data that I identified as having earning taxes. They range from Flint, Michigan with a -1.12% growth rate in 2008-2009, to Denver, Colorado, who experienced a 2.1% growth rate over the same period. Of these 57 MSAs, 45 are in the bottom half of cities ranked by population grown (the average MSA in 2008-2009 had a population growth rate of roughly .87%) and 9 were in the upper 50%.
This of course is not the whole story. The data only gives us an incomplete glimpse into what’s happening at a specific moment in time and doesn’t give us any information about trends. I would assume that young cities with high rates of growth might implement an earnings tax but that the tipping point isn’t reached for a while, but without controlling for how long each of these earning taxes have been in place I can’t make that conclusion. There are also many other idiosyncratic determinants of population growth that the data doesn’t allow me to engage. There is also a substantial risk that my data selection is incomplete. Regardless, it is suggestive that close to 90% of identified MSAs with earnings taxes are below the average MSA population growth rate; it suggests that earnings taxes has a dampening if not negative effect on population growth, particularly in cities hit hard by the recession.
If I have time this week I’ll try to expand on this, but no promises. Here is Dr. Haslag from the Show-Me Institute with a more sophisticated analysis and I quote in part:
How much of this phenomenon can actually be attributed to the city earnings tax? Saint Louis and Kansas City are hardly the only earnings-tax-enforcing cities that are losing economic power from their base state. Cities such as Philadelphia, Pennsylvania, and Cincinnati have also seen losses in employment to neighboring states. In fact, from 1998 to 2006, every MSA that includes counties from two or more states, in which one enforces a city income tax, has seen a decline in the ratio of employment within the area subject to an earnings tax relative to total MSA employment, even while similar multistate MSAs without earning taxes have experienced, on average, a modest increase in that ratio during the same period
Individual decisions, aggregate problems. My brother.
My brother, George, is a superbly accomplished, brilliant person. In 2000, he won the National Spelling Bee and took 2nd place at the National Geography Bee. His high school career included him becoming an Eagle Scout and valedictorian. He was accepted to Harvard and to my knowledge graduated with degrees in Chemistry and Russian, presumably with honors.
His intention was to eventually end up in medical school and follow my father into the medical profession. My father, also named George, is a Ph.D. biochemist who went to medical school at 42 and currently practices endocrinology in St. Louis. My father and I have deep differences in personality and ideology but beyond that I have a deep and profound respect for his work. As a physician, his work is profoundly and immediately meaningful in the lives of many, many people. Many have lived where they might have died and learned to live well because of his choice to practice medicine.
My father is well compensated, of course. He works 14-hour days even as he approaches 70. If in my life I am capable of doing a tenth of the good he has done, I will be surprised. A good physician is one of our world’s most valuable real assets.
My brother and I have never really gotten along, but I was proud that he went to Harvard hoping to be a physician. When he graduated, however, he’d lost that dream. He is now an investment banker, working for William Blair, a Chicago-based investment company.
This I think is one part of the story of this economic recession. Brilliant minds converged at the world’s best educational institutions and got blinded by the money they could find in the financial sector. Here is Joseph Stiglitz, the recipient of the 2001 Nobel Memorial Prize in Economics, whose words ring all too true for me:
Finally, I have emphasized how our financial sector failed in its essential societal roles, especially with respect to the allocation of capital, and how the sector’s’ incentive structures may have contributed to that failure. But there is another misallocation of resources that resulted from the sector’s compensation policies, one whose effects are graver and longer lasting, and one which, as a teacher, I have felt intensely. There was a misallocation of scarce human capital, as some of America’s most talented young succumbed to the lure of easy money—brilliant minds that, in another era might have made real discoveries that enhanced our knowledge or real innovations—that would have enhanced societal well being. In earlier decades, our best students went into a variety of areas—some into medicine, many into research, still others into public service, and some into business. Each found fulfillment of their potential at the same time they served their communities in one way or another. At Amherst College, where I serve as a trustee, we talk of helping our youth live lives of consequence. In this modern era of a finance-dominated economy, unfortunately, a disproportionate share of our most talented youth went into finance, lured by the outsized compensation. The costs to our society of this misallocation are incalculable.
On energy efficiency, conservation, and the behavioral economics of Republicans
I’ve been working on a response to Christine Harbin’s op-ed on Missouri’s green energy sales tax holiday over at the Show-Me Institute. This paragraph particularly stood out to me:
…Acquiring a more fuel-efficient new appliance could also encourage the purchaser to wash dishes and laundry more frequently than before, which means that the overall decrease in energy usage may be much smaller than anticipated — or could even increase. If usage does drop as a result of sanctioned purchases, however, the reduction in overall Missouri energy usage will still be minimal at best unless every Missouri resident purchases a new appliance during the week that rebates are offered.
The assertion that the consumers might respond to increased energy efficiency of course is not a new one, and there is some empirical backing for that claim. This study conducted with Opower suggests that political affiliation may play a role in how consumers respond to these programs. Specifically, conservatives seem to be the single group that increases their energy consumption in spite of (or maybe to spite) efforts to increase the conservation of energy:
In a study evaluating the program’s effectiveness, Opower researchers compared power use before and after the HER reports began arriving, and further compared this change with a group of control households that never received the reports. On average, the HER households reduced their consumption in the months that followed by a little less than 2 percent. Not bad, but probably not enough to save the planet.
Working with the same utility as Opower, Costa and Kahn matched up information on the households in the pilot study to data on political affiliations and a database of past charitable giving to environmental organizations. The economists found that the 2 percent average decline in energy use obscured significant differences in the responsiveness of different types of households to the conservation message. Registered Democrats who give to environmental organizations and live near other liberals reduced their consumption by 3 percent. For liberals who started out as heavier-than-average consumers, the reduction was almost 6 percent. Republicans who live in conservative neighborhoods (and hence had no neighborly pressure to conserve) and had no record of giving to environmental organizations actually increased their consumption by 1 percent.
Why would some energy-conscious Republicans all of a sudden become power hogs? One explanation is that many conservatives don’t believe that burning energy harms the planet, so when they learn that they’re better than average, they become less vigilant about turning the lights off. That is, they’re simply moving closer to what they now know is the norm (what psychologists call the boomerang effect). Costa and Kahn also look for guidance from the patron saint of right-wing fundamentalists, Rush Limbaugh, who encouraged his listeners to turn on all their lights during Earth Hour. Costa and Kahn suggest that ardently right-wing electricity customers might respond to paternalistic nudges by burning more energy, just to thumb their noses at Big Brother.
H/T: MarginalRevolution.
Markets in North Korea
Horrifying. From the Chosun Ilbo:
Rare footage of markets and other scenes of North Korean society offers vivid testimony of the major changes that have happened in the reclusive country since a botched currency reform in December last year. The Chosun Ilbo and the Caleb Mission unveiled the footage Tuesday.
It shows an open-air market and train station on Onsong, North Hamgyong Province in October 2009, just before the currency revaluation, and in March this year. Onsong boasted a relatively developed market due to its thriving trade with China, which is just across the border over the Duman (or Tumen) River.
Footage taken in October shows a bustling market, but the same place in March is almost deserted, with only a few traders selling goods. In October, the market was overflowing with food, clothes, shoes, cooking oils, squid and other goods. But three months after the currency debacle, only a few bags of corn are visible in the stalls. Products that were part of South Korean aid shipments to North Korea can also be spotted.
I’m unable to embed the video for some reason, but the clickthrough is worth it. Consider how much human suffering must have accompanied closing this market. For instance:
Violence is growing in North Korea amid a worsening food shortage after the disastrous currency revaluation last December, according to sources in the hermit country.
One person was killed by armed guards on Feb. 16 when a group of people attempted to rob a food train at Komusan Railway Station in Puryong-gun, North Hamgyong Province, defector group North Korea Intellectuals Solidarity said. The attack came on North Korean leader Kim Jong-il’s birthday after a disastrous currency reform sent food prices skyrocketing.
On food safety
One of the arguments I’ve made in defense of schools choosing to buy local agricultural products is that when you deal with someone you know, you’re able to verify the safety and quality of the products you’re getting fairly easily. This is diametrically opposed to the other option: buying agricultural products that are made by industrial agriculture operations, which means relying on an inefficient and functionally useless federal regulatory mechanism. Some people (particularly Sarah Brodsky at the Show-Me Institute) defend the broken system of industrial agriculture without ever considering the dangers implicit in this system. In this vein, here is Helena Bottemiller describing how federal regulatory mechanisms are woefully inadequate in ensuring basic food safey:
Veterinary drugs, pesticides, and heavy metals are making it onto our plates via meat, according to a federal audit released this week.
The U.S. Department of Agriculture (USDA) Office of the Inspector General (OIG) report concludes that the agencies responsible for monitoring harmful residues are “not accomplishing” their mission.
“Together, [USDA’s Food Safety Inspection Service], FDA, and EPA have not established thresholds for many dangerous substances (e.g., copper or dioxin), which has resulted in meat with these substances being distributed in commerce,” says the audit, which identifies lack of agency commitment and poor interagency coordination as key issues.
The OIG also found that FSIS does not attempt to recall meat, even when its tests have confirmed the “excessive presence of veterinary drugs.”
“Not only does overuse of antibiotics help create antibiotic-resistant strains of diseases, but the residues of certain drugs and heavy metals can have potentially adverse health consequences if they are consumed in meat,” OIG reported. The audit offers the following table, which lists five drugs and substances found in meat and their potential health effects (click to enlarge):
On rights and healthcare re: Pileus
I caught this discussion of rights over at Pileus. The writer is James Otteson:
By contrast, granting people a right to health care means imposing positive duties on some for the benefit of others. That is precisely the sort of liberty-impinging exploitation that the Declaration meant to rule out. Congressional action declaring it legal does not change its essential character, just as the legality of slavery at one time in this country did not alter its essential character. Using some for the benefit of others has an intrinsic moral repugnance that is not erased by congressional action or by closing our eyes to the actual source of or the full costs of the proposed benefits.
Take one other case. A measure in the recently passed ObamaCare bill prohibits private companies from offering federally guaranteed student loans, leaving the federal government itself as the only lender. Part of the rationale for this is that people have a “right” to education that should, therefore, be guaranteed and provided by the government.
I want to talk about the second case first. While I agree nominally with Otteson’s discussion of ‘rights’ here in the positive and normative sense, I think that the scenario has more to offer. Specifically: why do private companies have the right to offer federally-guaranteed loans? The federal government as an entity who chooses to act in a market for loans is not obligated to commit to any stipulation regarding who can offer loans backed with their money. Sure you can criticize the rationale that people have a right to an education, but the rationale is a different thing from the policy itself.
The rights discussion on healthcare is far more compelling of an argument. But I don’t evaluate these policies in a vaccuum. I think if we are intellectually honest then we admit that for a long time these sensible libertarian ideas have been lip candy for the right wing, who uses the discussion on rights as a way to distract from larger inequities that their policies perpetuate (for instance, opposition to same sex marriages). So yes, Otteson is correct in a world where there is an equal playing field. But in this world the content of the message is a tool, whether for good or for bad, and there are many different playing fields, dominated by many different players.
Healthcare in particular is too broad of a topic to make these simple generalizations about. How do libertarians respond to the many instances where someone’s insurance coverage is revoked right after they fall sick and begin making claims? The obvious answer is that there should be some kind of perfect third party to facilitate arbitration. Libertarians think that the market is that perfect third party. But while that theory is true in theory, in practice markets are subject to constraints that make them vastly more imperfect mechanisms.
Extend my counter-example. I have insurance, I get cancer, my insurance company cancels my coverage as a pre-existing condition…and there is no good market actor to redress this dispute because no one has an incentive to. At every step of the way, I, the consumer, am hobbled by the asymmetries of power and information that exist. To fight this claim, I have to find a lawyer (a costly process) who has to navigate a costly process for resolution of my complaint. By its nature, this system acts as if it were bound by the laws of inertia. In a nutshell, the structure is one that is biased towards the status quo.
Here I want to step back and make an argument about something we don’t talk enough about. That thing is common pool resources. A good example of a common pool resource might be a fishing ground. No particular person can own the sea where the fish are, nor can they own the fish prior to catch. In this world you’d expect the tragedy of the commons; everyone overfishes to maximize their short term profits. But of course this is absurd. In real life, you find that people tend to set up formal or informal governance mechanisms to allocate the fishery resources to optimize its production over time.
I think of healthcare in a sense as mechanism to optimize the most important common pool resource we have: ourselves. Think about it this way. A government’s function is to provide those goods and services that the private sector cannot. There are disagreements on where the line lies but generally, providing for the public safety is one of them. In this regard we have a national defense program that is the third largest line on the budget. We spend between 38-44% of tax revenues on national defense. To this day, I cannot recall a single conservative I know who says we need to cut military spending (I’m sure they exist, but they don’t get the headlines). No one is giving the President credit for what might be one of the more significant and unprecedented events in Presidential history: cutting defense spending in the last budget.
But ultimately, our most meaningful resource is not our guns or nuclear weapons or aircraft carriers. Our most important resource is our people. In a world where so many people are hobbled by a market structure that maximizes producer surplus at the expense of consumer surplus, I think there is a strong argument for the government to provide healthcare.
I agree with many people who say the bill that actually passed is badly written and contains too much, etc, etc. But let’s be honest and say that the world does not admit of the easy solutions that follow from a naive interpretation of classical liberal/libertarian thinking.
Anti-Mankiw: What’s Wrong with the Most Popular Economics Textbook
Here I am reproducing in its entirety a post over on Facebook from my old college roommate and current TFA teacher, Jack Soltysik. Jack remains a friend, of course, and is the most motivated smart person I know. Since leaving college, we have kept in contact and my respect for his intellectual faculties and integrity has only grown.
On a side note, my 2000 National Spelling Bee winning brother went to Harvard to become a doctor ([sarcasm]and of course is now getting into finance [/sarcasm]) and as recently as 2007 told me that he sometimes had dinner with professors including Mankiw.
In any case, I agree with Jack on Mankiw. But here I’ll let him speak for himself. The entire post is worth reading:
Greg Mankiw writes the most widely used econ text in the country and I thought it was cool that he linked to some recent protests (http://gregmankiw.blogspot.com/2010/04/anti-mankiw-movement.html). What follows, I guess, is my 2 cents.
A few years back, Mankiw wrote:
“Some students may view the economic mainstream as right of center. That assessment is probably correct, at least as judged by the universe of college professors. But the job of an introductory course is to present, as honestly as possible, the consensus of the profession. If the typical economist is more market-friendly than the typical literature professor, then that point of view will likely be reflected in the leading textbooks.”
I think that I’m *generally* satisfied with this approach to academic openness and freedom. Sociologists are to the left of political scientists which are to the left of economists (please keep in mind that something like 80-90% of economists identify as Democrats and the the numbers for journal editors are higher). I don’t think any discipline is crazy; I think most ideas in college curricula are reasonable and to the extent that you disagree with models of thinking, don’t take the course; and if you can’t avoid the course, it will probably do good for you to be exposed to contrarian ideas; and you will have plenty of opportunities to study and read about whatever the hell you want.
But I think a bigger issue is that the foundations of economics, by the beginning of the 20th century, were divorced from ethics, rewedded to calculus, and there has been very little looking back. When Keynes weaved together his General Theory to get a trodden world out of the depression, the entire “trick” was analytical; it was done on pen and paper with maths. He opens up his book by saying:
“The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to thro over the axiom of parallels and to work out a non-Euclidean geometry.”
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