costs

Still thinking about the Olympics

Bruno Gonçalves Rosi Current Events, Economics , , ,

Rio Olympics are close to the end, and so far it has been a wonderful time for Brazilian athletes: the country is scoring 15 total in the medal table, quite high in its historical record. Brazil’s first Olympic medal in 2016 was won by Felipe Wu right in the first day of competition: silver in Shooting, 10m Air Pistol Men. Wu was followed by Rafaela Lopes Silva, who won gold in Judo, Women -57 kg, and then by Mayra Aguiar, who won bronze, also in Judo, Women -78 kg. Rafael Silva won another bronze for Brazil in Judo, Men +100 kg, and then Arthur Mariano won still another bronze, this time in Gymnastics Artistic, Men’s Floor Exercise. Diego Hypolito won silver in the same competition. On the tenth day of competition Poliana Okimoto won Bronze in Marathon Swimming, Women’s 10km and Arthur Zanetti won Silver in Gymnastics Artistic, Men’s Rings. The next day, Thiago Braz da Silva surprised everyone by beating favorite French Renaud Lanillenie and winning gold in Athletics, Men’s Pole Vault.

In the last few days other athletes followed the ones mentioned in this opening paragraph, but I limit the text to them for a reason: one highlight of these first 9 Brazilian medalists is that, with the exception of Hypolito, all of them are in the military, and some of my friends on what is considered “the right” in the Brazilian political spectrum are using this information to poke (in good spirit) my friends on the left. On the other hand, my friends on the left highlight that many of the Brazilian medalists also have in common coming from very poor backgrounds, and finding in government social programs the chance to become professional athletes. I want to be careful to say that both are wrong and I want to explain why (I hope I will still have some friends after this). Basically both ignore the concept of opportunity cost.

The concept of opportunity cost postulates that spending in one direction means not spending in another. In other words, that every choice comes with the cost of forgoing the next best alternative. It was developed in all but name by 19th century French economist Frédéric Bastiat in the parable of the broken window (also known as the broken window fallacy or glazier’s fallacy) that appeared in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Not Seen). The parable goes somewhat like this: a boy breaks a window. The window owner gets upset, but someone tries to comfort him by saying that this will give the window manufacturer the opportunity to work. In the end, the economy wins. Bastiat shows that this is a fallacy: the money spent in a new window could have been spent in another way, say, with new shoes. The world would have new shoes and still have a window, but now the world has a new window and no shoes. Bastiat proceeds to show the law of unintended consequences, or how our actions can affect the economy in ways that are “unseen” or ignored, and also to apply the concept to several areas of public policy. Two of these happen to be military expenditure and “Theatres, Fine Arts.”

Concerning military expenditure, Bastiat argues that spending money in order to defend the country against foreign aggressors can be a good investment, but that any money that goes beyond this necessity would have been better spent in other way. This argument goes against Bastiat’s contemporaries who argued that money spent on the military had the benefit of creating jobs, even if defense was not a real necessity. Bastiat’s conclusion is that if the money was left with the taxpayer, this person would find ways to spend that would create more and better jobs. Applying to current events, if Brazil is spending money in the military in order to protect its borders, this is a good investment. If instead it is spending money in the military in order to get Olympic medals, the money should be spent elsewhere.

Bastiat lived before modern Olympic Games, so he has nothing directly to say public spending in this kind of event, but I guess that what he says about “Theatres, Fine Arts” also applies here. Some of his contemporaries defended that the government should invest in Theatres and Fine Arts, because these things are good in themselves, created jobs, and so on. Bastiat was once more against what he saw as excessive public spending. This time his answer exposed him to the logical fallacy of the straw man, or misrepresenting one’s argument in order to make it easier to attack: his critics accused him of not caring about Theatres and Fine Arts. But if we examine the evidences carefully, that is not the case at all: to say that the government should not invest in Theatres and Fine Arts is not to say that nobody should invest in it. It is just to say who is supposed to make the investment, the government of individuals. I am not equalizing Theatres and Fine Arts with sports, but I believe the lesson applies in this field as well: to say that the government should not invest in sports is totally different from saying that nobody should invest in it.

In conclusion, it seems that public investment in the military and social programs is helping Brazil to win medals in this Olympics. But we can ask ourselves where would that money have gone had this investment not been made. Based on Bastiat, I believe that if the money spending was left for the individuals, Brazil would have better military, more Olympic medals, and less necessity of social programs, not to mention better jobs, and a better overall economy. Perhaps after this Olympic Games my friends both on the left and on the right can feel like investing more in sports. Or maybe they will realize they prefer to spend on something else.

The minimum wage still bites

Vincent Geloso Current Events, Economics , , , , , , , , ,

Politicians, pundits and activists jumped on a new literature that asserts that there no negative effects of substantial increases of the minimum wage on employment. Constantly, they cite this new literature as evidence that the “traditional” viewpoint is wrong. This is because they misunderstand (or misrepresent) the new literature.

What the new literature finds is that there could be no significant negative effects on employment. This is not the same as saying there are no negative effects overall. In fact, it is more proper to consider how businesses adjust to different-sized changes by using various means. Once, the minimum wage is seen in this more nuanced light, the conclusion is that it still bites pretty hard.

The New Minimum Wage Literature

Broadly speaking, the new literature states that there are minimal employment losses following increases in the minimum wage. It was initiated twenty years ago by the works of Alan Krueger and David Card who found that, in Pennsylvania and New Jersey, a change in the minimum wage had not led to losses in employment. This caused an important surprise in the academic community and numerous papers have found roughly similar conclusions.

These studies imply that the demand for labor was quite inelastic – inelastic enough to avoid large losses in employment. This is a contested conclusion. David Neumark and William Wascher are critical of the methods underlying these conclusions. Using different estimation methods, they found larger elasticities in line with the traditional viewpoint. They also pointed out Card and Krueger’s initial study had several design flaws. With arguably better data, they reversed the initial Card and Krueger conclusion.

These critics notwithstanding, let us assume that the new minimum wage literature is broadly correct. Does that mean that the minimum wage is void of adverse consequences? The answer is a resounding no.

This is because of an important nuance that has been lost on many in the broader public. In a meta-analysis of 200 scholarly articles realized by Belman and Wolfson, there are no statistically discernable effects of “moderate increases” on employment. The keyword here is “moderate” because the effects of increases in the minimum wage on employment may be non-linear. This means that while a 10% increase in the minimum wage would reduce teen employment by 1%, a 40% increase will reduce teen employment by more than 4%. A recent study by Jeremy Jackson and Aspen Gorry suggests as much: the larger the increase of the minimum wage, the larger the effects on employment.

If labor costs increase moderately, the strategy to reduce employment may be relatively inefficient. The increase of labor costs needs to reach a certain threshold before employers choose to fire workers. Below such a threshold, employers may use a wide array of mechanisms to adjust.

Adjustment channels

Employers on their respective markets face different constraints. This diversity of constraints means that there is no “unique” solution to greater labor costs. For example, if the demand for one’s products is quite inelastic, labor costs can be passed on to consumers through an increase in prices. While this may not necessarily hurt workers at the minimum wage, it impoverishes other workers who have fewer dollars left to spend elsewhere. This is still a negative outcome of the minimum wage – its just not a negative outcome on the variable of employment.

In other cases, employers might reduce employment indirectly by reducing hours of work. This is an easy solution to use for employers who cannot, for a small increase in labor costs, afford to fire a worker. Even Belman and Wolfson – who are sympathetic to the idea of increasing the minimum wage – concede that increases in the minimum wage do lead to moderate decreases in labor hours. More skeptical researcher, like Neumark and Wascher, find that the effects on hours worked is much larger. Again, the variable affected is not employment measured as the number of people holding a job. However, a reduction in the number of hours worked is a clearly a perverse outcome.

Another effect is that employers might reduce expenses associated with their workers. Even Card and Krueger, in their book on the minimum wage, recognize that employers may opt to cut on things like discounted uniforms and free meals. An employer facing a 5% increase in the minimum wage will see his labor costs increase, but firing an employee means less production and lower revenues. Thus, firing may not be an option for such a small increase. However, cutting on the expenses associated with that worker is an easy option to use. This means fewer marginal benefits and on-job training. Employers adjust by altering the method of compensation.  For example, economist Mindy Marks estimated that a 1$ increase of the minimum reduced by 6.2% the probability that a worker would be offered health insurance.  Again, employers adjust and the effects are not seen on employment. Nonetheless, these are undisputedly negative effects.

The effect may also be observed on the type of employment. Employers may decide to substitute some workers by other types of workers. Economist David Neumark pointed that, subsumed in the statistical aggregate of “labor force” is a shift in its shift. In his article, written for the Employment Policies Institute, he stated that “less skilled teens are displaced from the job market, while more highly skilled teens are lured in by higher wages (even at the expense of cutbacks in their educational attainment)”. Another example could be that a higher minimum wage induces retired workers to return to the labor force. Employers, at the sight of a greater supply of experienced workers, prefer to hire these individuals and fire less-skilled workers. In such case, “total employment” does not change, but the composition of employment is heavily changed. The negative effects are clear though: less-skilled workers are not allowed to acquire new skills through experience.

Conclusion

None of these adjustment mechanisms in response to “moderate increases in the minimum wage” are desirable. Yet, all of these channels would allow us to conclude that there are no effects on employment. To misconstrue the ability of employers to select multiple channels of adjustments other than reducing employment as the proof that the minimum wage has no negative effects is perverse in the utmost. The statement that “moderate increases in the minimum wage has no statistically significant effects on employment” is merely a positive scientific statement with no normative implications whatsoever. If anything, the multiple adjustment mechanisms suggest that the minimum wage still hurts and that is both a positive and normative statement.

Muddy thinking on child care

Rick Weber Economics, Liberty, Politics , , ,

Five Thirty Eight had a disappointing discussion of an interesting issue: the cost of child care for working parents. The basic issue is that kids are expensive in time and money. Unfortunately, the discussion mostly revolved around questions of how to engage in economic engineering by government in order to expand access to child care and parental leave.

The hosts see these policies as having costs and benefits, and they see the value in studying alternatives empirically, but they miss an important issue: providing these sorts of goods doesn’t require screwing up markets by adding an extra layer of complexity to the tax code. If these goods are worth providing (that’s another couple of cans of worms) then just give money to new parents. Better yet, move to a basic income guarantee.

Another important point they miss is that if some good is difficult to get, it’s worth figuring out what to do about the root problem rather than just throwing money at the issue and hoping someone will figure out the important stuff later.

A response to a student

Rick Weber Economics , , , , ,

Each week I assign some reading or video. Recently I assigned a series of videos where Bryan Caplan discusses common biases, including the anti-foreign bias

One student questioned the benefits of expanded immigration, wondering if the costs to American workers might be too great. Below is my response:

My understanding of the evidence is that immigrants to the US are almost always complementary to US labor (e.g. Indian doctors that keep American designers healthy, or Salvadorian cooks who feed American engineers). The area where your suspicion is true (again, based on my limited understanding of the data) is with high school dropouts.

High school dropouts face competition from immigrants (who are often unable to apply their skills due to regulations or attempts to avoid being caught by immigration authorities) because relatively low-skilled immigrants face similar disadvantages in labor markets (i.e. they have a similar comparative advantage but their alternative options are even worse).

“Just Leave Me Alone Goddammit!”*

Rick Weber Economics , , , , , ,

The basic argument I want to make is that we’ve been thinking about labor and human capital imprecisely,** and we would do better to think of labor as the selective application of attention, and habit (which economizes on attention) as the basic essence of human capital.

Attention

The kernel of this idea was planted when I read Pragmatic Thinking and Learning a few years ago. An important point it makes is that whenever our work is interrupted it takes something like 15 minutes to get back to work. Mental work is like barbecuing (or what the uninitiated erroneously call “smoking”). After 8 hours of cooking your guests are impatient (and drunk) and want you to check the meat. So you open up the barbecue and a plume of smoke billows out. You put in a meat thermometer and sure enough, the meat isn’t done. But now it’s going to take another 15 minutes for enough to smoke to build up to get the process moving again. 20 minutes later people want you to check again. (And that’s why our parties back in San Jose so often dragged on so long.) Showing up to work for 8 hours a day isn’t sufficient for getting your work done; sometimes you just need your boss to leave you alone long enough for you to focus deeply enough to solve the problem you’re facing.

Or we could think of work like juggling. Working on some difficult problem, you’ve got a few pieces of mental material in the air. When someone knocks on your door (or you take notice of an email notification on your phone) you drop the balls. Getting them going again takes some effort, so even a one second interruption sets you back a few minutes. Those of us who work at desks are familiar with how difficult thinking can be. Managing our attention takes effort. But with practice we can get better at coping with distractions and skipping the easy, but unproductive paths offered to us.

And what about grunt work? There’s less attention necessary (perhaps rhythm serves a role in maintaining that minimal bit of attention), but nobody gets paid for not doing what they’re told. Your job is to keep applying effort in the appropriate way. The only human capital you really need is what is necessary to get out of bed and get to work every day.

Habit Capital

People who smoke cigarettes, they say “You don’t know how hard it is to quit smoking.” Yes I do. It’s as hard as it is to start flossing.

—Mitch Hedberg

Habit offers a means of economizing on attention. Instead of using up our mental capacity to decide to brush my teeth every day, I just do it automatically. Flossing is not so easy… except that I was able to make it a habit by piggybacking it on an existing habit.

Many of the skills we have are built on a collection of complex little habits, whether it’s muscle memory (you must watch the video above), understanding how to read graphs, or bearing in mind that everything has an opportunity cost.

(Obviously) getting a college degree is not the same as accumulating human capital. What college does (we hope) is inculcate students with critical thinking habits and some basic knowledge deemed necessary or particularly helpful for navigating the world. Learning on the job is similarly about providing workers with habits, and both positive and normative knowledge (i.e. factual knowledge and norms/beliefs/corporate culture). Growing up is about building up human capital largely in the form of internalized norms (moral habits). Habits are everywhere and they’re at the core of what we mean when we use the term human capital.

Habit capital allow us to direct our attention to critical areas in the same way physical capital allows us to leverage (and ultimately replace) our physical effort. By establishing habits we can get certain things done (teeth brushed, books read, etc.) while conserving attention. This takes more attention upfront just as physical capital requires upfront investment.

Anticapital

Economists generally don’t think much about bombs as an investment. Bombs require foregoing current consumption, but once they’re made, they’re intended to get a negative return by destroying something of value. Physical anticapital, as a social scientific idea, falls primarily in the domain of International Relations. Which isn’t to say economists haven’t thought about investments that destroy value. The idea of rent seeking is an important one, but it’s one that has been rationalized.

There’s probably not much to gain by thinking about rent seeking as investment in anticapital.*** But we can bring bad habits out of the purview of irrationality and bring it into the warm, rational glow of economics with the concept of human anticapital.

Just like in biological evolution, we’re satisficing, not optimizing. Habits may initially be adaptive and turn bad as circumstances change. We should expect a tendency towards “good” habits–and how those habits propagate is certainly an interesting question–but we should also expect the odd bizarre byproduct, misfire, and obsolete habits to emerge.

“We are still very close to our ancestors who roamed the savannah. The formation of our beliefs is fraught with superstitions–even today (I might say, especially today). Just as one day some primitive tribeman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm.”

—Nassim Taleb

tl;dr:

Attention matters more than time. Habit economizes on attention. Mental work involves applying mental tools to particular problems and habit allows us to do so more or less automatically. In other words, habit is human capital.****

*That’s one possible title for the next paper I want to write. A more boring but descriptive possibility is “Habit Capital.” Another with more regional flavor is “Hey! I’m Working Here!” Maybe I’m not very good at titles…

**This follows in a similar vein as my entrepreneurship research which basically boils down to: entrepreneurship theory is good, but our empirical measures suck.

***Although I should mention that thinking about rates of depreciation will surely shed light on rent seeking questions.

****I’ll leave it for the comments to sort out whether it’s the only sort of human capital. Maybe you can also help me sort out how to wrap belief, understanding, and learning into this view.

From the Comments: The Contribution of American Allies to Pax Americana

Brandon Christensen Comments , , , , , , , , , , ,

Dr Stocker answers my concerns about free-riding and rent seeking with this gem:

Good points Brandon. On the rent seeking, I think you are broadly correct, but I would offer two qualifications. European nations/the EU often foot a lot of the bill/take on associated civilian tasks where America has taken military action, so that the US is not subsidising the defence and security needs of Europe quite as much as it might seem. So for example, in the Yugoslav breakup led to US military operations and a comparatively passive role for Europe, but a lot of the afterwork was taken on by Europe and there is no point in military intervention without work on building civil society to create long term security and stability. Going back a bit further to the first Gulf War/expulsion of Saddam from Kuwait, Germany and Japan did pay a lot towards the cost in return for not participating. Despite [this] they got a lot of abuse in the US Congress from politicians who don’t appear to understand that their non-intervention in the Gulf owed a lot to constitutions and attitudes which the US encouraged/imposed during post-World War II occupation. Recently, though European govts have been cautious in what they say in public about the Ukraine crisis and containing Putin, there is a growth in military spending and co-operation done in fairly quiet ways largely with the aim of deterring Putin from adventurism in the Baltic states. Just one example, Germany has recently taken 100 Leopard II tanks out of retirement and work is underway for the Leopard III. Moving to the Pacific, Japan is enhancing its military and weakening constitutional restrictions on the deployment of the military (imposed by the US in the post-war Constitution) in reaction to Chinese assertiveness.

While I think it is broadly correct that the US has been paying for a military burden which should be born by Europe and Japan, the situation is not as extreme as it often assumed in the US and as far as I can see is moving in a more balanced direction. In general while it is true that the US has a very impressive military machine with some impressive technology and officers, I think some Americans are a bit over confident about this. A lot of Americans, at least amongst those who take an interest in military kit, appear very convinced that the Abrams 2 is the best tank anywhere, I would suggest that in military capacity, for cost, the Leopard II is probably better (it certainly does much better in export markets) and even in absolute terms ignoring cost, the French Leclerc (which is extremely expensive) has a good claim to be the best tank around, and the Korean K2 is another strong but very expensive candidate. The Abrams is expensive, heavy, difficult to transport and difficult to keep in sufficient fuel, though it can certainly do a very good job. A lot of Americans appear to be incapable of thinking of France as anything other than a surrender monkey joke in military terms, which is really very far from the reality, as can be seen by the very strong role that France is now taking in northwest Africa against violent Islamist fundamentalists. The US military may well be able to have the same military capacity for lower cost if it moves away from the Abrams II model of a tank that is expensive to run and transport as well as build.

So broadly a correct point Brandon, but I think the situation is a bit better than is often understood in America and is moving in the right direction as Japan and Europe are getting used to the idea of taking responsibility for dealing with new threats from China, Putinist Russia and the hydra of Islamist fundamentalists.

A very good point, and an even better angle with which to view the world.

My only quibble is that the right direction American allies are moving can easily be changed without a more fundamental shift in institutional arrangements between us. Some sort of federal or confederal arrangement would go a long way toward addressing this issue, and would further deepen the economic and cultural ties between constitutional democracies.

Or am I just looking for problems where there are none, in order for my arguments to gain ground?

Tricks of Unequal Poverty: A Repost (In Honor of Bernie Sanders)

Jacques Delacroix Current Events, Politics , , , ,

Note: This is an old post, reproduced today in honor of American Senator and presidential candidate Bernie Sanders

In the previous installment:

I explained how the general standard of living in America, denoted by real income, grew a great deal between 1975 and a recent date, specifically, 2007. This, in spite of a widespread rumor to the contrary. The first installment touched only a little on the following problem: It’s possible for overall growth to be accompanied by some immobility and even by some regress. Here is a made-up example:

Between the first and the second semester, grades in my class have, on the average, moved up from C to B. Yet, little Mary Steady’s grade did not change at all. It remained stuck at C. And Johnny Bad’s grade slipped from C to D.

Flummoxed by the sturdiness, the blinding obviousness of the evidence regarding general progress in the standard of living, liberal advocates like to take refuge in more or less mysterious statements about how general progress does not cover everybody. Or not everybody equally, which is a completely different statement. They are right either way and it’s trivial that they are right. Let’s look at this issue of unequally distributed economic progress in a skeptical but fair manner.

It’s awfully hard to prevent the poor, women and minorities from benefiting

I begin by repeating myself. As I noted in Part One, it’s too easy to take the issue of distribution of income growth too seriously. Some forms of improvements in living standard simply cannot practically be withheld from a any subgroup, couldn’t be if you tried. Here is another example: Since 1950, mortality from myocardial infarctus fell from 30-40% to 5-8%. (from a book review by A. Verghese in Wall Street Journal 10/26 and 10/27 2013). When you begin looking at these sort of things, unexpected facts immediately jump at you.

Fishing expeditions

The US population of 260 millions to over 300 million during the period of interest 1975-2007 can be divided in an infinity of segment, like this: Mr 1 plus Mr 2; Mr 2 plus Mrs 3; Mr 2 and Mrs3 plus Mr 332; Mr 226 plus Mrs 1,000,0001; and so forth.

Similarly, the period of interest 1975 to 2007 can be divided in an infinity of subperiods, like this: Year 1 plus year 2; year 1 plus year 3; years 1, 2, 3 plus year 27; and so forth. You get the idea.

So, to the question: Is there a subset of the US population which did not share in the general progress in the American standard of living during some subperiod between 1975 and 2007?

The prudent response is “No.” It’s even difficult to imagine a version of reality where you would be right to affirm:

“There is no subset of the US population that was left behind by general economic progress at any time during the period 1975- 2007.”

Let me say the same thing in a different way: Given time and good access to info, what’s the chance that I will not find some Americans whose lot failed to improve during the period 1975 to 2007? The answer is zero or close to it.

This is one fishing expedition you can join and never come back empty-handed, if you have a little time.

Thus, liberal dyspeptics, people who hate improvement, are always on solid ground when they affirm, “Yes, but some people are not better off than they were in 1975 (or in ______ -Fill in the blank.)” The possibilities for cherry-picking are endless (literally).

Everyone therefore has to decide for himself what exception to the general fact of improvement is meaningful, which trivial. This simple task is made more difficult by the liberals’ tendency to play games with numbers and sometimes even to confuse themselves in this matter. I will develop both issues below.

To illustrate the idea that you have to decide for yourself, here is a fictitious but realistic example of a category of Americans who were absolutely poorer in 2007 that they were in 1975. You have to decide whether this is something worth worrying about. You might wonder why liberals never, but never lament my subjects’ fate.

Consider any number of stock exchange crises since 1975. There were people who, that year, possessed inherited wealth of $200 million each, generating a modest income of $600,000 annually. Among those people there were a number of stubborn, risk-seeking and plain bad investors who lost half of their wealth during the period of observation. By 2007, they were only receiving an annual income of $300,000. (Forget the fact that this income was in inflation shrunk dollars.) Any way you look at it, this is a category of the population that became poorer in spite of the general (average) rise in in American incomes. Right?

Or, I could refer to the thousands of women who were making a living in 1975 by typing. (My doctoral dissertation was handwritten, believe it or not. Finding money to pay to get it typed was the hardest part of the whole doctoral project.) One of the many improvements brought about by computers is that they induced ordinary people to learn to do their own typing. Nevertheless, there was one older lady who insisted all along on making her living typing and she even brought her daughter into the trade. Both ladies starved to death in 2005. OK, I made them up and no one starved to death but you get my point: The imaginary typists fell behind, did not share in the general (average) improvement and their story is trivial.

So, I repeat, given a some time resources, I could always come up with a category of the US population whose economic progress was below average. I could even find some segment of the population that is poorer, in an absolute sense, than it was at the beginning of the period of observation. Note that those are two different finds. Within both categories, I could even locate segments that would make the liberal heart twitch. I would be a little tougher to find people who both were poorer than before the period observation and that would be deserving of liberal sympathy. It would be a little tough but I am confident it could be done.

So, the implication here is that when it comes to the unequal distribution or real economic growth you have to do two things:

A You have to slow down and make sure you understand what’s being said; it’s not always easy. Examples below.

B You have to decide whether the inequality being described is a moral problem for you or, otherwise a political issue. (I, for one, would not lose sleep over the increased poverty of the stock exchange players in my fictitious example above. As for the lady typists, I am sorry but I can’t be held responsible for people who live under a rock on purpose.)

Naively blatant misrepresentations

A hostile liberal commenter on this blog once said the following:

“Extreme poverty in the United States, meaning households living on less than $2 per day before government benefits, doubled from 1996 to 1.5 million households in 2011, including 2.8 million children.”

That was a rebuttal of my assertion that there had been general (average) income growth.

Two problems: first, I doubt there are any American “households” of more than one person that lives on less than $2 /day. If there were then, they must all be dead now, from starvation. I think someone stretched the truth a little by choosing a misleading word. Of maybe here is an explanation. The commenter alleged fact will provide it, I hope.

Second, and more importantly, as far as real income is concerned, government benefits (“welfare”) matter a great deal. Including food stamps, they can easily triple the pitiful amount of $2 a day mentioned. That would mean that a person (not a multiple person- household ) would live on $1080 a month. I doubt free medical care, available through Medicaid, is included in the $2/day. I wonder what else is included in “government benefits.”

The author of the statement above is trying to mislead us in a crude way. I would be eager to discuss the drawbacks of income received as benefits in- instead of income earned. As a conservative, I also prefer the second to the first. Yet, income is income whatever its source, including government benefits.

The $2/day mention is intended for our guts, not for our brains. Again, this is crude deception.

Pay attention to what the other guy asserts sincerely about economic growth.

Often, it implies pretty much the reverse of what he intends. In an October 2013 discussion on this blog about alleged increasing poverty in the US, I asked the following rhetorical question:

“Or have Americans’ standard of living only improved as the gap [between other countries and the US] closed?“

I meant to smite the other guy because the American standard of living has only increased, in general, as we have seen (in Part One of this essay posted). A habitual liberal commenter on my blog had flung this in my face:

“….Since 1975, practically all the gains in household income have gone to the top 20% of households…” (posted 10/23/13)

(He means in the US. And that’s from a source I am not sure the commenter identified but I believe it exists.)

Now, suppose the statement is totally true. (It’s not; it ignores several things described in Part One.) The statement says that something like roughly 60 million Americans are richer than they, or their high income equivalents were in 1975. It also says that other households may have had almost stationary incomes (“practically”). The statement does not say in any way that anyone has a lower income in 1975. At best, the statement taken literally, should cause me to restate my position as follows:

“American standards of living have remained stationary or they have improved….”

You may not like the description of income gains in my translation of the liberal real statement above. It’s your choice. But the statement fails to invalidate my overall assertion: Americans’ standard of living improved between 1975 and 2007.

What the liberal commenter did is typical. Liberals always do it. They change the subject from economic improvement to something else they don’t name. I, for one, think they should be outed and forced to speak clearly about what they want to talk about.

Big fallacies in plain sight

Pay attention to seemingly straightforward, common liberal, statist assertions. They often conceal big fallacies, sometimes several fallacies at once.

Here is such an assertion that is double-wrong.

“In the past fifteen years the 20% of the population who receive the lowest income have seen their share of national income decrease by ten percentage points.” (Posted as a comment on my blog on 10/21/13)

Again, two – not merely one – strongly misleading things about this assertion. (The liberal commenter who sent it will assure us that he had no intention to mislead; that it’s the readers’ fault because, if…. Freaking reader!)

A The lowest 20% of the population of today are not the same as those of fifteen years ago, nor should you assume that they are their children. They may be but there is a great deal of vertical mobility in this country, up and own. (Just look at me!)The statement does not logically imply that any single, one recognizable group of social category became poorer in the interval. The statement in no way says that there are people in America who are poor and that those same people became poorer either relatively or in an absolute sense. Here is a example to think about: The month that I was finishing my doctoral program, I was easily among the 20% poorest in America. Hell, I probably qualified for the 5% poorest! Two months later, I had decisively left both groups behind; I probably immediately qualified for the top half of income earners. Yet, my progress would not have falsified the above statement. It’s misleading if you don’t think about it slowly, the way I just did.

I once tried to make the left-liberal vice-president of a Jesuit university understand this simple logical matter and I failed. He had a doctorate from a good university in other than theology. Bad mental habits are sticky.

B Percentages are routinely abused

There is yet another mislead in the single sentence above. Bear with me and ignore the first fallacy described above. The statement is intended to imply that the poorer became poorer. In reality, it implies nothing of the sort. Suppose that there are only two people: JD and my neighbor. I earn $40, neighbor earns $60. In total, we earn. $100 Thus my share of our joint income is 40%, neighbor’s is 60%. Then neighbor goes into business for himself and his income shoots up to $140. Meanwhile, I get a raise and my income is now $60.

In the new situation, my share of our joint income has gone down to 30% (60/60+140), from 40%. (Is this correct? Yes, or No; decide now.) Yet, I have enjoyed a fifty percent raise in income. That’s a raise most unions would kill for. I am not poorer, I am much richer than I was before. Yet the statement we started with stands; it’s true. And it’s misleading unless you pay attention to percentages. Many people don’t. I think that perhaps few people do.

My liberal critic was perhaps under the impression that his statement could convince readers that some Americans had become poorer in spite of a general (average rise) in real American income. I just showed you that his statement logically implies no such thing at all. If he want to demonstrate that Americans, some Americans, have become poorer, he has to try something else. The question unavoidably arises: Why didn’t he do it?

Was he using his inadequate statement to change the subject without letting you know? If you find yourself fixating on the fact that my neighbor has become even richer than I did because he more than doubled his income, the critic succeeded in changing the subject. It means you are not concerned with income growth anymore but with something else, a separate issue. That other issue is income distribution. Keep in mind when you think of this new issue that, in my illustration of percentages above, I did become considerably richer.

Liberals love the topic of unequal progress for the following reason:

They fail to show that, contrary to their best wish, Americans have become poorer. They fail almost completely to show that some people have become absolutely poorer. They are left with their last-best. It’s not very risky because, as I have already stated, it’s almost always true: Some people have become not as richer as some other people who became richer!

Policy implications of mis-direction about income growth

The topic matters because, in the hands of modern liberals any level of income inequality can be used to call for government interventions in the economy that decrease individual liberty.

Here are a very few practical, policy consequences:

A Income re-distribution nearly always involves government action, that is, force. (That’s what government does: It forces one to do what one wouldn’t do out of own inclination.) That’s true for democratic constitutional governments as well as it is for pure tyrannies. In most countries, to enact a program to distribute the fruits of economic growth more equally it to organize intimidation and, in the end, violence against a part of the population. (For a few exceptions, see my old but still current journal article: “The Distributive State in the World System.“ Google it.) This is a mild description pertaining to a world familiar to Americans. In the 1920s, in Russia, many people (“kulaks”) were murdered because they had two cows instead of one.

Conservatives tend to take seriously even moderate-seeming violations of individual liberty, including slow-moving ones.

B Conservatives generally believe that redistribution of income undermines future economic growth. With this belief, you have to decide between more equality or more income for all, or nearly all (see above) tomorrow?

It’s possible to favor one thing at the cost of bearing the travails the other brings. It’s possible to favor the first over the second. This choice is actually at the heart of the liberal/conservative split. It deserves to be discussed in its own right; “Do your prefer more prosperity or more equality?” The topic should not be swept under the rug or be made to masquerade as something else.

If you are going to die for a hill, make sure it’s the right hill.

PS: There is no “income gap.”

Growing Poverty in the US: A Repost (In Honor of Bernie Sanders)

Jacques Delacroix Current Events, Politics , , , ,

This is an old post, reproduced today in honor of American Senator and presidential candidate Bernie Sanders

It’s vital to the liberal narrative that pretty much everything has to go generally downhill (except global warming, of course, which is always going up even when it’s not, like right now). Life has to deteriorate, they think. That things are getting worse is an article of faith among liberals; it’s even a tenet of their faith. (If things are swimming along fine, what excuse is there for government intrusion?) You might even say that most liberals hate most good news. Prominent among the liberals’ permanent myths is the belief that Americans have become poorer except for a tiny minority of the very rich __________% (Fill in the blank.) In its most common version the idea is that Americans’ real standard of living has done nothing but decline since sometimes in the seventies. This, whatever the numbers say.

I, for one, know it’s not true. I was there, after all, from the beginning, even from before the beginning! I remember well how bad the good old days were in many respects. I am distressed that some people with apparently conservative or libertarian ideas have now also espoused this false belief. In this essay in two parts, I try to help readers find their way in the midst of often misleading or downright false statements that seem to support this erroneous belief. As usual, I do not address myself to specialists but rather to the intelligent but ignorant. Specialists are welcome to comment if they agree to do it in English or in some other official language.

Two forewords

1 I don’t contend that I understand what happened to American real incomes during the current crisis, say, between 2009 and 2013. I will say nothing about this recent period. (If I told you what I suspect happened, you might be astounded, though.) I refer in this essay only to the period 1975-2007.

2 I believe poverty and prosperity have to be measured in terms of real income, income as experienced by real human beings: It’s not how many dollar bills you have in your wallet, it’s what your paycheck actually buys that matters. This brings up several tough technical problems we will get into presently or in the next episode. If you think of poverty in different terms, I am not sure I have anything useful to say to you.

The superficial facts

General federal statistics, all OECD figures, all World Bank numbers show that on the average Americans have become considerably richer since 1975. Nevertheless, these statistics, contrary to a now common belief – significantly understate the economic progress of Americans. We, in general, have become vastly richer than were were then.

I will deal later explicitly with the issue of possible differences between what the average shows and the economic progress of sub-categories of the US population. In the meantime, I must point out that some common forms of enrichment cannot be confined to a particular group. Cleaner drinking water, for example, is usually cleaner for everyone. It would be impractical to reserve wells of dirty, polluted water for the poor or for racial minorities. (However, if you search a little you might actually find liberal allegations of such segregation or, at least, the intimations of such. National Public Radio is a good bet.)

Here is what I don’t intended to do, don’t do: I do not accuse government statistics of lying. I help others read them and complement them where they need to be complemented. There is not government conspiracy designed to mislead us about the living standards of Americans, I think.

Major (unintended) sources of bias.

There are three major sources of bias in expressing standard of living that understate, underestimate, understate economic betterment. I explain them below.

Ballooning health expenditures

Since the seventies, most employed Americans have taken most of their pay raises in the form of health benefits. This results from a historically accidental peculiarity of the American wage and benefit system going back to WWII. (It may be getting removed by the implementation of Obamacare as I write in 2013). The large increase in health expenditures provided by employers do not appear in wage statistics. Yet, they constitute consumption in a way similar to straight wages. In fact, wherever people are given a choice between more steak and more health care, they seem to chose more steak and more health care. Health care possesses an interesting characteristic all of its own: While there is a limit to how much steak an individual can ingest, there is no limit at all to how much health care -broadly defined – the same individual can absorb. It’s close to infinite. Why, I am considering right now some surgery to correct a nose I have not really liked for more than sixty years!

Whether it is a wise societal choice to spend apparently limitless resources on health care, much of it for the old and economically unproductive is an interesting issue in its own right. However, it’s not my issue here. Health services have been produced in vast quantities since 1975. They were eagerly consumed by Americans. Health expenditures constitute a part of the standard of living. If you don’t believe this, just ask yourself if the withdrawal of all health care would not be a lowering of the standard of living.

Better quality of common goods

Common objects on which comparisons of living standard across time are based have improved tremendously in quality. This is difficult, sometimes impossible to measure. Indices of comparison across time (1975 to 2007) don’t do a good job of it.

Nominal wages, the numbers printed on your paychecks, have to be corrected for inflation. We all know that a dollar does not buy as much as it did in 1975. (Around that time, my salary of $20,000/year was quite comfortable.) Federal international and private organizations in charge of these things do their very best to correct raw numbers in meaningful ways. However, they meet with several limitations because things of 1975 are often radically different from what bears the same name in 2007.

(Note: The agencies in charge do their best and mostly intelligently. Again, I am not faulting their efforts. Also, I think there is little intellectual fraud involved in this work because their results are among the most and best scrutinized in the history of the world.)

Here is an example: I suspect that the average television set of 1975 was like mine was then: It was small, offered only black and white images, often had scratchy sound, and gave access to little more than three national networks. Watching television then was like eating in a mediocre restaurant that offered only three dishes (and there was maybe a hot dog stand outside).

When economists correct for inflation, they have little choice but to compare that television set with a modern ultra-flat etc… Hence, when they report that the cost of a television set has increased in face dollars by, say, 100%, they are not able to take into account that the actual service (the enjoyment) attached to a contemporary set with precise colors, faithful sound that is a gateway to 300 sources is ten times, or one hundred times, greater than what I derived from my 1975 B&W set.

This example can pretty much be turned into a general rule: Everything is better, works better, tastes better, gives more service than its equivalent back then. When you find a seeming exception, you soon discover that it’s not real. Two examples of exceptions that don’t resist examination:

A     Cars are more expensive now than then by several measures. This means that it takes more days of mean (average) American wages to buy the cheapest car in American than it did then. But the cheapest car on American roads today are vastly better in every way than their supposed equivalent back then. They break down less often; they are safer (weight for weight); they require much less maintenance. (Older people will remember the days when every car required an oil change every 5,000 miles and when prudent car owners changed oil every 3,500 miles.)

In addition, much of the rise in real car prices is due to mandated safety and environmental buffers now built into them that did note exist in 1975. (It’s startling to see in not-so-old movies parents getting into the family car with their children and driving off with no one buckling safety belts because there aren’t any.) No matter how one feels about the current health and environmental restrictions pushing upward car prices, they are undeniably form of consumption. It’s useless to cry,” I don’t want it” when you imposed it on yourself through the political process you deem legitimate in every way.

B     Many older people, and I am often tempted to join them, believe that any number of produce just tasted better back then, produce such as tomatoes and strawberries, for example. This is pure delusion. Here is how I know: Several times, I have steeled my resolve, put cash in my pocket and directed my steps to the local farmers’ market. There, against all my instincts, I purchase a pound of organic tomatoes or a tiny basket of grossly priced strawberries. Now organic produce is not better for you (See “organic food” on this blog.) but it’s often fresher, and often handpicked. Each time, I recovered in my mouth the taste of produce of my youth. Each time, I did the calculations only to rediscover anew that the outrageous cost of the farmer’s market produce was actually less, as a percentage of any income, or in inflation-corrected dollars, than the equivalents did when I was young.

We have become used to paying little for mediocre produce, the better produce of yesteryear are still available. They are not even especially expensive. They appear expensive because we are spoiled by general low food prices.

An then, of course, there is the coffee. It was so vile then, coast-to-coast, in 1975 that if anyone but a drunks’ bar served it today he would probably be indicted. And then, there is bread that would have qualified as light construction material. The list is endless: In the good old days, most things were mediocre to very bad and they were, in fact expensive. Current measures are seldom able to take improvement in quality into account. For this reason, they understate average economic progress in America between 1975 and 2007.

I repeat that this average economic progress is also mostly widespread, available to all parts of the population. There are, in fact, few corner bakeries operating especially in the ghetto and specializing in nutritionally unsound, bad-tasting bread for African-Americans.

There may be an exception to the general rule that things have become cheaper in thirty years with constant quality I am not able to deal with here. It may be a major exception: Housing in all its forms may be more expensive in real terms now than it was in 1975. Much housing is the same now as it was then, so prices matters a great deal. Thus, better quality would not explain superior cost. I am eager to see sources on this issue and to publish them here.

New goods, new services

When comparing the prices of things and services then and now, economists are not able, of course, to take into account objects and services that simply did not exist then. This inescapable fact also understates the real progress in living standards. I repeat: Some good things are not counted at all in comparisons of the standard of living then and now because they did not exist at all then. This fact in itself constitutes an overstatement of the standard of living of then. The Internet and its many manifestations, its many subordinate services, such as Google, are a case in point.

I hasten to add that this judgment does not depend on how much you, personally value the Internet and its multiple offerings. To demonstrate that it’s a form of consumption, it’s enough to observe that few of those who can have access to the Internet actually turn it down. I, for example, like most residents of developed societies probably know more than one thousand people. Of the people I know, only three refuse to gain Internet access (and they periodically cheat by catching a ride on a relative’s network tool!)

I can hear some older readers grumble ( as one did recently on this blog) that newfangled technical innovations, such as the Internet and hugely better television, actually made life worse. I smile sarcastically inside for the following reason: Very few Americans seem to be following the primitivist dream implicit in such judgment and make for the wilderness. This, although it would be easy because there is probably more and more undeveloped, empty space in America as the population become more concentrated in a few mega cities. This is too has improved since 1975: There is more and wilder wilderness.

Summary

Large health expenditures, better products, more products have increased the general standard of living of Americans considerably beyond what wage and income statistics show. This statement is implicitly based on averages. The demonstration above does not exclude the logical possibility that some sectors of American society were worse off in 2007 than they, or their equivalents were in 1975. This issue is dear to liberal sensitivity. I deal with it in Part 2, soon forthcoming.

A vision for environmentalists

Rick Weber Economics , , ,

The sun is setting and people start settling in for bed instead of staying up late and watching TV. As fast as battery technology advances, it’s imperfect so we deal with it by using less electricity at night. Similarly, on windy days, people stay inside, but leave once the wind calms down and it’s nicer to be outside. This is a world where people are in tune with the weather and adjust their behavior accordingly.

How can we get such a world? Education won’t be enough (though it will be necessary) because, let’s face it, people are creatures of habit, and lazy people (i.e. 80%+ of the population) would rather leave any given habit alone. We could try to mandate behavior, but that will be costly and the Law of Unintended Consequences promises ironic blow-back.*

Luckily there’s a fairly simple way to effectively nudge people in the direction we (environmentalist-types) would like to see: flexible prices! In a world where a lot of electricity is generated by solar and wind** market determined prices would automatically encourage people to conserve resources and set the pace of their lives to match natural rhythms. Will it be enough? Probably not, but it will certainly be an essential step in the right direction.

* I recently came across the following in The Complete Walker:

I’m tempted to suggest they [trowels] be made obligatory equipment for everyone who backpacks into a national park or forest. I resist the temptation, though–not only because (human nature being what it is, thank God) any such ordinance would drive many worthy people in precisely the undesired direction but also because blanket decrees are foreign to whatever it is a man goes out into wilderness to seek, and bureaucratic decrees are worst of all because they tend to accumulate and perpetuate and harden when they’re administered, as they so often are, by people who revel in enforcing petty ukases. Anyways, a rule that’s impossible to enforce is a bad rule. (p. 698)

** Obviously the likelihood of such a world is a whole ‘nuther can of worms. Let’s leave that for another post.

What would I ask the president in an interview?

Rick Weber Current Events, Politics , , , , , , , ,

My favorite podcast really hit the Big Time this week. Marc Maron interviewed President Obama last week and released the episode today. Marc Maron does a great job interviewing his guests but this episode is (naturally) pretty different. Obama mostly gives a lot of fluff, but he did make some interesting points on the role of political institutions in polarizing politics, as well as the role of [implicit] property rights in shaping political outcomes.

While I was waiting for this episode to be released I wondered what I would have done in Maron’s position. It’s tempting to say “just scream non-stop for an hour until the president agrees to be better.” But of course, that wouldn’t do anyone any good (although I think it would sell advertising on cable news). The question is then “how do I avoid throwing softballs, maintain a good conversation, and still nudge in the direction of change I’d like to see?”

One thing I think would be important were I in that position is to restrict the number of issues I bring up. The limits of human attention mean that we simply can’t handle more than a handful of things at once. Piling on all the issues and complexities of the world would only serve to reduce anyone’s ability to do anything positive. Another thing I think would be important is focusing on areas where we already mostly agree. Nobody over the age of 25 is likely to change their opinion on just about anything, so why waste your energy. That’s sunk ideology. And besides, even if you’re talking to a real piece of work, you have some obligation to do a good job of being a conversationalist, and focusing on differences is less likely to lead to a good conversation.

So what would I ask Obama in an interview?

  • What do you see as the path forward to immigration liberalization?
  • Will you please push for a bill that allows any law-abiding person to work in the United States without giving them access to the Welfare state? (I would word that differently if I were actually interviewing the president, but you get my drift…)
  • Would you please let Nassim Taleb explain his risk-management argument for climate change interventions? And can he please also be required to comment on his argument’s relationship to the Law of Unintended Consequences?
  • What is your favorite episode of South Park?

That third point should be at least a little bit controversial. I’m agnostic on whether there’s anything to be done about climate change (although I’m all for using it as an excuse to liberalize immigration for the world’s poor). I’m seriously skeptical of governments’ ability to do any good in that arena. I’d really rather not add fuel to the fire, but I think it’s important to raise the standards of debate, and I think Taleb’s argument* is the most sensible one. Not only that, it has wide applications that should push (benevolent/benign) politicians to support simpler rules and fewer interventions.

Oh yeah, and I’d ask him if he’s a secret gay muslim. (“Does your mom know you’re a secret gay muslim?” Anyone else remember playing that game?)

* Taleb’s argument goes roughly as follows: We face uncertainty, but there is a non-zero probability of a catastrophically bad outcome. Maximizing expected utility is not the appropriate risk-management strategy in this case. Our most urgent need (our highest marginal benefit course of action) is to eliminate the possibility of the catastrophic outcomes–and perhaps after that start thinking about maximizing expected utility. Essentially the argument is “don’t play Russian Roulette!” But an essential underpinning is that a probability distribution describing outcomes in complex systems often exhibits “wild randomness”. In contrast to the “mild randomness” of the normal distribution, in wildly random situations it’s difficult or impossible to even have an expected utility. The conclusion I would hope they would draw is that intervening in complex systems (and particularly creating new complexity through increased regulation and more tax loopholes) is best avoided, and particularly at the national level.

A quick thought on justice

Rick Weber Culture , , , , , ,

I thirst for justice. Sometimes it nearly gets me killed.

Driving in Long Island traffic gives me many opportunities to exercise my justice muscle which just reduces my life expectancy by that much more. This whole “turn the other cheek” thing is health advice, not an ethical rule. Don’t get me wrong, I wouldn’t want to live in a world without justice. But as an individual I need to work on tempering my own craving. I need to quiet that voice deep in head that shouts “THEY MUST PAY!”

This desire for justice seems to be part of human nature. I’d bet that it’s an essential part of hunter-gatherer society. But in the society where I can perceive all sorts of injustices, it can lead me astray. I’m glad I’m not allowed to be a vigilante because I’d almost certainly kill myself in the process.

From the Comments: Libertarians and Love

Brandon Christensen Comments , , , , , , ,

Rick responds to my question about heartless libertarians:

You’re spot on. There’s a mental image I’ve read (and I’m going to butcher this because I don’t remember it clearly) of a moral gradient (I’m 60% sure that’s what it’s called). The way I fit this concept in my head is that we each have a sort of a topographical map of something hill-shaped. This map represents the moral weight we put on others and ourselves. We’re at the center, and the points furthest away are those strangers from far away that we will never meet in our lives. Different areas may represent different groups of people. Even better, instead of a topographic map, you’re forming it with a finite amount of playdough. Some people might have more or less playdough than others, but they’re usually pretty similar.

Say one person’s hill is shaped like Grinch mountain (incredibly steep) he holds himself in far higher esteem than anyone else, even those very close to him. Someone whose map is a flat plain (or plateau, but it’s hard to tell, isn’t it?) is messiah-like in her even-handedness with humanity; every person is as valuable to her as her mother. Both of these are very different from normal, and we like to see other people be normal. Sometimes quirkiness is acceptable, and I suppose we might admire someone whose map looks like a ridge representing her strong devotion to the children of an African village she visits every year as well as animals of all sorts.

When I compare my moral gradient to the people around me, I notice some important differences. I put a much higher weight on strangers and foreigners. I still probably put a lower weight on the poor than a typical democrat. But that effect is swamped when you account for how much more I care about strangers and foreigners. So if I care more about the world’s poor, then who’s missing out on love? From whence came this playdough? I’m pretty sure it’s my girlfriend’s coworkers. I honestly can’t keep them straight and I can’t piece together the stories I hear about them into anything but the most abstract people.

I think my moral gradient might be pretty typical for a libertarian. Like you, I don’t want to put people out and that can appear stand-offish. But that’s really just me saying, “I don’t know you, but I believe you aren’t simply a solipsist delusion left here for my abuse or neglect.” But other-oriented sentiments come at a cost. I consider people in the abstract, where non-libertarians consider people on a case-by-case basis. Each one is special, but only a few of them actually count. Most people incorporate Dunbar’s number as both the limit of their social network and a limit to the number of people they actually care about. For me, I basically recognize “family”, “friend”, “human being”. I don’t have “second cousin, twice removed” or “friend’s ex-boyfriend’s cool cousin that I still hang out with some times.”

That’s all a very long winded way of saying “egh, their measure for love might have been focusing on love for those in-between strangers whose names I just can’t remember for the life of me.”

Here is the wiki for Dunbar’s numbers (Robin Dunbar is a British anthropologist). Here is more from Rick on the topic. The ‘moral gradient’ Rick speaks of probably has to do with the research of the economists Sandra Peart and David Levy (I’d start here, if you’re interested), but I’m just wagering a guess.

A question on adverse selection for the economists

Rick Weber Economics , , ,

I can’t think of an example of adverse selection occurring without asymmetric information. Does anyone else know of one?

But as long as I’m here waiting for answers, let me think through an aspect of this…

The classic example of adverse selection in my mind is the Death Spiral. (My dad sells group benefits, so growing up I would hear about some of the weird outcomes of different states’ insurance regulations on things like pre-existing conditions.) Trying to pull apart adverse selection (AS) and asymmetric information (AI) has led me to an interesting thought: The adverse selection problem created by preventing insurance companies from using the (very sensible) policy of not covering pre-existing conditions (i.e. of only insuring insurable things) may unravel some epistemic aspect of this situation.

The private costs of sharing information about pre-existing conditions falls and this might have modest benefits to offset the significant costs of AS. I’m sure health economists would be happy to have this sort of information, and maybe it would give insurance companies’ actuarial division some new insights that could apply to other markets.

David Friedman on Judging Outside Your Expertise

Rick Weber Liberty , , , , , , ,

David Friedman writes:

Accepting the views of experts on a question you are not competent to answer for yourself, assuming that you can figure out who they are and what they believe, is often a sensible policy, but one can sometimes do better. Sometimes one can look at arguments and evaluate them not on the basis of the science but of internal evidence, what they themselves say.

He goes on to give examples of inconsistent claims made by global warming alarmists. His (short) post is worth the read. Here are my 2 cents:

First, (in response to the block quote) deferring to experts is sensible but requires a certain degree of expertise in picking out who they are which is a difficult task. We’re all human, and it’s hard to hold something in your head without thinking it’s true. That makes it hard to not be arrogant. We need to emphasize strongly that interpreting information is hard, and the outcomes are not at all obvious. Those concerned with anthropogenic climate change (myself included) are better served by stressing the uncertainty involved and making arguments centered on appropriate risk management.*

Second, The issue of climate change boils down to a series of sub-issues that need to be considered carefully:

We need to think about costs and benefits. A warmer world would be a boon for many people. If we could set the average world temperature, we would want it to be higher than 0 Kelvin. We might even want it to be warmer than it is today.

We need to think about the uncertainty surrounding what’s happening, as well as what we can do about it. We should be particularly skeptical about cost estimates for any effort to try to control the environment.

(This one’s a bit of a non sequitur.) We should use this as an excuse to do things that would help reduce the costs of climate change that we should be doing anyways. Specifically, we need to liberalize immigration policy in wealthy nations. Let’s say there’s a 0.00001% chance that climate change has a bad outcome, and that specifically that outcome is that the entire country of Bangladesh will catch fire and kill everyone. That’s a good excuse to let Bangladeshi’s come to America, but we should be doing that anyways. It’s a low cost (actually a negative net-cost) solution to a potential problem of climate change.

Here’s one that I think the smarter alarmists/deniers already recognize: this is a political discussion. Politics and the truth don’t mix. But recognizing this point and making it widely known may allow people to tone down and argue something closer to the truth.

skepticalscience
Global warming will lead to catastrophic… life?

Both sides like to think of themselves as skeptical (as demonstrated by that masthead which warns that we might have to suffer through the addition of a habitable continent (?)), and good for them. We should value skepticism in this. But that skepticism shouldn’t lead us to make bold claims on one side or the other. It should lead us to ask a lot of “what if?” questions. This is a risk management issue, not a social engineering one.

* I like Taleb but I’m not as worried by GMO’s as he apparently is, but I haven’t read that paper either.

Here’s why you should default on your student loans. And here’s why you shouldn’t.

Rick Weber Law , , , , , , , , ,

This article popped up on my newsfeed the other day and I (as always) read the headline (“Why I defaulted on my student loans”), looked to see if it was posted by one of my sane or insane Facebook friends (no idea…), then promptly forgot about. Then I saw this response: “The New York Times Should Apologize for the Awful Op-Ed It Just Ran on Student Loans” (posted by a sane friend). Okay, let’s give this some thought.

Lee Siegel (of the first article) writes that he made some bad decisions and faced the prospect of either living a life he didn’t want, or defaulting on his obligation. The question then is “should more people follow his example?”

Choosing a major is essentially an entrepreneurial decision. You are investing in a set of human capital goods that you hope will provide a return in the future sufficient to justify the cost of the investment. One thing we know about entrepreneurship is that it usually fails. We also know that this failure is often not socially wasteful but simply a cost of experimentation. America was lucky to end up with a system of bankruptcy that is uniquely easy on defaulters… why lucky? Because it turns out that this system meant to merely shift resources towards farmers also allows entrepreneurs to quickly dust themselves off and get back to work on their next experiment. Some turn out to be brilliant and ultimately outweigh the costs of past failures.

But this wasn’t what Siegel was advocating. His decision was to not pay his debt but to stay in the line of work he trained for. His thinking was “sunk cost, and now it’s someone else’s problem.” Yes, the higher-ed industry is screwy on all sorts of margins, and yes, he probably didn’t have great information beforehand. But rather than learn from his mistake, he simply ignored it.

Using bankruptcy to subsidize risky experimentation turns out to make sense in some cases (it’s hard to believe, but there it is). And this might be justified in some cases in schooling… it might be worth it to subsidize 100 post-secondary schools that try all sorts of crazy methods on the chance that we learn something useful from the experience. And I think we can justify defaulting on student loans that were made in fraudulent circumstances (“Hey Buddy, wanna get a degree?”). It might be sensible to allow loan forgiveness for students who get a degree in a field that turns out to be obsolete by the time they graduate… as long as it’s paired with a policy requiring student loan applicants to watch a 12 hour long video course on employment projections and labor economics.

We might even justify subsidies by partial loan forgiveness for students studying art or some other field that might generate positive spill overs–but if we do, the decision shouldn’t be left to those who already owe a lot of money for attending an expensive school. It’s not up to Siegel to determine that he should get a subsidy. He wasn’t suggesting walking away from his mistake and starting fresh, he was suggesting letting someone else pay for the cost of his mistake while he reaped the rewards.

If there’s anything to learn from Siegel’s decision, it’s that understanding costs isn’t a requirement for writing in high profile news papers and so we should be leery of policy advice given by journalists. I think the second article I linked to makes a compelling case that Siegel is a bum.