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.

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Why we do the things we do

This Marginal Revolution post reminded me of something I encounter frequently, even with myself. The post excerpts a study:

In fact our conscious brain has surprisingly little grasp of what makes us decide to do one thing rather than another.  A telling example of this ignorance has been provided by Joe LeDoux and Michael Gazzaniga, two neuroscientists who conducted a study of patients with a severed corpus callosum, the bundle of nerve fibers connecting the two hemispheres of the brain, leaving the two sides of the brain unable to communicate with each other.  LeDoux and Gazzaniga gave instructions to these patients, via their right hemisphere (hemispheres can be targeted with instructions shown to either the left or right visual field), to giggle or wave a hand, then asked them, via the left hemisphere, why they were laughing or waving.  The patients’ left hemisphere had no knowledge of the instructions given to their right hemisphere, but the patients would nonetheless venture an explanation, saying that they were laughing because the doctors looked so funny or waving because they thought they saw a friend.  However implausible the answer, the patients were convinced they knew why they were acting in the way they were; but they were deluded in thinking so.  Their self-understanding was pure confabulation.

I often find myself in discussions with folks who can’t override their urge to start jabbing their mouth and simply say, I don’t know, why do you think what you think?

I, too, often find myself doing things that I find odd and when I search for an explanation, I find that my first explanation is usually one that would satisfy an external observer. But, then I dive deeper and find other reasons that weren’t intuitive, but were probably more important than the externally acceptable reason.

I’m cheap. I was a loyal shopper of Walmart, until Target opened across the street from it. Then I found myself in Target more often. Why? I’m cheap. I’m supposed to like the lower prices. And, at the time, there was a visible difference in most prices.

So, on several trips to Walmart and Target I “observed” myself. I asked myself questions. What’s keeping me from going to Walmart? Why am I going to Target?

Many things popped up. The Target parking lot isn’t as packed. I don’t have to walk as far. Target’s parking was clean. The store was cleaner and updated. The product displays were always in good order and the products were well presented. I would have to wait a long time to checkout at Walmart. At Walmart, it seemed like they shoved the products on the shelves.Target had some different products that I would like to browse. I wasn’t scared of the folks who shopped at Target. The folks who worked at Target seemed a bit less tired and a bit more engaged.

I came to find that it just wasn’t one reason. There were many. Some would say it was the overall experience. Maybe some mattered more than others, but they all mattered.

Walmart recognized this, too. They responded by improving on many of these things and have won me back, sometimes.

The depth and breadth of these reasons surprised me. I didn’t put conscious thought into any of these things until I first noticed my behavior was odd (not always going for the lowest price) and then decided to “observe” my behavior.

That exercise alone humbled me into being more willing to say, I don’t know, recognizing that he world is complex and the simple answer is often not the whole story. That reminds me of a favorite Oliver Wendell Holmes quote:

I would not give a fig for the simplicity this side of complexity, but I would give my life for the simplicity on the other side of complexity. -Oliver Wendell Holmes, Jr., Supreme Court Justice, 1902 – 1932

Not sure I’d give my life for it, but it’s definitely worth more.

Internet fables and tax fairness

 

I enjoyed two opinion pieces from the Wall Street Journal today. First, Gordon Crovitz adds color to the story of who invented the Internet. Big government supporters often herald the internet as government innovation done right, but Crovitz calls that an urban legend and gives credit to Xerox’s R&D lab.

And, in a good example of organizational myopia, Xerox tried to leverage the network to sell more copiers, rather than connect all humans. Crovitz adds a good point made by someone else:

As for the government’s role, the Internet was fully privatized in 1995, when a remaining piece of the network run by the National Science Foundation was closed—just as the commercial Web began to boom. Economist Tyler Cowen wrote in 2005: “The Internet, in fact, reaffirms the basic free market critique of large government. Here for 30 years the government had an immensely useful protocol for transferring information, TCP/IP, but it languished. . . . In less than a decade, private concerns have taken that protocol and created one of the most important technological revolutions of the millennia.”

Another piece by Ari Fleischer dissects the claim that the Federal tax code is unfair. These two paragraphs sum it up nicely.

There’s also another way of looking at fairness, and that’s the tax burden. Here, consider the top 20% of income earners (over $74,000). They make 50% of the nation’s income but pay nearly 70% of all federal taxes.

The remaining 30% of the tax burden is borne by 80% of the taxpayers, those who make less than $74,000. In short, this group’s share of taxes paid, 30%, is lower than the share of income they earn, 50%.

To be fair, fair share supporters will argue that you also need to add consider payroll taxes, which are not ‘progressive’. True enough. But, these supporters never seem to address that there are benefits tied to payroll taxes as well.

The main idea of payroll taxes, Social Security and Medicare, is to force some financial accountability. I’d be willing to make those programs voluntary. That would solve any progressivity issues on the collection side.

 

A pretty penny saved is a pretty penny earned

On Marginal Revolution, Tyler Cowen linked to this page with pictures of some extravagant public libraries.

While these libraries are beautiful, I think they also demonstrate the careless spending that takes place when bureaucrats get a hold of other people’s money.

It reminds me of this post of mine where I eventually get around to suggesting that if libraries were not paid for by third parties through tax dollars and donations, we would likely still have libraries, but they’d look less like jobs programs for architects and artists and more like Blockbuster, Netflix and Redbox.

I’m sure all of these libraries have fans who can’t imagine the world without them, but it’s easy to treasure something that you didn’t pay for directly.  If these folks were asked to cover the cost of the library, few would.

Why C+I is a better measure for the health of the economy

In this post, I claimed that Gross Productive Domestic Product = Consumer Spending + Investment Spending – 2 times Government Spending, or GPDP = C + I – 2G.

Tyler Cowen explains why during this EconTalk podcast:

Considering our economy right now: about 17% of it is health care; about 6% in terms of GDP is education; and with some overlap, 15-20% is what we call government consumption–government activity, not just transfers. At all levels of government, including state and local. Add those all up, take out the overlap, and it’s a pretty big chunk of the economy, like 20-30%. Those are all sectors where there are massive subsidies, massive distortions of incentives, a lot of bad policy; and it’s hard to measure value.

So, when we talk about biases in measuring output and living standards, the bias I worry about the most is we’re spending a lot of money and simply writing it down as value added when it might not be.

GDP measures how much money was spent in the economy, not how much value is created.

What do you do when you spend money that destroys value?  You try not to do it again.

If you buy something and you don’t think the value you received was worth the price, you stop buying it and you might warn others to save their money or spend it elsewhere.  As I pointed out in the post, What is a job?, when we spend our own money we typically think in terms of cost vs. benefit relative to the cost vs. benefit of alternative choices for the spending.   This is the engine of value creation.

But, what happens when third parties, not just governments, spend money and it destroys value?  Often, money continues to be spent because it is being spent for reasons other than value creation.  Sometimes more is spent to try and fix perceived problems.

Third party spending doesn’t have to hold to the same rules as first party spending.  As I also pointed out in What is a job?, there are many reasons for third parties to spend money that have nothing to do with value creation.  This is the engine of value destruction.

This is why I don’t believe C + I + G is a good representation of value created in the economy.

This is also why we should carefully consider the change in incentives when we make changes that moves payments from first parties to third parties, like in the areas Cowen points out — health and education.

Given the incentives around G, I’d rather keep as much of the economy as possible in C and I transactions and use C + I as the measure of the productive, or value creation, estimate for the economy.

The Great Stagnation

In this highly recommended episode of the EconTalk podast, Russ Roberts and Tyler Cowen discuss Cowen’s new $4 ebook, The Great Stagnation.

The premise of Cowen’s ebook is that the growth and progress experienced by the average family from around 1890 to about 1970 was much higher than the progress experienced since.   He believes the first period picked the low-hanging fruit like greatly reducing death to disease through antibiotics, plumbing and hygiene and reducing infant mortality through better baby delivery methods.  Since the low hanging fruit has been picked, Cowen believes improvements have been slower and tougher to make.

That thesis has received a good deal of criticism from economists on the conservative and libertarian end of political spectrum, surprisingly.   Some of the criticisms include:

  • The measures Cowen uses to make his case are flawed and don’t properly reflect technological improvements that allow so many more people to afford things that weren’t conceivable even ten or twenty years ago.
  • Cowen’s exaggerates the meaning of stagnation.
  • Tyler, himself, is courting leftist bloggers (I don’t think that one came from an economist, but I seen it in the comments on various sites discussing Tyler’s book).

As Cowen points out on EconTalk:

I’m coming along and saying the rate of growth for the typical family has declined, and oddly I’m hearing skepticism from a lot of the same economists who are criticizing current policies for lowering the rate of economic growth. That’s always fun.

Great point.

Even though many people think of the late 70s through 00s as a time of deregulation, it has been a time when government has grown larger than necessary — under both Democratic and Republican administrations — with greater interference in private markets.

Government influence on markets in contributing to the financial crisis was a good example.

The politicians’ influence on the private market showed up in policy aimed at expanding home ownership through such things as the Community Reinvestment Act, Fannie Mae and Freddie Mac and Federal Reserve monetary policy.

A specific example: Fannie and Freddie were sanctioned by the implicit (now explicit) guarantees from government (taxpayers) to buy loads of sub prime mortgages — that is, mortgages from folks who did not have a good history of repaying debt — thereby creating a market for something that really didn’t have much, if any, value.

To better understand Tyler’s point on how all this might divert resources from productive pursuits and slow real growth, consider what would happen if government signed up taxpayers to buy surpluses of the singing and dancing mounted fish that were a popular novelty item a few years ago.

You can imagine that a lot of people would make singing and dancing mounted fish and we would have more of those things than anybody would want.  Which means taxpayers would be funding the purchase of loads of those fish when they could have spent their hard earned wealth on things they found more valuable.

Which gets to another point Cowen made in the discussion.

So, when we talk about biases in measuring output and living standards, the bias I worry about the most is we’re spending a lot of money and simply writing it down as value added when it might not be.

This comment of Tyler’s inspired by post C + I, which I plan to write more about soon.