The (kids) gloves are coming off?

Russ Roberts and Don Boudreaux, of Cafe Hayek, don’t know what to call their recent posts about Paul Krugman. I have a suggestion: It’s about time.

Economist Russ Roberts criticizes Krugman for his treatment of intellectual opponents, like economist Robert Barro, in this case. Roberts quotes two passages from Krugman’s own economics textbooks that support an argument that Barro makes:

Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

Yet, while Krugman said as much in his text books, in his blog post, Krugman does a poor job of characterizing this incentives-driven view of what Barro calls “regular economics”:

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

And:

If you read Barro’s piece, what you see is a blithe dismissal of the whole notion that economies can ever suffer from am inadequate level of “aggregate demand” — the scare quotes are his, not mine, meant to suggest that this is a silly, bizarre notion, in conflict with “regular economics.”

Not exactly. I did read Barro’s piece. He sets a good example of how to characterize opposing views, accurately and without straw-manning it like a 9-year-old who just put gum in her sister’s hair because “she deserved it”:

Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving “aggregate demand.” Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment.

And, it wasn’t quite a ‘blithe dismissal’. It was an argument that Krugman chose to blithely dismiss himself, instead of addressing it.

So, why did Krugman describe Barro’s argument as he did? Why not simply state the argument. For example, Barro believes that the unemployment creates incentives for people not to work, something I also believe and have written in my textbooks. Where I disagree with him is that I believe during recessions, those incentive effects are overwhelmed because there are fewer jobs a lot more people who want them.

Don Boudreaux goes one further and criticizes the people who seem to relish in their own intellectual capacity to deal with Krugman’s nuances (by using bigger words than I used in the previous paragraph), while missing a larger point, that economics shouldn’t be used to justify stealing.

I did something that I rarely do. I read Krugman’s whole piece, and was reminded of why I choose not do so. Not only do I agree with the points made by Roberts and Boudreaux above, but there are other things that bug me.

Here’s a couple of those things.

1. He says of Keynes’ “discovery” of aggregate demand:

…while I’m generally against scientific pretensions, it amounted to a scientific revolution, something like plate tectonics in geology.

First, I don’t put much stock in anyone who compares economics to science. I think they will be prone to be more confident in their views than they should be, which can lead to disastrous results.

Second, why make this analogy if he really is “generally against scientific pretensions.” Just not in this case? Aggregate demand is lone example in economics where scientific pretensions is warranted?

Something else bugs me. Krugman writes:

Think, for example, about the Great Recession and its aftermath. Regular economics says that economies should normally get richer each year, as their work force and capital stock grow, and technology advances. But after 2007 the United States and other advanced countries suddenly went into reverse, becoming poorer instead of richer, and for an extended period too [pointing to a chart of declining GDP in the recession].

Does regular economics say that economies should get richer every year? Maybe. I haven’t heard that one.

Is GDP a measure of wealth? I thought it was a measure of economic activity. Can’t GDP decline and wealth still go up? If Bill makes $100,000 a year and has $1 million in Apple stock, does his wealth go down if his salary declines to $90,000? Not necessarily. It depends on how much he spends, doesn’t it? If he spends $80,000 a year, his wealth can still grow after the decline in his salary, no?

Perhaps I’m mistaken in my understanding of GDP. If so, please correct me. But, if not, it seems that Krugman’s language is unnecessarily sloppy here for a Nobel economist.

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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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We win with markets

Paul Rubin made a great point in his Wall Street Journal op-ed (thanks to Don Boudreaux, Cafe Hayek, for pointing to it).

Economists should point out that what makes markets thrive is cooperation, while competition plays a supporting role. This might help the perception of markets. As an example:

…we might say that a poor person has been outcompeted in the market. Or we might say that a poor person cannot successfully cooperate with others because he lacks valuable skills and has little to sell.

Again, the words matter because viewing the circumstance in terms of competition could lead to penalizing those who are viewed as outcompeting him, even though they did nothing wrong. It might even lead to banning certain terms in transactions—with minimum-wage laws, for instance—that make it even more difficult for the poor person to cooperate. The cooperative metaphor, by contrast, would suggest that the solution is increasing the skills of the poor person, giving him something to sell on the market.

Unfortunately, Rubin would still need to convince many other economists that minimum wage laws make it more difficult for the poor person to cooperate.

More good stuff from Cochrane on health care

I recommend reading John Cochrane’s op-ed in today’s Wall Street Journal, What to do when Obamacare unravels. It’s a great follow-up to my health care reforms.

Here are a couple quotes from Cochrane’s piece that addresses some common concerns over non-government medicine.

What about the homeless guy who has a heart attack? Yes, there must be private and government-provided charity care for the very poor. What if people don’t get enough checkups? Send them vouchers. To solve these problems we do not need a federal takeover of health care and insurance for you, me, and every American.

And (emphasis mine)…

No other country has a free health market, you may object. The rest of the world is closer to single payer, and spends less.

Sure. We can have a single government-run airline too. We can ban FedEx and UPS, and have a single-payer post office. We can have government-run telephones and TV. Thirty years ago every other country had all of these, and worthies said that markets couldn’t work for travel, package delivery, the “natural monopoly” of telephones and TV. Until we tried it. That the rest of the world spends less just shows how dysfunctional our current system is, not how a free market would work.

Enough with the education olympics

Wendy Kopp, CEO of Teach for All, suggests in the Wall Street Journal that we call off the education arms race.

I agree. She’s referring to viewing education system effectiveness, as measured by standardized test scores across countries as a competition.

We should be happy that other countries are doing so well. Isn’t that good for us to live in a more educated world? Perhaps we might even be able to learn something from them, if we care to.

Or maybe we’ll just discover that they’re really good test takers.

The Wall Street Journal also offers this piece today about the education arms race, which says:

Since 1998, the Program for International Student Assessment, or Pisa, has ranked 15-year-old kids around the world on common reading, math and science tests. The U.S. brings up the middle—again—among 65 education systems that make up fourth-fifths of the global economy.

I have a few other thoughts to consider.

How well do PISA scores on reading, math and science correlate with prosperity now and in the future? Perhaps there’s a threshold that is good enough and, for whatever reason, the other countries are, to their own detriment, are far surpassing that.

For years I’ve heard that U.S. doesn’t have government health care and it results in sub par medical care performance vs. countries that do.

We do have government education, yet that still seems to result in sub par performance. So, maybe whether the government provides something isn’t the key to success. Maybe there are other factors.

Though, I must say that I do see as one bad outcome of our education system our inability to be able to put such results in proper perspective.

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.

Inconsistency of the Day

A thought occurred to me while I read this Wall Street Journal opinion piece that explains that taxes are high on American corporations. This is despite an earlier GOA report that showed a 12.6% effective tax rate.

It turns out there were two problems with that report. First, it had a small sample size. It was based on one year, 2010. That year saw heavy write-downs (i.e. tax deductions) from the financial crisis, so it was an anomaly. Second, it didn’t include taxes paid to foreign countries.

Another study, with a longer period or 2004 through 2010, showed the total tax rate exceeded 35%.

The thought that occurred to me was this: I wonder how those who tell us that ‘corporations are not people’ feel about corporate taxes. 

My guess is that they don’t want corporations to have a voice in the political arena, but they want to tax the heck out them, which I find inconsistent.

They should realize that corporations are made up of people. Shareholders and employees are people.

While I sort of agree that corporations in the political arena are usually out to use government’s power against us, I think the proper place to fix this is by reducing the power government has, rather than trying to keep the 16 year-old-girl away from the proverbial bad-boy.

I also think that the proper place to tax corporations is at the individual level. Taxing corporations just reduces the transparency of the taxes government is imposing on individuals.

Incentives matter: Work and welfare edition

The Wall Street Journal has a must-read interview with Bob Funk, CEO of Express Employment Services — a $2.5 billion employment services agency. There’s also a good companion piece, Won’t Work for Food Stamps.

Funks covers some key points from a report his company plans to publish on Monday called, The Great Shift.

Here are snippets:

[Funk believes] “anyone who really wants a job in this country can have one.” With 20 million Americans unemployed or underemployed, how can that be?

To land and keep a job isn’t hard, he says, but you have to meet three conditions: “First you need integrity; second, a strong work ethic; and, third, you have to be able to pass a drug test.” If an applicant can meet those minimal qualifications, he says, “I guarantee I can find employers tomorrow who will hire you.”

He thinks the notion of the “dead-end job” is poisonous because it shuts down all sense of possibility and ambition. One of his lifelong themes, Mr. Funk says, is that “a job—any job—is by far the best social program in America and the ladder to success.”

The primary jobs problem today, Mr. Funk says, is that too many workers are functionally unemployable because of attitude, behavior or lack of the most basic work skills. One discouraging statistic is that only about one of six workers who comes to Express seeking employment makes the cut. He recites a company statistic that about one in four applicants can’t even pass a drug test.

“In my 40-some years in this business, the biggest change I’ve witnessed is the erosion of the American work ethic. It just isn’t there today like it used to be,” Mr. Funk says. Asked to define “work ethic,” he replies that it’s fairly simple but vital on-the-job behavior, such as showing up on time, being conscientious and productive in every task, showing a willingness to get your hands dirty and at times working extra hours.

He fears that too many of the young millennials who come knocking on his door view a paycheck as a kind of entitlement, not something to be earned. He is also concerned that the trendy concept of “life-balancing” is putting work second behind leisure.

Funk admits to a prejudice (emphasis added):

“I guess I’m a little prejudiced to the immigrants and especially Hispanics,” he says. “They have an amazing work ethic. They don’t want handouts and are grateful to have a job. Our company has a great success rate with these workers.” This focus on work effort is seldom, if ever, discussed by policy makers or labor economists when they ponder what to do about unemployment. To most liberals, the very topic is taboo and is disparaged as blaming the economy’s victims.

The author of the WSJ piece includes some eye-opening stats to back Funk’s claims. There are 47 million people receiving food stamps, 14 million people collect disability benefits and with unemployment insurance extended to 90 weeks, Funk calls these:

…[the] vast social welfare state programs that have become a substitute for work. There’s a prevalent attitude of a lot of this generation of workers that the government will always be there to take care of them. It’s hard to get people to take entry-level jobs when they can get unemployment benefits, health care, food stamps and the rest.

The companion piece shows the sharp rises in such social welfare programs. The cost of food stamps has more than doubled since 2008 to $83 billion and one in seven Americans receive food stamps. The government spends ‘roughly $40 million a year…to convince to enroll’ in food stamps.

“I’m from the government and I’m here to help”

The Wall Street Journal had two good commentaries on Obama’s latest pitch to use more government to fix problems caused by government — that is, his recent speeches on college education.

1. From Obama State University, this one is a page out of Hugo Chavez’s playbook:

 “We’ve got a crisis in terms of college affordability and student debt,” said Mr. Obama, without a trace of irony at the State University of New York at Buffalo. The same man who three years ago forced through a plan to add $1 trillion in student loans to the federal balance sheet over a decade said on Thursday, “Our economy can’t afford the trillion dollars in outstanding student loan debt, much of which may not get repaid because students don’t have the capacity to pay it.”

Naturally, the President blamed somebody else and demanded more authority over higher education.

Mr. Obama specifically blamed colleges and universities for charging too much. “Not enough colleges have been working to figure out how do we control costs, how do we cut back on costs,” he said. His solution is for the federal government to rate colleges on their effectiveness and efficiency, and then to allocate federal subsidies to the schools that Washington believes are providing the best education at the lowest cost.

Chavez and Obama don’t understand (or admit to understanding) that incentives matter. They distort incentives then blame the problems that result from those distorted incentives the folks who respond to them.

It’s not that colleges haven’t been working to figure out how to control costs (actually, some are, but we haven’t widely accepted the for-profits just yet), it’s that they have no incentive to do so.

Well, Obama is now proposing incentives, I can imagine some will say. To them, I respond, imagine how much credence you would put into a Federal government’s rating system for restaurants. My guess is that no matter what those ratings say, you’re still going to trust your gut and what you hear your family and friends say.

This is also from the article:

Mr. Obama is trodding a well-worn political path. Politicians subsidize the purchase of a good or service, prices inevitably rise in response to this pumped-up demand, and then the pols blame the provider of the good or service for responding to the incentives the politicians created. Think housing finance and medical care. Now President Obama is attacking colleges for rationally raising tuitions and padding their payrolls in response to a subsidy machine that began in 1965.

That’s when the feds launched a program to make college “affordable” by offering a taxpayer guarantee on student loans. Federal grants and loans have been expanding ever since and it’s no coincidence that tuition prices have been rising faster than inflation for decades. This week the White House noted that since the academic year ending in 1983 tuition and fees at four-year public colleges have risen by 257%, while typical family incomes have advanced 16%.

2. Richard Vedder: The Real Reason Colleges Cost So Much

Here’s something I’ve noticed when visiting my own alma mater:

Many colleges, he notes, are using federal largess to finance Hilton-like dorms and Club Med amenities. Stanford offers more classes in yoga than Shakespeare. A warning to parents whose kids sign up for “Core Training”: The course isn’t a rigorous study of the classics, but rather involves rigorous exercise to strengthen the gluts and abs.

Or consider Princeton, which recently built a resplendent $136 million student residence with leaded glass windows and a cavernous oak dining hall (paid for in part with a $30 million tax-deductible donation by Hewlett-Packard CEO Meg Whitman). The dorm’s cost approached $300,000 per bed.

Universities, Mr. Vedder says, “are in the housing business, the entertainment business; they’re in the lodging business; they’re in the food business. Hell, my university runs a travel agency which ordinary people off the street can use.”

My alma mater has a fantastic turf field complex for its students. It has an indoor/outdoor mini water park resort. The dorms look like alpine ski lodges. It has an arena for women’s basketball and one for men’s. The commons area rivals high-end shopping mall experiences. And, yet, they still have the nerve to call me weekly asking for money. No thanks.