Pride and Subsidies

Freakonomics had an episode on the dramatic impact of subsidies on the visual effects (VFX) industry. Long story short: 1) VFX companies operate on razor thin margins, 2) the industry chases subsidies from competing local governments–Canada and London are  currently important locations, 3) Californian politicians want to bring these jobs back to LA, but doing so would probably be a net burden.

(Let’s put aside the issue of the state of California trying to play central planner by effectively creating different tax rates for different industries. That’s a bad idea for reasons we can explore later.)

Putting yourself in the head of a Californian, something about the policy feels right (maybe not for the typical NOL reader, but probably for the median voter). I’m sure you could convince the median voter that these subsidies are a bad idea, economically. But even so, I’d be willing to bet that you’d still get significant support.

I’m confident that if you were to talk this issue over with a representative sample of California voters–or X industry in Y region for similar industry upheavals–you could convince them of the probable negative impact of such policy and still see many voters at least weakly supporting the policy. Why? Because being able to point to a movie and say “that awesome explosion was made in my backyard,” is worth some degree of sacrifice for these people.

Perhaps people want our government to give us something to be proud of (God knows they give us enough things to be ashamed of!). Perhaps people have some latent willingness to pay to be able to say that some high status industry is in their community/city/state/country.

We like pride, but it costs us. This puts us squarely in the domain of economics. How do we figure out how to make the trade off between pride, and the price we must pay for it? Some cases seem easy, at least in hindsight–the sacrifice of the civil rights movement was a small price to pay for the pride generated–but cases like the VFX industry, aren’t so obvious, but still high stakes.

I don’t think we’re likely to be able to figure out the bill. We can be proud of NASA, movies, the post office, and whatever else. But how much of the cost can we attribute to engaging in activities that make us proud? We get the same issue in markets. I have more than brand loyalty for Honda (the maker of my motorcycle); I’m also proud to associate with Honda as an innovative company with a history of liberating the world’s poor.

A clever statistician or economist could estimate some important facts about how people tend to make these trade offs. Doing so could help us make better decisions, but can’t ultimately replace our own judgment.

Given the uncertainty we face we really have to make a decision about whether to err on the side of over- or under-provision of pride goods–and this is true in a variety of settings.

I suspect that the “let 1000 flowers bloom” approach is the appropriate one here. We don’t want to have one Secretary of Pride deciding to err on the side of over-provision and the result is that a bunch of children die from preventable causes so that we can all feel proud about how cool the latest domestically produced Fast and Furious movie is going to be. On the other hand, it would be a tragedy of slavery was never ended because it would interrupt business as usual.

Markets, civil society, and government face different sorts of pros and cons with respect to how they might make these trade offs. Arguing about them could create a new academic discipline at the intersection of ethics, economics, and sociology.

In all three spheres, there will be many very bad decisions made. But if you aren’t free to be wrong, you aren’t free. The question to ask is what sort of pride goods will tend to survive, and in which spheres?

What we can say for sure is that private, voluntary exchange and cooperation (free markets and civil society) at least allow us to choose our associations. And they require us to choose, and choose again on a regular basis. Our nation is mostly based on luck. Where we live tends not to change much. Voting with your feet is costly, so we should expect it to be that much harder to dismantle big mistakes. The political process routinely results in outcomes we’re ashamed of (about half of voters are ashamed of the results every presidential election!).

There aren’t markets in pride so it’s hard to know how the benefits compare to the costs. But we can (and do) exhibit pride in markets. We should probably do more of it. And perhaps we should also be more skeptical of government, even though we normally think of them as providing pride goods. On the margin, anyways, I think this is a good direction for most people to move. Be proud of your community because the people have whatever unique traits they do. Be proud of the brands you buy from for their contributions to the state of the art. Be proud of your local sports team.

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The Antebellum Puzzle, Anthropometric History and Quebec

I recently gave an interview on Economics Detective Radio with Garrett Petersen to talk about my forthcoming article in Economics & Human Biology (with Vadim Kufenko and Alex Arsenault Morin). In the interview, I explain why anthropometric history is important to our understanding of living standards, their evolution and short-term trade-offs in economic history. The interview is below, but you should subscribe to Garrett’s podcast as he is well on his way to becoming a serious competitor to EconTalk with the bonus that he does lots of economic history.

Podcast link (download).

The Roots of Truth and the Roots of Knowledge

John Oliver raises a Hayekian point on the roots of knowledge:

Just because they believed you and you believed them, doesn’t make it true! This isn’t like Peter Pan where believing in fairies will keep Tinker Bell alive. This isn’t a magic thing Peter, she has Lou Gehrig’s Disease.

He’s rightly picking on Donald Trump, who has a) been a particularly bad epistemologist, and b) should be held to a higher standard because he’s the president.

But the truth is that we’re all in the same boat: we believe what we hear from what we believe are reputable sources (because we heard those sources were reputable from sources we believed to be reputable). Most of our knowledge we take on faith from other people. In essence, we can’t simply know the truth in a vacuum; we depend on the context created by our culture, language, and personal experience. It’s only by trusting others that we can stand on the shoulders of giants.

What’s so special about science is that the standards are higher than in other domains. Knowledge has been carefully curated over generations by fallable humans engaged in a particular subculture of society. To the extent science makes good predictions, it creates value in society, and to the extent it can verify and capture that value, its practitioners get funding and get taken (mostly) seriously by the educated public.

You might notice that there are many places where science can go wrong. And the history of science is replete with blind alleys and shameful episodes. But also glorious advances in our knowledge, capability, and humanity. The same is true of all areas of life that deal with knowledge from politics and journalism to how you clean your kitchen. To the extent we see both competition and cooperation (in a variety of institutional forms) we will tend to see knowledge and truth converge. (I think.)

In this respect, we’re all, essentially, in the same boat. We should expect fallability and adopt a humble attitude. As surely as I want to believe John Oliver’s portrayal of current events (most of the time), I’m not about to fly to DC to check things out for myself.

Because, this isn’t about belief, it can’t be… Faith and Fact aren’t like Bill Pullman and Bill Paxton. When you confuse them it actually matters. Real people get hurt when you make policy based on false information.

We face trade offs when it comes to knowledge. Received wisdom might be correct enough to operate a bed and breakfast. But we’ve created real fragility in our political system by vesting so much power in the White House. It means that the standard of truth has to be so high that not even a crazed billionaire hell-bent on becoming president (a segment of society usually celebrated for their levelheadedness!) can be trusted to pursue.

Let me sum up:

  1. Our knowledge is always based on the trust we place in others. As such we can be more or less certain about any thing we might know. I am very certain (0.99×10^-100) that gravity exists and keeps me rooted to the earth, but less certain (0.05) that I am organizing my bookshelves correctly.
  2. We can, and do, have different standards of truth in different areas of our lives. I don’t make any important decisions that don’t account for the severity of gravity. But I’m not going to sweat it if I put a new book on an inappropriate shelf.
  3. We absolutely need to hold our government to very high standards. Nuclear weapons are scary, but lesser powers also call for very high standards. The level of certainty I’d insist on for nukes is at least an order of magnitude higher than the level for regulating pollution. But the level of certainty for the latter is orders of magnitude higher than might be possible under alternative arrangements.
  4. At the same time, we have to accept our own fallability, particularly when it comes to our ability to accurately know the truth. But that’s no reason to be nihilistic; it should inspire a striving for constant improvement in general (while making the appropriate trade offs on the margin).

On the trade off between the rule of law and lower taxes

The recent Carrier deal has caused some controversies in liberty-oriented circles. For example, The Mises Institute published a defense of the deal, arguing (along other lines, please read the article yourself):

there is nothing inherently wrong with an administration focused on keeping jobs in America — especially if this is accomplished by relieving tax and regulatory burdens.

The point I wish to make here is a general point, so I won’t go into the specifics of the Carrier deal. Among other reasons: I don’t know the specifics of the deal (I don’t know the content and I don’t know how the deal came to pass.) What I wish to do here is to argue the general case on how to view these kinds of tax exceptions.

The point we ought to remember, I think, is that there are a trade offs between two important liberal values, although they are important in different ways. On the one hand, we have the idea of rule of law, the idea that the law is general, not specific, applies to everyone rather than some, and that it’s not designed to favor some because it should serve an open-ended order. Things that contribute to such a legal order are ipso facto prima facie good, things that take away from such a legal order are ipso facto prima facie bad.

On the other hand we have the idea that taxes are bad. Things that lower taxes are prima facie good, things that increase taxes are prima facie bad.

But neither of these things trump all other considerations. Let me give you two examples.

  • Suppose there was a law that said that the taxes on, for example, business started by family members of politicians are automatically exempted from taxes. Would this be a good law?
  • Suppose there was a law that said that everyone has to be drafted and has to serve mandatory military service overseas, except the family members of politicians. Again: would this be a good law?

In both of these questions, the answer depends on the liberty-inspired framework you use to answer the question. If you think the value of the rule of law outweighs the value of individual liberty of those family members (who are, after all, not responsible for the actions of their political family members) than you think these are bad laws. If you think the increase in individual liberty for those family members is more important than the violation of a rule of law principle, than you think these are good laws. My point is not to say how one should determine this, my point is that there are two liberty-inspired frameworks that can justify an outcome, and both of these frameworks are relevant in determining what kind of laws we ought to support.

To make the issue slightly more applicable: is the increased damage on the rule of law (created by allowing a specific exception on the general laws on taxes) larger or smaller than the benefits that allow a company to have less taxes?

Some people have tried to argue by analogy – for example, comparing it to the draft. The problem is that analogies quickly run into the problem of changing the relative values of the two important concepts. For example: is it a good thing that women are exempted from the draft? Yes, this seems like obviously a good thing. Would it be a good thing that male children of politicians would be automatically exempted from the draft? This seems like less obviously a good thing.

Would it be a good thing if white people were automatically exempted from the draconian drug laws? Maybe it would, but maybe that also lowers the chance of getting rid of the drug laws altogether. Different margins matter in these kinds of evaluations.

The wrong thing to think is that all policies are pro tanto good just because they increase liberty on some margin for some people, especially if this allows for the prolonging of bad policies by the current ruling class. Some policies can be bad on some margins and good on others and reasonable people can disagree whether the complete net effect of this is good for all.

Maybe it’s a good thing that some people are exempted from evil laws (such as taxes), but it’s not good that the political class gets to choose who does so. Because those who will be exempted will be those who are connected to the political class. So one can absolutely like lower taxes, oppose politicians’ power to choose who is exempted and oppose that, and still be happy for a company that they got a tax cut. (Unless, of course, the company itself is evil. This is certainly possible if they are partners in, for example, the wars that the USA commits.)

So tl;dr. As I posted somewhere on facebook:

Rule of law and lower taxes are two good things. A president (or important person connected to the ruling class such as the president elect) getting to pick and choose winners isn’t desirable, but a tax break is. A higher tax isn’t desirable, but a rule of law is.

Trying to argue the case based on principle seems wrong. It depends on the margins. In the case of the draft, the margin *against* rule of law seems important enough to say it’s a clear victory for liberty to not have women included.

In the case of tax breaks, this is less obvious and reasonable people can come out on different sides of this, I think.

The trade offs of Hillary vs Donald

An interesting thing to talk about is whether one ought to support the Donald or the Hillary. And it’s my impression that those who are marginally in favor of Donald and vice versa do that with a completely different view on the risks associated with either of them.

People who favor Hillary have something like this in mind:

Hillary will continue with the status quo that started with George W. Bush (especially foreign policy) and continued under Obama (who added domestic trends such as Obamacare). Trump, on the other hand, is a complete wild card who will transform the (fragile) political institutions we have into something of an even more authoritarian system. And having an authoritarian figure with his fingers on the red button just seems like a very bad idea.

People who favor the Donald are seemingly thinking something like this:

Hillary will continue with the status quo that started with George W. Bush (especially foreign policy) and continued under Obama (who added domestic trends such as Obamacare). Trump, on the other hand, will be such a weak politician that he will get almost nothing done. Even in his own party, he is so unpopular that he won’t get executive discretion even if he asked for it. He won’t be able to achieve anything and he might even get impeached. But regardless, he will be an overall failure of a politician, and that’s a good thing relative to the trend that Hillary started.

I could be wrong, of course, but this seems like the trade off that people are making. We know, with a reasonably high certainty margin, what kind of policies Hillary will favor. Trump, however, is a complete wild card. Some people think the wild card will accomplish very little (and thereby show a high confidence in the current workings of the American governmental system), so therefore he is preferable to Hillary. Other people think he will accomplish a lot (and thereby showing very little confidence in the current workings of the American governmental system.)

I think this trade off is basically right: where you stand on Hillary versus Trump depends on your view in the likelihood they’ll achieve what you think their plans are. Which of these have the correct view, I do not know. But it’s an interesting question nonetheless.