On the (big) conditions for a BIG

This week, EconTalk featured a podcast between Russ Roberts and Michael Munger (he of the famous Munger-proviso which I live by) discussed the Basic Income Guarantee (BIG). In the discussion, there is little I ended up disagreeing with (I would have probably said some things differently though). However, I was disappointed about a point (which I made here in the past) which economists often ignore when discussing a BIG: labor demand.

In all discussions of the BIG, the debates always revolve around the issue of labor supply assuming that it will induce some leftward shift of the supply curve. While this is true, it is irrelevant in my opinion because there is a more important effect: the rightward shift of the labor demand curve.

To make this argument, I must underline the conditions of a BIG for this to happen. The first thing to say is that a) the social welfare net must be inefficient relative to the alternative of simply giving money to people (shifting to a BIG must be Pareto-efficient); b) the shift mean that – for a fixed level of utility we wish to insure – the government needs to spend less and; c) the lower level of expenditures allows for a reduction in taxation.  With these three conditions, the labor demand curve could shift rightward. As I said when I initially made this point back in January 2016:

Yet, the case is relatively straightforward: current transfers are inefficient, basic income is more efficient at obtaining each unit of poverty reduction, basic income requires lower taxes, basic income means lower marginal tax rates, lower marginal tax rates mean more demand for investment and labor and thus more long-term growth and a counter-balance to any supply-side effect.

As I pointed out back then, the Canadian experiment (in Manitoba) with a minimum income led to substantial improvements in health outcomes which meant lower expenditures for healthcare. As a result, b) is satisfied and (by definition) so is a). If, during a shift to a BIG, condition c) is met, the entire discussion regarding the supply effects becomes a mere empirical issue.

I mean, equilibrium effects are best analyzed when we consider both demand and supply…

P.S. I am not necessarily a fan, in practice, of BIG. Theoretically, the case is sound. However, I can easily foresee policy drifts where politicians expand the BIG beyond a sound level for electoral reasons (or even tweak the details in order to add features that go against the spirit of the proposal). The debate between Kevin Vallier (arguing that this public choice reasoning is not relevant) and Phil Magness (who argues the reverse) on this issue is pretty favorable to Magness (in my opinion). UPDATE: Jason Clemens over at the Fraser Institute pointed to a study they made regarding the implementation of a BIG in Canada. The practical challenges the study points too build upon the Magness argument as applied in a Canadian perspective. 

Wars and Presidents: Avoiding the Power-Display Bias

This week on EconTalk, Russ Roberts interviewed Bruce Bueno de Mesquita on how presidents who took the United States to war find themselves higher in the rankings of “Great Presidents” (see this paper by Henderson and Gochenour on the issue)  For some time now, I have found myself in agreement with that contention as wars are generally momentous events that stand out in history. In contrast, the man who sits by and does nothing except preventing a war or making it easier for people to trade, that is harder to observe.  But why would evaluating Presidents be associated with such a premium? Individuals are aware that wars are bad, so why are they praising this? On other metrics, how do Presidents fare?

On the power-display bias 

In my forthcoming book on Canadian economic history (published by Palgrave McMillan as part of their Studies in Economic History), I reviewed some pantheons and counter-pantheons of Presidents (which I will present below) and I felt I had to offer my argument regarding these pantheons:

The established pantheon and the counter-pantheon differ mostly due to people’s bias towards positively assessing outward signs of power. When he wrote to one of his correspondents that “absolute power corrupts absolutely,” British historian Lord Acton was not only speaking of politicians, but also of those would retroactively judge them: Acton was referring to a general human tendency – accentuated amongst historians – to be more forgiving of those who hold power, because the powerful are judged by their actions. Indeed, it is easier to size up a politician who undertook significant reforms – regardless of the results obtained thereby – than to evaluate the achievements of one who passively held the line. If the reformer fails, it can be said that at least he tried. Moreover, a given president’s place in the pantheon is closely linked to how many Americans he killed during the military conflicts that defined his reign. The more Americans killed per capita overall, the higher a given president’s ranking in the list of “greats.”

Economic history teaches us, however, that the most proactive presidents may not be the most beneficial to their country, on the contrary. For several years now, Franklin Delano Roosevelt (1933-1945) has been the subject of increased criticism in the economic literature for his interventionist economic policies between 1932 and 1939. Economists Albrecht Ritschl, Monique Ebell, Lee Ohanian and Harold Cole have determined that FDR’s interventionist policies in fact served to prolong the Great Depression.

In other words, the bias we have when evaluating men with power is that we evaluate based on the exercise of displaying the use of power. Those who refrain from using it are, properly, not recorded as historical events are conflicts/tensions/oppositions. This I think is generally a bias that is easily to fall prey to. I am not immune to that even if I happen to have libertarian leanings. I often see in one politician or another in history a man/woman that I wish would be here today to “save the day” (one of my childish belief). But each time I dig around that person, I am less enthused. For example, I used to be an admirer of William Pitt the Younger – a fierce one. After all, he had assisted Wilberforce in ending the slave trade, he had instituted a sinking fund to repay the British public debt (he had willfully tied his hands) and he he had been moderately sympathetic to the American revolution. I saw his role in the wars against France as a contest of circumstances. But, that was the point, I was ready to discount the war. In addition, as I read the work of Jane Humphries on child labor in industrializing Britain (here and here), I discovered more unsettling things.  During the French Wars, the build-up of the British state did lead to some crowding-out on factors markets, notably the labor market. Upon complaints of manufacturers, Pitt proposed to “Yoke Up the Children”. More precisely, he proposed the use of orphan in the public care to work as pauper apprentices to firms at pences on the shilling (bad pun of pennies on the dollar). He “lent” orphans to private firms and its hard to assume that they consented to work (as Humphries’s use of oral histories makes clear). If a person with libertarian leanings like me was willing to excuse such a man before, it is quite telling of how limited knowledge shores up the reputations of powerful men. This is because their use of power overshadows all the rest. Their use of power is like the joke about economists looking where the lamppost is: we evaluate them on what their use of power has illuminated.

Other Metrics

So, are there any other metrics that are less subjected to our inherent power-display bias? Obviously, anything that has a subjective element will be biased. However, evaluating the evolution of living standards under their rule is one way to go at it. Mark Zachary Taylor, in an article published in PS: Political Science and Politicsproposed an economic ranking of US Presidents since 1789. Whichever way you cut it, there is a weak rank correlation between the rankings of presidential greatness and the ranking of economic grades.


There is another type of ranking, which is more subtle. It measures how much Presidents refrained from expanding federal power. This exercise was made by Richard Vedder and Lowell Gallaway (two great economic historians) who measured presidents based on their changes to the size of government and inflation. This measure alone (see table below) is not sufficient to be convincing, but taken as part of a constellation of rankings, it provides a key piece of evidence. This is really a counter-pantheon to the rankings of presidential greatness. In fact, one could see it as the cost for societies of presidential greatness.


When comes the time to evaluate great rulers, being aware of our biases is crucial (as Lord Acton, I think they should rarely be excused based on flimsy excused like circumstances – the virtue of being an historian/economic historian is that we have enough hindsight to say how terrible certain choices were).  And that awareness should lead us to develop a “dashboard” of rankings to properly weigh the impact of such rulers.

A metaphor for the Socialist Calculation Debate

This week’s episode of EconTalk was fantastic, and in particular drew an important parallel between the complexity of the human brain and the complexity of market economies. The guest was discussing radical nanotechnology (basically the idea that engineers could out do bacteria by applying good design principles in place of random mutation and natural selection), and Russ pointed out that the logic is basically the same as in Socialism. Radical nanotechnology runs into a fundamental problem as long as it ignores the emergent processes occurring at the molecular/cellular level.

Later, the guest discusses the issue of artificial intelligence and points out that the fundamental unit of biological computing is not the neuron (which we simulate on computers using neural networks), but the molecule. In other words, natural intelligence is the outcome of a complex process that isn’t simple enough for us to easily replicate on a computer.

All that in mind, the idea of socialism* is like the idea that we could replace a brain with a pocket calculator. Yes, the idea is to get a very powerful calculator, but the problem is that it’s replacing a computer that’s far more complex and sophisticated.

* i.e. Centralized control of the means of production… socialism has nothing to do with sharing (you’re thinking “Egalitarianism”) and everything to do with control, and particularly the attempt to rationalize complex systems.

A libertarian argument for an FDA

Whoa! Yeah, I’m going to do this, but let me start with some caveats. First, this is an argument, not the argument. Every silver lining has a storm cloud, and acknowledging the silver lining doesn’t mean you’re in favor of tornadoes. Second, I’m being sloppy with the term libertarian; classical liberal is closer to the truth, but doesn’t make for as good a title. Most importantly, I think my argument is swamped by the traditional libertarian arguments against the FDA. All that said, this argument has some interesting implications for how we think about intervention generally. Here goes…

The human body is a complex system that we do not fundamentally understand. Although every complex system is unique, they have similarities. In the case of both the human body and society/markets, interventions lead to unintended consequences which can offset the (ostensible) gains from the intervention. At the end of the day, although the FDA intervenes in the complex system of human society, it also prevents intervention in the complex system of human physiology.

The Hippocratic Oath instructs its speaker to not play God and to avoid over-treatment, and the justification for that is made clear in a recent Econ Talk. The guest was on to promote his book which discusses the problem of medical reversal–the phenomenon of medical practices that are adopted and subsequently abandoned after evidence shows the practice to be ineffective or worse. From this position he argues that the FDA’s mandate to ensure not just safety, but efficacy, is especially important. His argument is that because of the cost of type II error the FDA ought to go further.

Let’s look at two extreme cases. In the “anything-goes” world, we might have a lot of people trying good and bad interventions with a lot of harm being done to the unlucky ones. You and I know that the real problem is one of information and that in a perfect world we would have “anything-goes-that-consumers-with-access-to-good-information-from-Consumer-Reports-®-or-a-competitor” but this world still leaves us with the problem (which we face in today’s FDA-evaluated world) that consumer trial-and-error is a poor substitute for randomized control trials.

At the other extreme we have the “first-do-no-harm-second-do-real-good” world of an ideal FDA. This world has very steep type I errors but instead of two steps forward, one step back, we would have one step forward, then another, and never any steps back…. but of course each step forward would cost a few billion dollars.

Neither extreme is ideal, but the second world is one where standards of evidence are taken very seriously. In that world I’d be a third grade teacher instead of a college professor. The standards of evidence are at the core of the problem of medical reversal, but also the problem of economic intervention (which is far less likely to be reversed, even in the face of good evidence indicating that it should be).

As far as medical intervention is concerned, my position is bullish on better efficacy evaluation of medical procedures but still bearish on the FDA itself. But looking at the FDA from this angle opens up an interesting thought experiment: what might be the effects of an Economic Intervention Standards Authority? In practice it would probably be awful (my guess is a federal bureau that attempts to quash Tiebout competition), but in a libertarian utopia it would be the bureaucracy that libertarian kids with administrative bents would dream of heading.