New ‘summer eating allowance’ hard to stomach for low earning taxpayers

Rishi Sunak on the economy and lessons learnt from the Covid-19 ...

[This is a guest post by Dr Wesley Key, Senior Lecturer in Social Policy at the University of Lincoln.]

The announcement on 8th July 2020 by Chancellor Rishi Sunak that the government will refund 50% of the cost of meals out during Mondays-Wednesdays in August 2020, at an estimated cost to the taxpayer of £500m, will, for many reasons, be hard to stomach for low paid working age taxpayers who cannot afford to eat out themselves. For such people, paying the rent, heating their homes and feeding their children will often leave little or nothing left over for dining out.

This new ‘summer eating allowance’ is likely to disproportionately benefit affluent older people with high levels of disposable income, whose custom typically helps to sustain many eating outlets during the mid-day/afternoon periods of the working week. The very same affluent older people who have qualified, with no means test, for free prescriptions aged 60-plus, for a free TV licence if a household member is aged 75-plus (up to August 2020), for a Winter Fuel Payment if a household member has reached state pension age, and for free local bus travel if they have reached women’s state pension age, regardless of their gender. The very same older people to benefit from the seven-fold rise in UK private pension income during 1977-2016.

Low paid and benefit dependent parents may also wonder why Chancellor Sunak is splashing out such a large sum of taxpayers’ cash, given that it took the efforts of Manchester United footballer Marcus Rashford to change government policy on 16th June 2020 to ensure that children eligible for Free School Meals continued to receive the relevant food vouchers during the elongated summer vacation period. This ‘COVID Summer Food Fund‘ was eventually set up at an estimated cost of £120m, less than a quarter of the cost of Sunak’s ‘Eat out to help out’ scheme, a.k.a. the ‘summer eating allowance.’

In the longer term, when the reality of tax rises and/or spending cuts to pay for the COIVD-19 bailout begins to bite, the government needs to focus on intergenerational fairness and ensure that well off pensioners pay their share of the nation’s debt. It is time that a government made non-poor over-60s purchase their medication via a Prescription Prepayment Certificate (PPC), which in 2020-21 costs younger adults £29.65 for 3 months or £105.90 for 12 months, sums well within the reach of people in receipt of private and state pension payments. It is also time to make employees aged 65-plus pay a tax of the same rate as the employee National Insurance Contributions paid by younger workers, in order for older workers to fully contribute to the funding of the public services that they use more extensively than their younger colleagues. Such moves to cut the benefits received by, and increase the tax taken from, healthy, active people in their 60s and 70s would help to increase the funding of the social care services that are largely used by people aged 80-plus who are no longer able to undertake paid work and are entitled to face lower user charges for the social care that they require to ensure a degree of dignity and independence in old age.

WatsOn My Mind: Stimulus Multipliers

The problems of trying to actually identify Keynesian spending multipliers is nothing new, but it was brought home to me this last week. You see, my mother-in-law passed away just after her stimulus check arrived. Her children chose to use it to pay for her headstone. Being more familiar with the discussion than most spending, I break it down this way:

Someone in government, trying to figure out how many jobs were created or saved by the stimulus bill, would ask us what we spent the money on. We would tell them it went for a headstone. They might figure out how much the monument workers are paid, how much of that $1200 went to the carvers and how much to the stone itself and multiply it throughout by marginal propensities to consume and any other leakages in the system to come up with a fancy number. (For those of to whom that is all Greek, see Jacob Clifford’s introduction.)

The usual first response to this is to cite the Broken Window Fallacy (introductory video here). That stimulus money had to have come from somewhere. Someone else will be taxed or have their savings inflated away to pay for it eventually, and the first round calculation does not take into account the jobs lost from this confiscatory taxation/seigniorage. Thank you, Bastiat.

The other problem more visible to me than usual is that we (the assembled kids) were totally going to get her a headstone either way. The stimulus check was entirely fungible and it will actually be spent over time with a little bit here and a little bit there because someone in the family has more in their savings account than they otherwise would have. Trying to follow and account for that spending and its effects borders on the well-nigh impossible. Forget the distinction between approximate right and precisely wrong (a quote misattributed to Keynes), it’s not even possible to know if you’re even in the right ballpark!

And those distinctions are still before factoring in monetary offset. Though with Powell begging the government to spend more, you might think that’s less of an issue also, but Sumner responds to that idea in the comments section at the same link.

PS – What did we do with our family’s stimulus check? Far as I know it’s still sitting in the savings account. Our needs are met, so we try to keep our mpc kind of low.

From the comments: follow on effects of liability rules?

Far be it from me to to tell anyone how to think, or what a word belonging to everyone really means. But I’m going to quickly indulge in a No True Scotsman-ism. Libertarianism means being skeptical of power. (I recently saw a great line on libertarians that needs sharing: “…every libertarian agrees on two things: that there’s only one libertarian and it’s them.”)

So I’m optimistic to see reductions in the amount of power government agents can exercise. I’m particularly optimistic to see changes that don’t take the form of “we’re going to manage that bit of power over there with a new bit of power over here” (i.e. regulation). A very short term version of such a change happened when Buffalo’s police union announced they wouldn’t cover the legal fees of their riot squad.

My enthusiasm was followed by the right question in the comments: “If this obtains, what is the likely effect upon the lives and property of Buffalo dwellers?”

In principle, we could dig into this question empirically, but not until we’ve got decent data with variation in the liability rules governing police behaviors. In the mean time…

Let’s break the question down: What are the average effects and how will those effects differ between different parts of Buffalo? What will be the effects on violent crime? What will be the effects on property crime? And how will those effects affect property values?

The most obvious and immediate change will be a reduction in police use of force. As we’ve seen, at least some of that force is used criminally. This change in the rules means reducing the likelihood of another Gugino incident. Which means a reduced likelihood of pulling resources away from productive uses to cover all the various costs involved in such incidents–the medical care and suffering, the resources surrounding arresting the perpetrators and keeping them safe should they end up incarcerated, the legal fees, etc. All else equal (i.e. ignoring secondary effects), this is equivalent to raising the cost of breaking windows–bad for the glazier, but more than offset to window owners.

Of course, the real question is about the impact of reducing the non-criminal use of force by police. The Buffalo experiment looks to be short-term and restricted to the riot squad, so we won’t be able to draw any conclusions from this (except, of course, that it confirms my priors and you’re looking at things the wrong way if you disagree with me. </s>)

The more interesting question is how extending this liability issue–i.e. curtailing qualified immunity–would affect the long run equilibrium? That outcome would eventually be capitalized into the prices of real estate. Safer neighborhoods will have higher property values.

Here’s my prediction: property values will increase in poor and non-white neighborhoods relative to wealthier and whiter neighborhoods.

Some caveats are in order:

  • I suspect that in most American cities poor neighborhoods are under-served by the police, so reduced legitimate police force will have minimal impact.
  • I also suspect (hopefully someone will share some helpful resources in the comments) that illegitimate police force is mostly concentrated in poor neighborhoods.
  • Wealthy neighborhoods might see some increased crime from reduced legitimate police force, but I’m doubtful. I think more likely the impact will be more like the effects of price discrimination–why pay more if the alternative isn’t terrible? To the extent poor neighborhoods get less terrible, the relative draw of rich neighborhoods will decreases.
  • There are any number of other changes coming down the pipeline that will make it difficult to disentangle the effects of qualified immunity holding all else equal.
  • To the extent we see a general improvement in the quality of policing (more ‘serve & protect’ and less cracking skulls) we should see an increase in property values across the board.
  • White flight is likely to happen which will bias results towards my conclusions. I want my hypothesis to be interpreted holding white flight constant.
  • The effects will go beyond just real estate price. I would expect something like this: for every $1 price reduction in rich neighborhoods, there will be <$1 price increase in poor neighborhoods, but the gap will be made up in other quality-of-life changes such as reduced chance of incarceration for victimless crimes, fewer hours of work missed, fewer injuries at the hands of police, etc.
  • I hope that these quality of life changes will make empirical analysis even more difficult as other follow on effects extend the time horizon of people in poor neighborhoods–e.g. if fewer people are sent to jail, that could lead to fewer young men getting involved in crime leading to entrepreneurs being more willing to invest in their communities.

My predictions are absolutely shaded by my ideological biases. And there’s no getting around how complicated these changes are (hopefully) going to be. But I feel confident predicting an implicit shift of wealth from the paranoid wealthy to the disenfranchised.

Is there anyone here who disagrees enough to help me clarify my thinking by putting money on it?

Brazil’s economy after the pandemic

I wrote an article on the path to economic recovery in Brazil after the pandemic. The article was published by Instituto Monte Castelo, a Brasilia-based think tank, and it is in Portuguese. Here is a summary of the key points.

Brazil’s economy is overwhelmingly interventionist, as shown by its progress (or lack thereof) in data compiled by the World Bank in its Doing Business studies, or Heritage’s Foundation Index of Economic Freedom, or the World Economic Forum’s Global Competitiveness Report. As predicted by theories of economic interventionism (more recently, Robert Higgs and Sanford Ikeda; but, classically, Ludwig von Mises), a time of crisis invites more government intervention or, remarkably at certain historical junctures, disintervention.

From a free market perspective, what can be done?

Brazil’s situation is, to a certain extent, a reflection of the global scenario. A global crisis was bound to happen, given the unrealistic inflation of asset prices in global financial markets, reflecting the artificial propping up of the major economies around the world by injections of money and credit, as well as increased public spending after 2009. COVID-19 triggered it, but it was the tip of the iceberg. Brazil suffered from capital outflows and its currency devalued sharply against the US dollar.

In terms of how the external scenario reflects on Brazil, the only thing that can be done is decrease the level of risk in Brazil’s economy, or maintain interest rates on a level that reflects the amount of risk in the economy (given that Brazil’s Central Bank has been cutting rates throughout the year). The fact that the President is fighting with his cabinet and with the other branches of the government also reflects poorly in terms of political risk.

However, there is a lot that can be done in terms of the domestic scenario. The economic crisis resulting from the pandemic also reflects, in part, a change in consumer preferences and in how things will have to be done safely to avoid contamination. This means that some businesses will not thrive as much (restaurants, for example) and that other industries will incur in much higher costs to operate more safely. This disequilibrium would have happened regardless of government-mandated restrictions, and alert entrepreneurs will spot a chance to obtain gain by creating value for their consumers and clients.

However, it’s much harder to shut down inefficient companies, fire people, and open new ones, and hire people, in a heavily interventionist economy such as Brazil’s.

Shutdowns and other government imposed restrictions, especially on the local level, are making things worse. Brazil’s case is one of a milder shutdown. The government is offering a small compensation package for the trouble, but not much compared to the “stimulus” packages in Europe and the US. This probably reflects a more sober approach by Brazil’s Central Bank. However, on the one hand small businesses struggle to get access to credit due to the red tape, so this favors large companies and will concentrate the market in the long run. There’s also an idea of propping up airline companies and other inefficient businesses. This, in my view, would be a mistake. But lobbyists will line up to get their share of the cake.

The path to economic recovery in Brazil will necessarily have to involve local and federal deregulation, cutting lots of red tape, and major tax reforms. Labor laws have been made more flexible a few years ago, and the current administration managed to pass a massive pension reform that will reconfigure some of the public debt. However, this is not enough. Deeper reforms to cut public spending on a more permanent basis will have to be proposed, and the federal government will have to work harder to signal institutional and political stability and predictability.

The challenge is that the current administration can’t get reelected in 2022 with very little to show in terms of the economy, and the effects of the reforms proposed above will only become clearer in the long term. The temptation is to do just what the US seems to be doing – anti-trade nationalism to punish a foreign scapegoat, or the abstract scapegoat of ‘globalism’, appease some of the cronies with monetary and fiscal populism, red herrings making the population and the media focus on culture wars, etc. But this temptation is to be expected according to the economic theory of interventionism. Whether it will be overcome, only time can tell.

Cyclical History

An interesting result from behavioral/experimental economics is that bubbles can happen even with smart people who should know better. But once those people go through a bubble, they do a better job of avoiding bubbles in the future.

I think this result has major implications for society more broadly and I think we’re seeing it play out in the news. In the ’70s people learned a lot of hard lessons about things like stagflation (and racism–but ask a sociologist about that) that made the following decades easier. But those people gradually retired and were replaced with people who weren’t inoculated to certain ideas (like the idea of inflating your way out of a supply-side recession).

We’re now living in a world where the median voter and her elected representatives have unlearned those hard lessons. And so we’re going to live through the 1970’s again. Hopefully. If we’re not so lucky we might live through the 1930’s again.

Broken incentives in medical research

Last week, I sat down with Scott Johnson of the Device Alliance to discuss how medical research is communicated only through archaic and disorganized methods, and how the root of this is the “economy” of Impact Factor, citations, and tenure-seeking as opposed to an exercise in scientific communication.

We also discussed a vision of the future of medical publishing, where the basic method of communicating knowledge was no longer uploading a PDF but contributing structured data to a living, growing database.

You can listen here: https://www.devicealliance.org/medtech_radio_podcast/

As background, I recommend the recent work by Patrick Collison and Tyler Cowen on broken incentives in medical research funding (as opposed to publishing), as I think their research on funding shows that a great slow-down in medical innovation has resulted from systematic errors in organizing knowledge gathering. Mark Zuckerberg actually interviewed them about it here: https://conversationswithtyler.com/episodes/mark-zuckerberg-interviews-patrick-collison-and-tyler-cowen/.

In Defence of Economics Imperialism

Under the guise of the end of “Neoliberalism”, economics is losing its grip. Troubles had begun with the 2008 financial crisis. As people had once lost their faith in the Gold Standard, by 2008 the consensus upon the self-regulation of the markets slept away. Even some of the most notorious free-marketeers -like Alan Greenspan- became renegade from their lifelong beliefs.

The COVID-19 crisis seems to complete that process. However, it is not a process of the end of Neoliberalism, but of the end of what Gary Becker called the “economic way of thinking” -and this is truly bad news. The end of the imperialism of economics is, in some way, the end of rationality and universalism in political thinking.

The demise of economics in politics, in fact, had begun just some months before the 2007-2008 Crisis: when Tony Blair stepped down from Downing Street. Or even before: when George W. Bush, trying to avoid losing his re-election as his father had done in 1992, crushed the superavit inherited from Bill Clinton’s administration and created twin deficits. But Bush’s misfortunes were at least generated by an ill-understanding of economics. We are in danger of the near future being ruled by a not-understanding of economics at all. That is why we should not renounce the use of the economic way of thinking.

The key is not to leave the task only to the economists. Philosophers, lawyers, sociologists, historians, and all sorts of social scientists should get involved. Milton Friedman was the scapegoat of the Left, but the 1980’s and 1990’s came after decades of works of thinkers of all nationalities and sorts, like Karl Popper, Robert Nozick, Friedrich Hayek, Bruno Leoni, Max Weber, Raymond Aron, T. S. Ashton, Gary Becker, Robert Mundell, James M. Buchanan, Gordon Tullock, Anthony Downs and many more.

Evolution in Everything: Handwriting

There’s a whole set of simple but profound lessons that, if I were being lazy, I might call “the economic way of thinking.” We move through a hand-me-down world, solving some problems and creating new problems, adjusting and adapting, and shaping the world that we pass on to the next generation.

I just stumbled on a lovely example in an article about ballpoint pens and the end of cursive. A technological change changed the nature of handwriting, but the structure of human capital lagged behind. Specifically, the widespread adoption of ballpoint pens meant the old way of writing–how to hold the pen, how to form the letters, etc.–was poorly suited to the tool being used. This should have been an opportunity to test unchecked assumptions (e.g. about what the “correct” way to write is) but instead an inefficient practice (cursive writing with a bic pen) persisted in the face of increasing obsolescence.

I particularly like the idea of trying something new (fountain pens) can lead to a realization that some old method has a lot more going for it than was obvious to the non-alert.

I wonder how many other mundane skills, shaped to accommodate outmoded objects, persist beyond their utility. It’s not news to anyone that students used to write with fountain pens, but knowing this isn’t the same as the tactile experience of writing with one. Without that experience, it’s easy to continue past practice without stopping to notice that the action no longer fits the tool. Perhaps “saving handwriting” is less a matter of invoking blind nostalgia and more a process of examining the historical use of ordinary technologies as a way to understand contemporary ones. Otherwise we may not realize which habits are worth passing on, and which are vestiges of circumstances long since past.

How the Ballpoint Pen Killed Cursive

Learning takes time. So in a dynamic society, it’s natural that there will always be some sort of practice outliving its utility. The only other way I see is stagnation: no new methods, no new problems, and we eventually setting into a “making the best of it” equilibrium.

The discovery of each of these inefficiencies creates some pocket of entrepreneurship. Sometimes it’s a massive, market oriented bit of entrepreneurship–like Bic industrializing the process of making cheap, reliable pens. Sometimes it’s a niche community of hobbyists (who might be incubating the next big thing). But that entrepreneurial reaction to inefficiency is pretty exciting. Realizing how my bad handwriting is the outcome of a technical problem makes me want to try fountain pens.

Wats On My Mind: the state of the economy

I wrote the following update for my Principles of Macroeconomics students and thought it might just count as an update for Wats On My Mind.

In the first two minutes of class, I asked you how you would know how the economy is doing. Let’s focus on our three big areas: GDP, unemployment, and inflation.

Initial estimates are that GDP decreased by 4.8% in the first quarter (Jan-Mar). Let me comment on that a bit:

  1. That number is almost certainly inaccurate. It will be revised 3 months from now, 6 months from now, and be finalized 9 months from now. That is totally normal – as more and more data rolls in, our estimates get better. My bet is that the number is worse than that because closed firms won’t be reporting anything yet.
  2. The number for the second quarter will certainly be worse than that. We were only closed for 2-3 weeks in March, so the fact that we’re done that much in such a short window is a bad sign. We have already been closed longer in this quarter and the careful, measured opening we’re doing right now – which I think is wise to prevent a new spike of cases – won’t make for an instantaneous rebound.
  3. This is as bad as we saw during the Great Recession, but faster. Again, my hope and expectation is that our recovery will also be faster.
  4. GDP dropped in the EU by 14%. So it could be a lot worse!

The Bureau of Labor Statistics also released new numbers. So far 30 million Americans have filed for unemployment. That is roughly 18-19% of the workforce. This is officially, as expected, the highest unemployment rate since the Great Depression in the 1930s. The good news is that the number of new applicants has been going down each week, from 6.8 million at the end of March to “only” 3.8 million last week. (Recall: That’s still 4x larger than the previous high set in the 1980s.) The other bit of good news is that 90% of unemployed workers expect to return to their old job, while that number is usually only 40%. That gives me more encouragement that we could quickly bounce back.

Inflation is DOWN. If this were primarily a supply shock, we would be seeing overall higher prices. That means the drop in aggregate demand is bigger than the supply shock. To a Keynesian or a Monetarist, that also means that all the fiscal and monetary stimulus we have done so far is not enough and more needs to be done. To a Classical economist, the thing that needs to be fixed is still supply – demand itself is not terribly important. A Hayekian, of course, thinks all this stimulus is making things worse – it messes with the price signals markets rely on.

To get a rough estimate of where inflation is going, I have been recommending comparing TIPS bonds to nominal bonds because the difference between the interest rate on those bonds (the TIPS spread) is the market’s best guess of inflation. As you can see here the TIPS spread fell from 1.8% in 2019 to 0.5% at the end of March. During April, it has recovered slightly to 1-1.2%. A very rough guesstimate based on that suggests we would need a stimulus 3x as large as we have done right now to return inflation expectations to normal. !!!

The very idea of having Congress spend an extra $5 trillion on top of what is already being done is more than my little fiscally-conservative heart can comprehend just now. Politically, though, I expect Congress will find it in their hearts/re-election campaigns to have another round of stimulus. The Federal Reserve has even called on Congress to spend more, so have no fears of monetary offset hampering anything. Here is a monetarist arguing the Fed needs to do a great deal more to ensure spending expectations don’t fall. One of the points, though, is that we should not expect hyperinflation is around the corner.

On that first day, most students suggested looking at the stock market. From Feb 21-Mar 23 the Dow lost 10,000 points – 1/3 of its value. Since then it has recovered more than half. Notice that the drop came BEFORE quarantine and that the stock market has been recovering even as unemployment has climbed to record heights. This is another reason I don’t recommend imagining that the stock market gives a clear and unbiased view of what’s going on in “the economy”! The situation right now is clearly much worse than it was a month ago, so trying to figure out current conditions would not make sense. If I wanted to give it the best spin possible, I’d say the stock market is predicting better times ahead despite how bad things currently are.

 A few other data points:

  • 59% of Americans say they can social distance as long as needed, which is up from a few weeks ago. (Gallup)
  • Western European countries started reopening earlier than we have and they are starting to see an increase in cases and deaths again. Now, so far that’s only a 3-day trend and it could just be a blip, but it’s not encouraging.
  • Most people are actually behaving like decent, responsible people during the crisis – and they usually do.

Paid Sick Leave and Schelling Focal Points

Paid sick leave is something I want more people to have. Of course it’s a good thing. Sick leave is valuable, but it’s not free so we have to ask it it’s worth it.

Right around the 11:30 mark is a tragic and hilarious line: “Dildos are not essential items. Books for kids, yes, but dildos? … No!” Good for John Oliver noting that deciding what is essential isn’t straight forward–apparently frivolous things might keep people inside and so serve the public health.

This is a classic Austrian point: prices (are supposed to) communicate information about how urgently people want a product. We run into trouble trying to prevent prices from reflecting the underlying economic crappiness of a crisis. Price gouging should be allowed for toilet paper and especially for grocery/Amazon workers. And the price of grocery workers should be passed on to consumers.

What we’ve got now requires each of us to not only ask “am I willing to pay this price?” but also engage in a moral calculus that is hard. I have to ask (as a person striving to be moral) if it’s really worth ordering X, Y, and Z from Amazon. But as a person who has to strive to be moral, it’s entirely too easy to fall for bad rationalizations.

So how do we help these essential-yet-replaceable* workers? Paid sick leave sure sounds good. And given the externalities involved in a pandemic, there’s a strong argument for mandating it.

But it’s worth remembering (particularly as a long run policy) that if we push on one part of a compensation bundle, something’s going to give. If we require employers to provide a company car (or simply encourage company cars through preferential tax laws), we shouldn’t be surprised to see monetary compensation fall. The same logic applies to paid sick leave.

But I’m my own devil’s advocate, so let me make a counter argument. I rarely use my sick days. I think I’ve taken 2 or 3 in the last 6 years. (I’m absolutely reevaluating that position now!) There’s this idea floating around in the back of my head that tells me to just tough it out and keep working. This isn’t because I carefully weighed pros and cons, it’s just received “wisdom” picked up by osmosis from the broader culture.

American culture values work over value. There’s no shortage of bullshit work because we’re in a work-too-hard equilibrium. This is not to say that hard work doesn’t have benefits. I’m happy when ambitious entrepreneurs work “too” hard to provide greater value. But there are a lot of cases where we create work for its own sake (especially in the higher ed racket, but apparently we’re not alone).

Essentially, we’re all playing a coordination game where we choose between “[appear to] work to make things better” and “stay home instead of passing your illness to other people.” Given American work culture, the Schelling focal point is <work, work>.

On the compensation end of things employers have to decide between offering more sick leave or some other compensation (like money). In this end, there is some benefit to zigging where other employers zag. If I’m running the only business to offer paid paternity leave, I get my pick of the best family-oriented workers while my competitors have to outbid each other to get the best of the other workers. But any mid-level HR manager is more likely to play the risk-averse strategy of following “best practices.”

So we’re in an equilibrium that underrates sick leave. We want to be in an equilibrium where it’s just good business sense to offer sick leave during a global pandemic. But coming from our current equilibrium, offering sick leave is a costly decision to privately provide a public good; it’s unlikely to happen unless the culture already promotes it.

I think we can get that equilibrium. I think we’re already moving towards it (ask yourself: would the board of the East India Company be more likely to offer sick leave than Amazon?). But we’re not there yet.

Paid sick leave should be good business sense right now**. But it depends on a culture where such behavior is widespread. I’m not convinced we could flip a switch and get that culture over night. Given that, I’m at least somewhat okay with contradicting my libertarian priors and calling for emergency mandates for paid sick leave. 2020 America isn’t likely to coordinate on the “right” short-term solution and coercion is probably the most efficient*** way to deal with this common pool problem. But outside of a public health emergency we shouldn’t allow top down mandates about the mix of compensation offered in markets (certainly not with the sort of people we elect to be on top).


(A couple rhetorical points: First, John Oliver isn’t speaking the language of those on the right. They won’t even be convinced that the issues he’s talking about are important. I think that’s a shame. Second, this is a tough time to try to argue against paid sick leave. In 2020 America, mandatory paid sick leave is probably required because we’re at the wrong Schelling point. Again, I don’t think conservatives or right-libertarians will find Oliver’s motivations convincing, but I believe that they could be persuaded. But that’s another blog post.)

(Two important counterpoints to the above: first, price increases hurt the poor. The way to solve that is to give charity money to the poor, not to try to make markets communicate information about relative scarcity and act as charity–that’s half-assing twice and it’s bound to be more inefficient than the charity would be costly. Second many people categorized as “essential” aren’t in a position to demand higher wages*. I don’t have an easy solution to this issue. Let’s talk about it in the comments.)

*Which is to say, workers who are in the same position as water in the diamond-water paradox.
**Not to say it would be cheap or easy.
***There you go. Now my friends on the left can accuse me of being a bloodless economist for opposing paid sick leave in general, and my friends on the right can accuse me of being a bloodless economist for supporting

Damned Models and Cutting off the Chinese

I have a good eye for what ought to be there but isn’t. Don’t congratulate me; it’s a natural talent. I am retired so, I usually spend hours listening to the radio, reading newspapers and, watching television and, (Oops) on the internet. Nowadays, I do more of the same.

Today’s lecture is going to be a little longer than usual, on the one hand. On the other hand, there will not be a test. Bear with me; it’s going to be worth it (if I say so myself).

The first thing that’s missing from the endless and frankly a little sickening commentary on the C-virus epidemic is a good explanation of what’s a “model.” I mean the kind of models that are being blamed a little bit everywhere and especially in the conservative media for seemingly wildly inflated predictions (of infections, of deaths, of anything connected to this illness). Just from listening to talk radio, I think that some, or many, believe that with “computer models,” computers actually do the thinking instead of people. It’s not so.

The second thing missing is a clear description of the downside of national economic self-sufficency that appears so tempting now that we are extra-sensitive to both the comparative incompetence of our China-based suppliers, and to the possible ill-will of the Chinese Communist authorities.

First, first: a model is logically pretty much the same thing as we do when we say, ” On the one hand, on the other hand.” That’s as in, “One the on hand, If have saved $20, I will buy a nice cake; on the other hand, if I manage to save $200, I will look for a good used bike.”

The problems are: 1 that we have only so many hands; if we had one hundred each, and remembered each, we could produce mental models that cover more possibilities; 2 that we are not agile at combining possibilities, like this: “If the third hand and the fortieth hand are combined with the fifty-first then, this will happen.”

Models – designed by humans working slowly – can be entered into computers with many values and many combinations of values to tell us what would (WOULD) happen if… That’s all, folks.

Don’t blame the models, don’t blame those who build the models, in this capacity, rather, blame those who don’t do the needful to explain to decision-makers what actual models do and don’t do. (It’s true that they are often the same as those who actually construct the models but in a different role.)

Also, blame American universities and colleges that should have been in the business of teaching this stuff to all students since the late sixties and that have only done it for a tiny elite minority. A big missed opportunity. Even high school students could learn, I believe.

Second undiscussed issue. Under normal circumstances, self-sufficiency has a certain intuitive appeal: Let’s not count on others because they might fail, or fail us and, at any rate, distance makes the best linkages vulnerable. Now that we worry about running out of essential medical supplies made in China, now that we fear a shortage of the raw materials that go into our medical drugs, our intuition seems broadly vindicated. It did not help that a highly placed Chinese Communist official actually threatened the US aloud, about a month ago, with withholding medications. (I am guessing he is not going to have a happy retirement.)

Much about our intuition is correct, of course. As I never tire of stating (wittily, if you ask me), we should not count on steel deliveries from China to build the naval ships we would use in a war with China. The steel deliveries might be too late.

That’s on the one hand. On the other hand, there is a downside to national self-sufficiency. It violates the general principle that specialization makes for efficiency. Just imagine that you had to grow all your own grain, harvest it, mill it, raise your own cattle, slaughter it, butcher it, skin it, preserve the meat, treat the skins (and cut and sew clothes out of them). You would do a bad job of some of these tasks, at least, possibly of all. You would have much less to consume than is true now. You would be poor.

And that’s the downside: National self sufficiency is a sure path to poverty. I am not speaking of small differences but of big ones. I remember clearly when the cheapest hammer at the hardware store cost $20, five years later, the cheapest hammer cost only $5. What happened in between was expanded imports from China. (Don’t even begin to talk about quality; the difference among the cheapest items of a kind is largely illusory anyway, or much exaggerated.) And if you think this is a special case, ask your self if the Canadians – who love bananas – should grow their own in the name of self-sufficiency.* (For an expanded view of international trade, see my series of articulated short essays beginning here: “Protectionism; Free Trade, Step-by-Step.”)

Here again, American colleges and universities deserve strong blame. First, many don’t even require a course in economics to graduate. One of the best undergraduates I have known personally, an honors students who is now very successful in her career, never heard a single lecture on anything pertaining to economics. Second, economics professors, by and large, do a piss-poor job of teaching international trade. Across 25 years of teaching in a business school, I have met a fair number of good MBA students who had taken three courses in international trade and still did not see the possible downside of self-sufficiency. So, this simple idea is not widespread among the educated populace. It’s not well anchored enough in the opinion media for many to push back intelligently against the wave of demands that the US minimize its dependency on what we obtain from abroad in general. (A national policy designed to induce American companies to source in Vietnam, for example, rather than in China is a different and defensible proposition.)

So, here you have it: Models are not to blame, confusion about them is; economic self-sufficiency is the road to poverty though it might be worth it. Knowing these two things does not prevent us from taking action collectively. It makes for more rational action in these irrational times.

* Those of you who received a decent education in economics might wonder here if I have just dealt improperly with the topic of Comparative Advantage. I haven’t, I have not even begun.

A Timely Agent Based Model

I’m going to play economic imperialist and declare that epidemiology is partly within the domain of economics. I’m not sure how big the overlap is, but certainly there are economic questions that bear epidemiological type modeling. The movement of ideas is, in the long run, as important as the movement of a virus is in the short run. In any event, economists should be using this sort of methodology more often.

Crisis, governments and the micro-macro conundrum

Layoffs and salary cuts are individual firm responses to a crisis that may make sense from a micro perspective- it is about saving money – but they will have dire consequences on the macro level.

I lived through this in Greece. Ten years ago, every firm was expecting the worst to come from the memorandum. They started making people redundant, pulling out from planned investment and cutting salaries. Unemployment went up, demand collapsed, public revenue went down, more austerity measures were needed and the downward spiral deepened. The country ended up losing one third of its economy in just four years.

Will it now be Greece on steroids everywhere?

The side effects of myriads of micro adaptations appear on the macro level. This is a key problem for economics and is particularly challenging for Austrian economics. Entrepreneurs creatively respond to a crisis by adopting a cautious and defensive approach long before some of them could spot new opportunities for investment and take positive action to exploit them. But if they all choose to first play ‘defense’, they shape the macro-environment in patterns that keeps telling most of them “keep on protecting yourself”, “there are more risks than opportunities out there”. Both supply and demand are on a continuous downward spiral. While some discerning entrepreneurs will spot some opportunities even in the direst of the circumstances, their plans need time to materialise and some may never come to fruition. In the meantime, most economic actors are not well positioned to start what they know to do well, and many have already lost their money in activities that went downhill.

On the other hand, the side effects of a large top down intervention such as the global lock down confirms the Austrian critique that central planning is also a risky endeavour. In an effort to control a complex reality, radical top-down interventions can divert investment to the specific activities they prop up, which appear sustainable for as long as this diversion lasts. Restrictive measures can also backfire, such as Greece’s shock austerity that was intended to balance the budget in Greece, or can prolong a precarious environment, such as the debt-fuelled bailouts elsewhere to save the banking system.

The problem is that policymakers do not have the tools to gain a full grasp of any potential unintended or undesired consequences from their actions. When they focus on one range of analysis, such as preventing a spike of deaths during the epidemic, the measures they take can generate a cascade of negative side effects in areas off their alarmed radar which they may have no idea how to arrest or fix.

I don’t see this micro-macro antithesis as an automatic validation of post Keynesianism in the sense that capitalism is always inherently unstable. It is unstable in periods of crisis when the micro and the macro can become a contradiction.

Exogenous shocks periodically happen. But it is worth studying what post Keynesians state: a crisis can emerge endogenously as in the financial markets.

The way out may be to think in terms of resilience rather than stability. I am inspired by Hilton Root’s forthcoming book Network Origins of the Global Economy. Resilience is the capacity of a system to accommodate turbulences and absorb shocks in recurrent episodes of instability. The system is unstable but can withstand the stresses.

Are multiple adjustments by adaptive agents able to bring about resilience in a system? Or do we need a central node to gain control and bring about order? Is a centrally-induced order a structure of relations that can be resilient over time, given that it depends on the health of the central node and knowing that the capacity of governments to understand and predict is limited?

Again: Never reason from a fatality change

The future isn’t written yet

Last week Richard Epstein predicted around 500 fatalities in the United States (I originally misread his estimate to be 50,000 for the US, not the whole world). His estimate was tragically falsified within days and he has now revised his estimate to 5,000. I still think that’s optimistic but I am hopeful for less than 50,000 deaths in the United States given the social distancing measures currently in place.

Today, several US peers have become excited about a Daily Wire article on comments by a British epidemiologist, Neil Ferguson. He has lowered his UK projections from 500,000 to 20,000 Coronavirus fatalities. The article omits the context of the change. The original New Scientist article (from which the Daily Wire is derivative with little original reporting) explains that the new fatality rate is partly due to a shift in our understanding of existing infections, but also a result of the social distancing measures introduced.

The simple point is:

Policy interventions will change infection rates, alter future stresses on the health system, and (when they work) lower future projections of fatalities. When projections are lower, it is not necessarily because the Coranavirus is intrinsically less deadly than believed but because appropriate responses have made it less deadly.

A PPE pandemic reading list

I haven’t written for a while – other duties get in the way – but I’d like to suggest this reading list in Philosophy, Politics, and Economics for the present time of crisis and perplexity. The main reason is that everyone seems to be an expert in Economics, Epidemiology, and Political Philosophy these days, assuming that from “facts” we can easily derive “values” and answer the question, “what is to be done?” I think this is at best a naïve attitude and at worst the same rationalistic hubris we experience everytime a political issue is simplified and reduced to a matter of “science”. Yes, there are facts and they shouldn’t be ignored, but it’s not easy to decide what is to be done, morally and politically, in light of those facts.

The first item on the list is Leviathan by Thomas Hobbes. A classic, and a reminder that people choose all the time to sacrifice some degree of liberty in the altar of survival (or a chance to survive), but also a reminder that Leviathan may turn from friend to foe, from protector to persecutor – and there is very little we can do about it. The second item is John Locke’s Second Treatise of Government, which then explores this topic in light of the fact that civil government shouldn’t have absolute power. It makes an attempt to show us how that power can, or should, be limited within a certain sphere of responsibility. Though it’s still there to protect us.

In this time of pandemic, people feel tempted to panic. People and politicians are calling for dramatic measures, and one reason is that the use of government coercion – which, according to Locke, ought to be limited – might be necessary to force people to cooperate, for example, by staying home. This is a proposed solution to the dilemmas of collective action posed by the problem that some may “free-ride” on the rest, and, as a result, the disease will keep spreading, frustrating any attempt to slow it down. Against dramatic, desperate and, perhaps, arrogant, use of political power, and in favor of prudence and wisdom, Edmund Burke’s collection of writings from the period of the French Revolution can be a beacon of light. On the other hand, explaining the dilemmas of collective action and suggesting ways of solving them, Mancur Olson offers an insightful look at incentives and group behavior in The Logic of Collective Action.

However, the idea that government coercion is the only solution to dilemmas of collective action (such as imposing a quarantine, for example) doesn’t hold water. In fact, other economists follow Olson in saying the problem is real and challenges a strict individualist way of thinking, but, adding to Olson’s point, they also acknowledge the role of private action and sanctions in fostering cooperation. Elinor Ostrom’s Governing the Commons is a wonderful study that opens up a number of possibilities for private enforcing of collective action to preserve and promote the frugal allocation of common goods. This can be complemented by The Quest for Community, an overlooked work by sociologist Robert Nisbet, where it becomes clear that, between individuals, the state, and the market, there’s room for other associations and communities that strengthen civil society – particularly in this challenging time. Nisbet’s lesson invites liberty-loving people to reflect on whether a hyper-individualistic view of the world ends up pitting helpess individuals against Leviathan instead of offering the buffer zone of community in between. This is something Alexis de Tocqueville discussed in the 19th century.

And just for the sake of dealing with the issue that “is” doesn’t easily lead to “ought”, and that science might have facts and an explanation for them, but does not easily conduce to a proper discussion on values policy, I must finish this PPE pandemic reading list with F. A. Hayek’s The Constitution of Liberty. On Chapter 4, for example, Hayek introduces a constrast between “rationalist liberalism” and “anti-rationalist liberalism”. Rationalist liberals assume too easily that knowledge of the facts on the ground will give them what they need to re-design a society governed by reason. Hayek warns us against this technocratic assumption and offers a defence of “anti-rationalist liberalism”. Anti-rationalist liberals understand the importance of spontaneous order and of constraining power (even at a time of crisis) while prudently balancing the values of liberty and safety in light of past experience and tradition.


Three Additional readings:

Buzan, Waever and De Wilde, Security: A New Framework for Analysis (1997). In a liberal democracy, the state steps in suspending some civil liberties only if it can persuade citizens that there’s a threat that justifies it. This book offers a framework to interpret how such threats are constructed in official and non-official discourse, and to what extent this construction of a threat can be effective.

Robert Higgs, Crisis and Leviathan (2013). 25th anniversary edition. Looks at US history and how government employed crises to its advantage and the advantage of the ruling elites. In particular, security and economy related issues are dealt with.

Sanford Ikeda, Dynamics of the Mixed Economy (2002). Shows that a time of crisis might be a time for further interventionism in the economy, as Higgs (see above) suggests, but might also be a time for disintervention, as seems to be the case with part of the agenda today (FDA deregulation, etc.) This is based on Ludwig von Mises’ view that interventionist economies are not very stable and are always swinging as a pendulum between socialism and capitalism.