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October 2017 posts

Friendly Amendment

By Jonathan B. Wight

Mort’s guide to the economic way of thinking is very helpful.  Thanks!

I have one friendly amendment.  Item #5 is “Economic thinking is thinking on the margin.”

This is often the case, but does not need to be the case.  Sometimes thinking at the margin will conflict with ethical norms it item #2.

Here are three examples:

  1. Suppose my partner is away, and I realize I can steal from him, and that the expected marginal benefit to me exceeds the expected marginal cost to me (based on probability of detection and the penalty for conviction). Should I use this logic to decide on my action?    Some actions are wrong, and no amount of MB>MC will make it right.  An ethical person does not even consider or calculate these terms!  (I’m not saying Gary Becker is wrong for positing that criminals make these calculations, for surely they do.  But the guide is normative, and hence should not encourage bad behavior.)
  1. In the famous Chevy Malibu case, in which the fuel tank was subject to rupture and fiery explosion in accidents, a GM engineer calculated that fixing the fuel-tank problem would cost $8.59 per car. But leaving the car as it was would cost even less, only $2.40 per car (based on settling the product liability lawsuits @ $200,000 per life). In considering the marginal costs and benefits for the company, GM managers decided not fix the fuel tank. This led an irate jury to fine GM $5 billion (later lowered to $1 billion). This marginal cost/marginal benefit calculation did not pass a basic ethical smell test: it failed to treat consumers with the modicum of respect that we owe all others. In a Kantian sense, it used others merely as a means to the company’s ends, and was dishonest because consumers did not know about this calculation.
  1. In the famous World Bank memorandum released by Larry Summers, it was put forth that polluting industries should be moved to Africa since the pollution would kill off people who had shorter lifespans anyway, and had a lower opportunity cost of death because they had lower earnings. Impeccable economic logic! But it fails the smell test also.  Determining the opportunity cost of pollution requires that people who are injured have a chance to have their grievances aired in an impartial court of law, with fair judges and juries.  It also should allow for democracy so people have a voice in the pollution laws.  It also allows for a free press to inform people about the risks and opportunities of chemical pollution.  It assumes people are free to meet and protest, without fear of human rights abuses.  Since many African countries lack these basic institutions, it is erroneous to assume that the MC/MB version of efficiency is ethically palatable.  Summers knew this, and had released the memo as a joke.  Not many people were laughing. 

Economists should not think they can operate like an automaton, calculating marginal costs and marginal benefits in a moral vacuum.  Knowing when to think at the margin is an important part of preparation for life as a public economist. 

My revised Item #5 is In appropriate circumstances, economic thinking is thinking on the margin.”   We should be ready with a good answer when students ask, what is an appropriate circumstance?  


Expanding the Economic Way of Thinking

By John Morton

While most college introductory economics courses focus on preparing students for higher-level courses, many, but not enough, high school courses stress economic thinking, a way of thinking that lies outside the students’ personal experiences.  This opens for them a whole new lens to observe the world. 

This situation is ironic because Adam Smith, the father of economics, used the economic reasoning approach in The Wealth of Nations and The Theory of Moral Sentiments.  After all, Smith discussed “man’s propensity to truck, barter, and exchange” instead of the endless academic studies on trivial problems we see today.  Unfortunately, Smith’s insights into economics as human behavior may have been too diffused to provide clear insights for beginning economics students.

ThThe modern father of the economic way of thinking approach was Paul Heyne (right) of the University of Washington.  His textbook, The Economic Way of Thinking, which was first published in 1973, went through 11 editions and sold 200,000 copies.  Peter Boettke of George Mason University continued to revise the book after Paul’s death in 2000.  In the preface to the book, Paul says he wants to help beginning students “master a set of concepts that will help them think more coherently and consistently about a wide range of social problems that economic theory illuminates.”

High school students were introduced to the idea that economics is about reasoning and not about memorizing bundles of trivial terms and institutional structures when the National Council on Economic Education (now the Council for Economic Education) published Capstone:  Exemplary Lessons for High School Economics in 1989.  Authored by Mark Schug, Don Wentworth, and Bob Reinke, Capstone is a series of lessons which relate to the six-point “Guide to Economic Reasoning,” known by many teachers and students as the “Handy-Dandy Guide.”  An internet search reveals thousands of K-12 lessons that relate to the “Handy-Dandy Guide.”

In 2005 Jim Gwartney and others put economic reasoning on steroids when they published the first edition of Common Sense Economics and developed an online course to teach it.  There are 41 basic principles of economics and personal finance explained in CSE.

Today 20 states require a course in economics for graduation from high school, and hundreds of thousands of other high school students take economics as an elective.  For many students, this is the last opportunity to take an economics course.  However, many of these courses are mediocre, and students don’t catch a whiff of economic thinking.  While others do study choice, opportunity cost, and trade, teachers tend to quickly move on to economic institutions and macroeconomics and fail to apply economic thinking to economic policy. 

Economic education needs an expanded but still succinct guide.  It should also be relevant to behavioral and ethical dimensions of economics.  Here is my crack at it.  I offer it to stimulate discussion.  Which points are trivial and should be dropped?  Which points should be added?  Which points should be revised?  Which new lessons should be developed to teach these ideas?  Which ideas are too political?  Here we go….

Guide to Economic Reasoning

  1. Economics is the study of human behavior.
  2. People choose for good reasons. These choices take place within a social environment reflective of differing values and ethical norms.
  3. There are no cost-free decisions.
  4. People respond to incentives in predictable ways although some of these effects are initially unseen.
  5. Economic thinking is thinking on the margin.
  6. People gain when they trade voluntarily--at least in their own minds.
  7. The invisible hand works better than the visible hobnailed boot.
  8. The value of a good or service is subjective and is determined by individual interactions in a competitive market.
  9. The only way to increase a nation’s real income is to increase its real output.
  10. Rules matter because rules influence incentives, and incentives alter choices. An economic system is the rule book for a society.

Let’s improve this list and start teaching economic reasoning.


Catalonian Independence      

By Jonathan B. Wight

Here’s a thought about breaking Spain apart by Joscha Fischer in Project Syndicate: Map_of_catalonia_and_spain2

“Were Catalonia [in yellow] actually to achieve independence, it would have to find a way forward without Spain or the EU.

“Spain, with the support of many other member states that worry about their own secessionist movements, would block any Catalan bid for EU or eurozone membership.

“And without membership in the European single market, Catalonia would face the grim prospect of rapid transformation from an economic powerhouse into an isolated and poor country.”

It is possible for a small country to be rich, but access to markets is a critical part of that formula.  Freedom, in this case, will not come cheap, as the UK is discovering in Brexit. 

The main reason for the existence of the EU is political—to maintain peace.  Economic interests are, or ought to be, secondary to national security.  Catalonians value their rich culture, their language, their culinary feats, and their manufacturing and financial prowess above their forced allegiance to the conquering Madrid.  

Such movements for local autonomy are afoot all over the world.  New technology may make it easier to pull off, but the power of economies of scale will always make it hard.  

It's not unreasonable for California or Texas to want to break away from the U.S.A., even as we add states like Puerto Rico.  Still, it will be a sad day when we cannot travel where we want in the lower 48, without passports, using common language and currency, sharing common values.

[Image: Yaya Silva, https://en.wikipedia.org/wiki/File:Map_of_catalonia_and_spain2.png]


AEA to Look Into Ethical Code for Its Members

By Jonathan B. Wight

The American Economic Association is setting up a committee to consider a Code of Professional Conduct for economists.

This represents a total about-face for the AEA, which previously insisted that there was no need for ethics training or support for its members.

The reason for the change was the public reaction or revelation about an economic jobs bulletin board that was “toxic” for women.  Here’s a link to a fairly shocking NYT article: https://www.nytimes.com/2017/08/18/upshot/evidence-of-a-toxic-environment-for-women-in-economics.html?_r=0

Not sure where this will end up, but there might be a vote as early as January in the AEA’s executive meeting.  Here’s the complete announcement:

To: Members of the American Economic Association

From: Peter L. Rousseau, Secretary-Treasurer

Subject: Statement of the AEA Executive Committee

Many members of the economics community have expressed concern about offensive behavior within our profession that demeans individuals or groups of individuals. The American Economic Association strongly condemns misogyny, racism, homophobia, antisemitism and other behaviors that harm our profession.

AEA President Alvin E. Roth has charged an ad hoc committee on professional conduct to formulate a set of guidelines for economists to be considered by the Executive Committee. The ad hoc committee is charged with evaluating various aspects of professional conduct, including those which stifle diversity in Economics. It will submit a report in time for discussion in January. There will be a period for comment by the AEA membership on that report following its release.

The Association is also exploring the possibility of creating a website/message board designed to provide additional information and transparency to the job market for new Ph.D.s, and will be surveying departments to assess what information about their search processes might be shared.


Protester Hugs Nazi

By Jonathan B. Wight

Don’t we wish to read more stories like this!

A protester at the Gainesville, Florida white supremacist talk on Thursday decided on a different tactic.  Instead of berating his rival, he asked if he could hug him, and got that permission. 

This was the exchange as reported in the Huffington Post between Aaron Courtney, an African American high school football coach, and Randy Furniss, a Nazi sympathizer (who had earlier been punched in the face by a different protester):  

“I had the opportunity to talk to someone who hates my guts and I wanted to know why. During our conversation, I asked him, ‘Why do you hate me? What is it about me? Is it my skin color? My history? My dreadlocks?’”

Courtney said he almost broke out in tears as Furniss ignored his questions, but decided that maybe “he just needs love. Maybe he never met an African-American like this.”

That’s when Courtney asked Furniss for the hug, which the man gave despite some initial resistance.

“I reached over and the third time, he wrapped his arms around me, and I heard God whisper in my ear, ‘You changed his life,’” Courtney told the Daily News.

Courtney said when he asked Furniss once again, “Why do you hate me?” Furniss finally answered, “I don’t know.”

Courtney took that as a honest response.

“I believe that was his sincere answer. He really doesn’t know,” Courtney said.

The ending is a kicker.  We really do not always know why we feel certain things, including rage directed at anonymous others who look different than us. 

Breaking down stereotypes and allowing for sharing of moral sentiments may be a necessary first step in reconciliation. In this case, it took a high school coach with the courage to stop hating and start loving.

This one encounter may exaggerate the power of love, since Furniss has not renounced his views.  But it may reveal a small crack in the armor we all use to separate ourselves from others.


Principles of Pluralism in Economics

By Jonathan B. Wight

Geoff Schneider has an interesting paper in current issue of The American Review of Political Economy.  It is an introduction to papers presented last winter at ICAPE, the International Confederation of Associations for Pluralism in Economics. 

Schneider argues that mainstream economics has paid lip service to pluralism, but remains mired in conventionality. He unveils his ten “Principles of Pluralist, Heterodox Economics” that are worthy of discussion [my comments in brackets]:

  1. Social provisioning is a crucial aspect of an economic system, and provisioning depends on more than GDP growth and market activities. [This wording sounds a lot like Marshall Sahlins, whose Stone Age Economics (1972) made an impression on me. Plenty of others, like Amartya Sen, would agree with item 1.]
  1. Labor is much more than a commodity; it is central to life and community. [Hear hear! And we should all re-read E.F. Schumacher, Small is Beautiful.  I have students read the chapter on “Buddhist Economics.” It is full of errors but engages their critical thinking about the means and ends of an economic system, including the meaning of their own labor.]
  1. Race, gender and class are important economic factors. [Anyone who doubts this, do a search for “Weinstein, Harvey.”]
  1. People organize themselves into groups, and these are central to the functioning of the economy. [See Adam Smith, The Theory of Moral Sentiments]
  1. People are complex: they are rational and irrational, influenced by culture, and they compete, cooperate and care. [See Bowles and Gintis, A Cooperative Species: Human Reciprocity and Its Evolution (2013)]
  1. Power structures are an essential aspect of all economic systems. [Read the history of any country! In particular, read Latin American history in relation to Britain and the United States, including the U.S.-led coups in Guatemala, Chile, and the breaking away of Panama so the canal could be dug.]
  1. Economic systems are evolutionary and prone to crises. [See Georgescu-Roegen, The Entropy Law and the Economic Process or anything from the Santa Fe Institute on complexity.]
  1. Ecology is fundamental to economics. [Actual economies are far more like biology than physics. Again, see anything from Santa Fe Institute.]
  1. Government can improve economic outcomes in capitalism. [See Adam Smith’s Wealth of Nations for the critique of unregulated financial markets.]
  1. Many economic relationships are uncertain rather than fixed. [As Georgescu-Roegen used to say, you cannot move up and down the same supply curve. The act of moving up permanently changes the choices people later make should demand drop.  Path dependency ensues—remember the ending to Robert Frost’s “The Road Not Taken.”]

Overall, this is a good list of the ideas students in basic economics should be familiar with.  It doesn’t take all that much time to prepare students psychologically for the real world by interjecting some of these ideas now and then, even if you are teaching a class that is emphasizing the standard model.  Many small schools do not have the resources to devote to teaching classes on heterodox economics, but that doesn't mean students should not be exposed.  It may inspire some students to pursue these ideas in their graduate work.

To read Schneider’s further justifications, or to read the other articles in this issue, go here


Lies and Vested Interests

By Jonathan B. Wight

Kevin Hassett, chair of the Council of Economic Advisers and potential Federal Reserve Chair nominee, clearly has a vested interest in looking good to his boss, President Trump, in order to get the big personal promotion to the Board of Governors.  Trump wants you on his team, and one way to cement your relationship is to make ridiculous claims in service of the President. 

This is presumably what led former White House Press Secretary Sean Spicer to insist that inauguration crowds were the largest ever, despite obvious evidence to the contrary.

Now Hassett makes the claim, in support of Trump’s tax proposal, that cutting taxes on profits by about $200 billion will produce a miraculous spillover of $600 billion in wage increases (about $4,000 per worker)!  Cutting taxes on profits is claimed to generate 3 times an increase in wages. 

Conservatives don’t usually like multipliers, so this isn’t a demand stimulus, but rather some sort of magical supply response.  Except that no such response has ever been witnessed.

Bruce Bartlett, advisor to President Reagan, noted “In 1986 we dropped the top income tax rate from 50 to 28 percent and the corporate tax rate from 46 to 34 percent.  It’s hard to imagine a bigger increase in incentives than that, and I can’t remember any big boost to growth.”

Larry Summers also attacks these numbers, and rightly so. They are absurd fiction… aggrandizing statements designed to obfuscate, confuse, and push forward one’s own policy objectives.  It seems to Hassett as if this is a giant sports game and the only goal is to win at any cost.  It is not serious economics, but an insult to the profession and those in it.

Do economists in the public service have a larger duty to their profession and to the public to put truth ahead of other considerations?  I claim they do, given that the market does not self-regulate very well.  Hassett, who in 1999 predicted the Dow would rise to 36,000 and who predicted massive inflation after the 2008 monetary stimulus, did not pay a professional price for these doozies.  He was sheltered at a think tank where his wild predictions fit within the ideology of the organization.  Groups with money have a vested interest to reward people well who say what they want to hear--repeatedly, and regardless of contrary evidence.

The market for science in economics is seriously broken (at least involving public policy) by the brashness of outright lies, the teller of which suffers no negative consequence.


The Joys of Bribery and Corruption

By Jonathan B. Wight

Those who love the marriage of big business and big government, which includes dictators and mercantilists, must be overjoyed to hear that President Trump supports allowing businesses to bribe government officials overseas.  Perhaps this was Trump’s modus operandi in his own career in New Jersey and elsewhere, or perhaps he thinks such bribes are the natural perks of a public office.  He may have heard that from Spiro Agnew. 

TillerLuckily, Secretary of State Rex Tillerson (who has been described by a Republican senator as one of the few people keeping this administration from total chaos) disagreed with the President.  He pointed out that Exxon operated in two hundred countries and resisted paying bribes.

In truth, Exxon probably pays millions in extortion money, such as buying services at inflated prices from a company owned by a government official or close relative.  Heaven forbid—Exxon would never pay a bribe.

That fiction may be preferable to the President’s approach of endorsing corruption outright.

Tillerson is probably ancient history anyway, for thinking the arcane idea that the Secretary of State should negotiate with our enemies rather than saber rattle and taunt them.

[Photo credit: https://greatagain.gov/tillerson-hearing-f9ff57c038ee#.8fpa697gf]


Mucking Up Monetary Policy

By Jonathan B. Wight

Krugman hits on a topic that has bothered me for the past eight months or so:  what will happen to monetary policy when Trump gets a chance to intervene?

A huge gap opens up when Stanley Fischer resigns as vice-chair in a few weeks (apparently for health reasons).  Three other Board seats are also vacant.  And Janet Yellen’s four-year term as chairwoman expires February 3, 2018. 

In short, the Fed is operating way understaffed and teetering on the edge of paralysis.  As with other unfilled positions in government, the Trump administration either doesn’t know or care about developing and keeping a pool of talent that is not politically driven. 

People like Yellen and Fischer have decades of institutional memory and experience dealing with financial and macro crises.  Their responses and policies, like Ben Bernanke before them, were nuanced and thought out.  They demonstrate a high degree of ethical conduct, meaning no hint of using the levers of government for personal advantage. 

Most importantly, they did not respond to knee-jerk complaints by political party hacks like Paul Ryan and others, whose knowledge of monetary policy apparently comes from the Russian-American novelist Ayn Rand’s characters in Atlas Shrugged (excerpt here).  There’s a lot of soaring rhetoric there and it’s easy to see how an impressionable teenager could be drawn into this world of deep passion and moral outrage.  I know I was.

The problem is the actual world is more complicated.  To my knowledge, Ayn Rand assumes that the velocity or rate of spending of money is a constant, perhaps 1.  Hence, any creation of new money beyond an increase in productivity causes inflation.  This is why Randians in Congress were so irate by the Fed’s dramatic quadrupling of the monetary base in the Great Recession of 2008.  They predicted (incorrectly) soaring inflation and complete debasement of money as we knew it. 

It didn’t happen, not by a long shot.  And these purveyors of doom were wrong because the model they used was way off base.  It takes sophistication and experience to navigate monetary policy, not ideology.  

I learned 30 years ago that velocity of money is not constant.  The rate of spending of money can swing suddenly (see chart), and hence the amount of money in circulation is not directly correlated with inflation.  During economic downturns and panics, people hold onto more money for precautionary reasons, not because they want to spend it.  Velocity contracts violently.  To keep the economy flowing, the Fed needs to create more money.  When times improve, that money can be carefully withdrawn (as the Fed is in the process of doing). 

Velocity.new
But ideologues like Paul Ryan aren’t interested in actually learning about the real world, if that means upsetting his youthful love affair with Ayn Rand’s heroic characters.  Ryan’s policy conclusions include such nuggets of “wisdom” as raising interest rates in the midst of recession and not worrying about unemployment (it will take care of itself).  While there are legitimate reasons for such views by thoughtful scholars, I don’t think much rational discourse on this will be forthcoming in the characters in Rand’s novels.  (It pains me to say this because I am a champion of using novels to teach economics--but there are limits!)

Krugman is thus worried about the future:

“But surely it’s possible, even probable, that the Federal Reserve, like other government agencies, is about to get Trumpified, that one of American policy’s last remaining havens of competence and expertise will soon share in the general degradation. And won’t that be fun when the next crisis hits?”


5 Million and Counting

By Jonathan B. Wight

When HHS Secretary Tom Price went on a binge of private aircraft flights, costing taxpayers $400,000, there was universal outrage.  Everyone should show more sensitivity to government spending!

Tax cuts are a form of government spending.   At least, a tax cut represents a likely increase in the government debt of a nearly equivalent amount. 

Those who claim that tax cuts will produce miraculous growth that lowers deficits have to explain the debacle in Kansas.  Also inconvenient to supply siders is the surge in the deficit under Reagan’s tax cuts, and the collapse of deficits under Clinton’s tax hike.

Nevertheless, Republicans are proposing a massive tax overhaul (we surely need that) that will boost the deficit by at least $2 trillion, and perhaps much higher. 

That $2 trillion represents five million private airline flights at $400,000 each.  Yet where is the outrage among deficit hawks at such a wasteful idea? 

*******

Some tax restructuring is needed and makes sense, like removing the itemized deduction for state taxes.  Allowing people to itemize their state taxes just subsidizes people living in some high tax areas instead of other areas.  Why does that make sense?  Let people live where they want, considering all the factors including high state and local taxes. 

Removing this provision will disproportionately hurt Democratic-leaning states.  That is unfortunate, only because these states often do better on many scores of quality of life, such as education, the environment, and so on.  I would be sorry to see these quality of life measures weakened.   

The proposed tax overhaul would not touch the home interest mortgage deduction, which is an even bigger scam.  Last time I checked, most of the benefit goes to the very wealthy, who have multiple expensive homes.  If we want to help the poor with housing, outright cash subsidies are a better way to go (long live Milton). 

Finally, lowering tax rates and eliminating special interests is a good idea—if that’s what would actually happen.  The lard dished out by this administration and Congress does not make me optimistic on this score.  This will be a huge giveaway to very, very rich that will impoverish the government’s revenue coffers.