Help, please

In the Wall Street Journal, David Laband, chairman of economics at the Georgia Institute of Technology, describes a recent experience of his at the airport as a lesson in economics.

Bad weather had created a bad circumstance for six people. Snow caused them to arrive late at the airport, too late for cabs, in those conditions, to come pick them up. The six passengers faced spending a night at the airport, but another passenger with a car offered to take them to their destination for $25 each. The gladly accepted.

Laband writes:

There are those who argue that this unscrupulous individual took “unfair” advantage of these travelers in distress by charging them at all. Critics would say that he was a heartless “price-gouger.” Really? The fact is, no one was offering to provide private transport for the stranded passengers at no charge. For that matter, the real price-gougers—government-regulated taxi companies—were nowhere in evidence.

I found this article interesting for a few reasons.

First, it describes a topic of conversation I’ve had frequently with friends and family, so it’s familiar territory. Yet, not quite. This is a little different because the conversation is usually about high prices in disaster areas. This wasn’t quite a disaster area, nor were the people unable to pay. Even the fee itself was lower than normal, I imagine. But, I like this particular circumstance because it doesn’t have the typical emotional loading as disaster situations.

Second, I still found myself being uneasy that the ‘savior’, as Laband describes him, took money. Even though it was less than a typical cab fare, even though the six passengers gladly paid him, even though the guy was going out of his way to help and the six passengers certainly faced a rather uncomfortable night.

Why did I feel uneasy about it?  And, if I felt uneasy about it, I can certainly see why the people I’ve discussed such situations do as well.

But, what is it? I can’t quite put my finger on it. Especially considering that Laband correctly describes real price-gougers as the government-regulated taxi companies.

Why I am more willing to accept their price-gouging behavior and less willing to accept this private guy’s actions?

If someone gave me a ride home in a similar situation, I’d want to pay them — at least ‘buy them a nice dinner’, which is about $25.

I don’t think I should be uneasy. I agree with Laband’s logic. All parties came out ahead. It enhanced social welfare.

But what’s the difference between ‘buying them a nice dinner’ and paying $25? Is it that he asked for the money?

Any thoughts?

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The road to hell is paved with…what again?

The Wall Street Journal gave us a timely reminder last week of Friedrich A. Hayek’s legendary Nobel acceptance speech.

An ungated version of the entire speech can be found here.

Here’s a portion of what the WSJ quoted:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights.

But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.

Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.

The whole thing is worth a read.

John Papola’s attempt at a productive discussion

This may be the beginning of a good discussion on economic worldviews (HT: Pretense of Knowledge) and is definitely worth a read.

Here’s a snippet of him responding to his opponent:

Mr. Livingston kicks off his rebuttal with a politically-charged round of ridicule complete with a barrage of buzzwords like “austerity,” “trickle-down” and “Reaganomics” whose sole purpose is to rile partisan fervor in the reader. My argument was thus hand-waved away as mere “faith” in classical economics with the assertion that “no amount of evidence” can shake me of my baseless dogma.

Innovative. Free. Very cool.

Tyler Cowen and Alex Tabarrok, George Mason University economists and co-bloggers at Marginal Revolution announced today that they will offer a free, online Developmental Economics course at their new online university, MRUniversity. Sign-up today.

I have a course suggestion: Drawing Conclusions from Comparisons.

This is a weakness I see at all levels, even the well-educated, who should know better. We often make comparisons between two populations and draw conclusions about the differences that happen to fit our biases and give too little thought to alternative explanations.

One example: Homeowners appear to be more responsible than non-homeowners. If we make it easier to buy a home, we’ll make a lot more people responsible.

Cue 2008 mortgage crisis that people are still trying to figure out, or still trying to blame on  free markets or deregulation.

Alternative explanation: Turns out before we relaxed the standards, responsible people were more likely to become home owners and that’s what explained the difference in responsibility between these two groups.

Folks who were able to meet the requirements to own a home did so by being responsible before they owned a home.

Short circuiting home ownership qualification tests (like being responsible enough to exercise financial discipline and save a down payment) ended bad. It allowed irresponsible people to own homes, and surprise, they continued being irresponsible.

It would have been nice to consider alternative explanations to the idea that started it all — that home ownership causes responsibility — before committing to it.

Consumption results from production, not the other way around

I recommend reading this column from Steve Horowitz.  It reminds me of this post of mine on wealth and where it comes from.

Here are some key sentences from Horowitz’s article:

One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy.

…we only have the power to consume if we have produced and sold something in order to acquire the means to engage in consumption. Starting the analysis with consumption assumes one has already acquired means.  Contrary to that analysis, wealth is created through acts of production that rearrange resources in ways people value more than alternative arrangements. These acts are financed with savings that come from households refraining from consumption.

Folks often skip right past the true source of consumption and skip right to the consumption. They mistake consumption for wealth. Wealth first had to be created somewhere.

Even the wealth acquired by rent-seeking bureaucrat was created somewhere merit-worthy before being directed into his pocket.

The health of the economy isn’t economic activity, rather it’s value creation. There’s an old saying   that what matters most can’t be measured, but what can be measured will be managed. We measure economic activity with GDP. That’s not value creation. Much damage has been caused trying to manage GDP.


Government by Fallacy

Columnist E.J. Dionne in the Washington Post:

Yet the drumbeat of propaganda against government has made it impossible for the plain truth about the stimulus to break through. It was thus salutary that Douglas Elmendorf, the widely respected director of the Congressional Budget Office, told a congressional hearing last week that 80 percent of economic experts surveyed by the University of Chicago’s Booth School of Business agreed that the stimulus got the unemployment rate lower at the end of 2010 than it would have been otherwise. Only 4 percent disagreed.

So when conservatives say, as they regularly do, that “government doesn’t create jobs,” the riposte should be quick and emphatic: “Yes it has, and yes, it does!”

The first problem with Dionne’s argument here is that it is what I call an expert fallacy. Just because a majority of a group of experts believe something, it doesn’t make it so. Majorities of experts have been wrong many, many times. I’m more interested in the actual case. Why do some experts believe it and some don’t?

On the Mercatus Center blog at George Mason University, Matt Mitchell posts more problems with Dionne’s argument. Doing his homework on the survey, something Dionne and his editors should have done, Mitchell finds that the survey responses aren’t as clear-cut as Dionne suggests.

On February 15, they [Booth Survey] put two statements to the panel and asked them to respond. The first statement reads:

Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

It is true that, of those surveyed, 51 percent agreed and 29 percent strongly agreed with this statement. Some of the comments from those who agreed with this statement are telling. Anil Kashyap of Chicago for example wrote, “But this is an incredibly low bar.” And Darrell Duffie of Stanford wrote, “Subsidizing employment leads employment to go up, other things equal. Adverse impacts through growth incentives might take time.” These statements (and others) suggest that perhaps the question was overly-narrow.

Thankfully, IGM probed further. They asked the economists to weigh in on a second statement:

Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.

This time, when the economists were asked about the longer-run, total effects of stimulus, they were much more equivocal. Less than half agreed or strongly agreed with the statement, 27 percent were uncertain, and the rest either disagreed or had no opinion. A number of respondents noted the uncertainties involved. Nancy Stokey of Chicago summed it up nicely, writing, “How can anyone imagine this question is answerable, given the current state of economic science?”

Problem 1: The statement that Dionne refers to may have been too narrow. Even some of those who agreed with it may not agree with for the reasons Dionne supposes.

Problem 2: Dionne didn’t mention the results of the second statement of the survey. When asked if the benefits of the stimulus will end up exceeding the costs, less than half agreed. Had Dionne presented the result of this question as well, would it have helped or hurt his point?

We should expect better from folks like Dionne. Not doing your homework and presenting a slanted and narrow view of a survey is lazy, especially for a professional.

I encounter bad form in my part of the political spectrum as well. I’m going to make a point to try to remember to post something about it when I see it.

But, I do have a double standard. I am pickier about the logic of the other side. I have a very good reason to be.

I ask nothing of Dionne, except to use better logic. But that’s only a request. He’s free to ignore it.

Yet, Dionne asks a great deal from us. He wants to force us to approve handing over very large sums of our money to bureaucrats so they can spend it how they see fit, based on his fallacious and narrow argument.

When people want to force me to do something that I don’t believe works, I’d like them to take the time and care and build a sound case.

When someone on my side of the political spectrum uses fallacy, it’s not usually to rationalize handing our freedoms over to bureaucrats.

(H/T to Russ Roberts at Cafe Hayek for the Dionne article and the Matt Mitchell blog post).

Lemonade Stand Economics

Thanks to Russ Robert of Cafe Hayek for pointing me to Jerry Jordan’s Investors Business Daily article,  Government Accounting is Like Lemonade Stand Economics.

I attempted to explain the same topic that Jordan writes about last September in my post, Government is an expense.

My key point then was that GDP is often misused as a measure of health for the economy, but that is like measuring the health of a business by adding its revenues and expenses together.

Jordan explains it better than I did with a lemonade stand example.  In his example, kids invest $10 in a lemonade stand, make $7 back by selling cups of lemonade and folks think that is good because there was $17 worth of economic activity, instead realizing there was a $3 loss.

GDP is not a good measure of the health of the economy because it’s like considering the $17 of lemonade stand spending and saying that was good, rather than realizing that $3 of value was lost in the process.  None of us would last long if we kept turning $10 into $7.  But, that’s essentially what we do when we increase government spending to keep GDP up.

The lemonade stand kids should learn from the signal they received from the market.  The signal is that selling lemonade in the neighborhood is not worth their while because customers do not value a glass of lemonade in that time and place to pay enough for it.

So, the kids should try other things.  Maybe they should try a different drink or different corner.  Or maybe they should offer to do yard work for their neighbors.

They should keep experimenting to discover things that their neighbors do find worthwhile enough to pay enough to make it worth the kids’ while too.  Full disclosure, I tried the lemonade stand experiment a few times too.  I tried it in the street and at family garage sales.  It never produced profits for me.  I did much better doing things like mowing lawns, raking leaves, shoveling snow and assembling bicycles.

We do no good encouraging the kids to keep at turning $10 into $7 to maintain that $17 of economic activity.