"Here’s a passage from pages 16-17 of the third edition of Paul Krugman’s and Robin Wells’s Economics (2013):
When markets don’t achieve efficiency, government intervention can improve society’s welfare. That is, when markets go wrong, an appropriately designed government policy can sometimes move society closer to an efficient outcome by changeing how society’s resources are used… An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.This passage is featured in the PowerPoint presentation for Jim Gwartney’s plenary-session talk today at the 2014 meeting of the Public Choice Society (in Charleston, SC – one of my favorite towns on the planet). Jim noted about this passage: “Apparently, according to Krugman and Wells, it’s not an important part of your education in economics to learn to identify just when governments work but also when they don’t work.”
The theme of Jim’s talk (based on research that he’s doing with Rosemarie Fike) was that it is not only intellectually sloppy or lazy but, in fact, deeply unscholarly and unscientific for economists today to ignore public-choice analyses of political decision-making. Jim presented evidence – of which this quotation from Krugman’s and Wells’s book is just one example – of the still-widespread failure of economists to take public choice seriously.
Stated differently, Jim presented powerful evidence from several current economics textbooks that an embarrassingly large number of such texts – many written by the world’s most acclaimed economists, such as Paul Krugman – are surprisingly naive and unscientific. The authors of these texts pretend to write about reality, but they instead write about a fantasy world. Far too many economists, such as Krugman – because they either ignore or are ignorant of public choice – simply assume that government somehow is not affected by the many imperfections that these economists readily find in markets. As Jim said, this continuing ignorance of public choice is embarrassing to those economists who do think seriously and realistically about their discipline and about the reality that that discipline aims to illuminate.
I’ll likely write more in a follow-up post about Jim Gwartney’s excellent presentation, but I conclude this post by asking you to suppose that the above passage from Krugman and Wells had ended not with
An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.but, instead, ended with
An important part of your education in economics is learning to identify not just when governments work but also when they don’t work, and to judge what market policies are appropriate in each situation.That is, if someone suggested that you assume that markets always work perfectly (or always work better than markets), what sort of scientific credibility would you accord to that person? I hope none. It’s profoundly misguided simply to assume that, if government fails to achieve some attainable and desirable outcome, that outcome can be achieved instead by markets that are assumed to operate perfectly. Such an assumption about market perfection (or superiority) would be unscientific. But such an assumption – as is made by too many economists today – about government perfection is equally unscientific. To assume or to suggest (as do many economists) that governments operate more ‘perfectly’ than do market is no more scientific than to assume or to suggest that, if your child is seriously ill with a terrible disease and medical doctors cannot guarantee that they will cure him or her, a local witch doctor can be trusted to bring about the desired cure.
You can assume witch-doctory to be an effective cure for whatever ails your child, but that assumption doesn’t make witch-doctory so. Yet your assumption about the wonders of witch-doctory does speak volumes about your understanding of reality. Jim Gwartney rightly laments that far too many economists today simply assume that the witch doctor – the state – has both the miraculous powers and the benevolent interest necessary to cure all social ailments, or at least to deal with these ailments better than can admittedly ‘imperfect’ markets."
Friday, March 7, 2014
See Witch-Doctory by Don Boudreaux of "Cafe Hayek." I think Milton Friedman said that we often replace market failure with government failure.
Quotation of the day on how the free market is intimately personal and the government is impersonal and dictatorial
From Mark Perry of "Carpe Diem."
"…. from Leonard Read, founder of the Foundation for Economic Education (one of the oldest free-market organization in the US), writing in 1971 in his essay “Leave it to the Market” (emphasis added):
The market, if free, is intimately personal; it renders justice in the only sensible definition of that term; it continuously and automatically moves ever-changing satisfactions and ever-changing aspirations – supply and demand of particular goods and services – toward a harmony one with the other; it is humane to the extent of the human kindness that is within us.
The alternative to the free market is the rigged, planned, dictatorial, coercive, interventionist, authoritarian market, variously known as the planned economy, the welfare state, omnipotent government . . . As contrasted with the free market, this is definitely disruptive and antisocial; it is forever and of necessity forcing ever-changing satisfactions and ever changing aspirations towards a state of disharmony one with the other—shortages of this, surpluses of that and so on; it stifles and eventually kills human kindness.
The free market is intimately personal . . . each person deciding for himself what to produce, where to work, what to buy and sell, and what are to be acceptable terms of exchange. I, who know more about me than anyone else, am in charge of me! How can a way of life possibly be more intimately personal than each individual his own decision-maker?
In the alternative situation, a bureaucrat presides over these decisions … He cannot know, only guess, what may be your countless and ever-changing preferences or what constitutes your idea of welfare. Someone who knows nothing of you and me in charge of you and me. Dictatorial to the core!MP: The last paragraph reminds me of something I once heard Walter E. Williams say, “Socialism only works if you know everybody’s name,” implying that central planning, income redistribution, and a welfare-type system with a social safety net might have a chance to work well within a family when you know everybody intimately and personally, but fails when it’s applied impersonally to a large group of people, i.e. society at large."
Quotation of the day on how government rescuing people from the market subjects them to dictates of third parties
From Mark Perry of "Carpe Diem."
". is from Thomas Sowell’s book “Basic Economics: A Common Sense Guide to the Economy” on p. 565 in the chapter “Myths About Markets”:
Perhaps the biggest myth about markets comes from the name itself. We tend to think of a market as a thing when in fact it is people engaging in economic transactions among themselves on whatever terms their mutual accommodations lead to. A market in this sense can be contrasted with central planning or government regulation. Too often, however, when a market is conceived of as a thing, it is regarded as an impersonal mechanism, when in fact it is as personal as the people in it. This misconception allows third parties to seek to take away the freedom of individuals to transact with one another on mutually agreeable terms, and to depict this restriction of their freedom as rescuing people from the “dictates” of the impersonal market, when in fact this would be subjecting them to the dictates of third parties.Exhibit A: The minimum wage law, which allegedly rescues unskilled and low skilled workers by taking away their freedom to transact with employers on mutually agreeable terms and subjecting them to the whimsical dictates of third parties like President Obama."
Thursday, March 6, 2014
Great post by Don Boudreaux of "Cafe Hayek." It discusses the idea that raising the minimum wage will lead businesses to raise the wages of other workers. Excerpt:
"In contrast, the alleged ripple effect discussed in the CNN report is a competitive market phenomenon. Employers who must pay their lowest-paid workers higher wages when the minimum wage is raised will, under this theory, raise also the wages of some or many of their higher paid employees in order to (as the CNN report puts it) “preserve their wage structure and retain quality employees.” That is, even though employers are not legally required to hike the wages of these higher-paid employees, competition to retain employees prompts employers nevertheless to hike those wages.
I do not doubt that some such “ripple effect” wage hikes occur. Within firms employees do care about the relative-wage structure. But I do doubt the prevalence of such ripple effects. If employers must pay higher wage rates not only to their lowest-paid workers but also to some or many of their higher-paid workers, the costs to employers of a higher mandated minimum wage are greater than those costs would be if a hike in the minimum wage required them to raise the wages only of their lowest-paid employees. All but the most naive proponents of the minimum wage must admit that at some point employers cannot simply absorb these higher labor costs or simply pass them all along in the form of higher prices charged to their customers.
That is, at some point all but the most naive minimum-wage proponents must admit one of two things. If the ripple effect exists, it must destroy some jobs. (Machines don’t care what other machines or workers are paid.) Or the ripple effect is not as prevalent as naive analysis supposes it to be: a higher minimum wage will compress wage structures rather than ratcheting all wages up.
One other thought. If this ripple effect is real – that is, if employers in reality are obliged by competitive pressures to respond to a hike in the minimum wage by raising the wages of some or many of their higher-wage employees – then this fact is further evidence against the claim that monopsony power infects labor markets. If employers are obliged by competitive market forces (in response to a hike in the minimum wage to $10.10) to raise wages of employees making, say, $11.00 per hour, that is evidence that employers have no monopsony power over these higher-paid workers. Employers with monopsony power over these higher-paid workers would simply tell these workers to deal with the fact that some other employees’ wages have risen. Employers would raise these higher-paid employees’ wages only if these employees will quit if their wages are not raised. Employers whose workers will quit under such circumstances cannot plausibly be said to have monopsony power over such workers.
So unless proponents of the monopsony-power hypothesis can plausibly explain that employers have monopsony power over only their lowest-paid workers (those paid the minimum wage) and not over workers any higher up on the wage scale, then any observed ripple effect would be evidence against the real-world prevalence of monopsony power.
Note that the absence of any observed ripple effect is not evidence that employers do have monopsony power over any of their employees. The absence of any such ripple effect is more plausibly evidence that each employee is paid a competitive wage that reflects his or her productivity."
See Spare Me Your Transparency, Please. by Megan McArdle. Excerpts:
"Take those calorie counts on menus. Seemed like an obvious win to mandate them for restaurants. Except that they don’t seem to accomplish anything. There’s some suggestion that maybe converting calorie counts into the amount of exercise required to burn them off might help, but so far, I can find only one study that supports this idea, and it is very thinly described and doesn’t seem to be available online.
Meanwhile, providing calorie counts does have actual costs. There’s the financial cost of devising them, which is not trivial. But there’s also the intangible costs to innovation and decentralization: Calorie counts are easiest to manage for chains preparing highly processed foods in a rigidly standardized way. Most of the people encouraging calorie counts on menus were probably not hoping that it would tip the scales toward more Applebee's and fewer smaller restaurant groups preparing artisanal foods from fresh ingredients.
And that’s just assuming that the effect of the transparency is neutral -- doesn’t help, doesn’t hurt. In fact, in one study of an actual calorie-count law, the information had the opposite effect: People consumed more, not less.
Nor is that the only case where transparency may have actually had the opposite of its intended effect. The Incidental Economist explains:
New York tracks and reports the mortality rates of heart surgeons. And great news: Operative mortality is going down! But is this because surgeons are ‘cherry picking’ only the least sick patients?Maybe that’s actually good, because those people are so sick that surgeons shouldn’t be operating on them. But that was the opposite of the idea behind the measure, which was to give patients better information for making choices -- not to have the surgeons make those choices for them. Moreover, one way that surgeons get better at operating on sicker patients is to, well, operate on sicker patients. It’s not clear to me that we want to throw a spanner in that process.
The idea behind public reporting of mortality rates was to allow patients to select the best doctors and to pressure doctors to improve their practice. How well did it work?
. . . Kolker provides several reasons to believe that New York surgeons are selectively avoiding the sickest patients.
The point is not to advocate against transparency, but to caution against viewing transparency as that most elusive of all creatures: a cost-free public good. We should save that sort of thing for Mother’s Day."
Great post from Megan McArdle.
The Barack Obama administration announced yesterday that it was extending the “grandfathering” of noncompliant health-care plans for two more years. In other words, everything is proceeding as I have foreseen:
The law still lacks the political legitimacy to survive in the long term. And in a bid to increase that legitimacy, the administration has set two very dangerous precedents: It has convinced voters that no unpopular provisions should ever be allowed to take effect, and it has asserted an executive right to rewrite the law, which Republicans can just as easily use to unravel this tangled web altogether.I wrote that in January, when the administration had so far evinced no willingness to inflict any pain on anyone, even if the pain was needed to make the law work. A month and a half later, this record is even stronger.
Many of the commentators I’ve read seem to think that the worst is over, as far as unpopular surprises. In fact, the worst is yet to come.
This latest maneuver is supposed to help midterm Democrats, who are facing a very tough landscape in November. But there will always be an election coming that Democrats will want to win. The longer this goes on, the harder it will be to activate the unpopular parts of the law. Especially if Republicans gain the trifecta -- House, Senate, presidency -- they are going to have no incentive to save Obamacare by sacrificing their own political fortunes.
As I explained in January, this has terrible potential consequences for the long-term viability of the law:
Obamacare’s exchange facility was conceived as a “three-legged stool”: guaranteed issue, community rating, mandate. Guaranteed issue means that an insurer can’t refuse to sell you a policy. And community rating means that they can’t agree to sell you a policy -- for a million dollars. The problem is that if you set things up this way, it makes a lot of sense to wait to buy insurance until you get sick, at which point premiums start spiraling into the stratosphere and coverage drops. Enter the mandate: You can’t wait. You have to buy when you’re healthy or pay a fine.The hacksaw makes the insurance market less viable, reduces coverage and forces the government to spend more money trying to keep insurers from exiting the market. And because so much of this is accomplished via administrative rulings of extremely dubious legality, the administration is handing Republicans a tool that they can use to keep dismantling the law should they take the White House in 2016. Democrats can complain, to be sure, and I’ve no doubt that in the event of a Republican victory, they will suddenly and unanimously rediscover their objections to these sorts of games. But they will not be able to convince anyone else that this is somehow novel and illegitimate.
There are actually other legs -- the subsidies, in particular, are needed so that you’re not ordering people to buy a product they can’t afford. But it doesn’t really matter how many legs the stool has; what matters is that it needs all of them. Take one away, and the whole thing is in danger of collapsing.
Unfortunately, whenever someone has voiced discontent with the way things are going, the administration has taken a hacksaw to another leg.
This is President Obama’s signature legislative achievement, the program for which he will be remembered. And he doesn’t have the courage to defend it, even when he is no longer facing re-election. If he won’t stand up for the hard choices his law requires, he can’t think that anyone else will either."
Tuesday, March 4, 2014
From Don Boudreaux of "Cafe Hayek."
"Hypothetical Scenario: Suppose the government grants to everyone who is at least as tall as 5 feet the privilege of stealing the property of all adults who stand shorter than 5 feet. Because the percentage of adults today who are shorter than 5 feet is very small, the number of people who would benefit from this government policy would greatly exceed the number of people who are harmed.
“Of course some people suffer,” concede supporters of the “Your Property Is Protected Only If You Reach Some Minimum Height” statute, “but these unfortunate losses are outweighed by the great and humane benefits that our policy bestows upon the larger number of people whose annual incomes are raised by this well-meaning legislation.”
So here’s another question for supporters of minimum-wage legislation, and especially to those many supporters who justify this legislation on the grounds that the income gains to those workers whose wages rise as a result of a hike in the minimum wage justify the resulting forced imposition of losses – namely, long-term unemployment at annual incomes of $0 – on those workers who lose jobs because of the higher minimum wage: Do you support the statute described in the above Hypothetical Scenario? If not, why not? Or – if you would oppose a policy such as that in the Hypothetical Scenario, why do you continue to support minimum-wage legislation
Note that I’ve made matters a bit easier for you in the Hypothetical scenario by granting your presumption that the number, or percentage, of people who gain from the policy is greater than the number, or percentage, of people who lose as a result of the policy."