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The Pernicious Prison of the Price Theory Paradigm

June 5th, 2014 3 comments

Steve Randy Waldman has utterly pre-empted the need for this post, cut to the core of the thing, in the opening line of his latest (collect the whole series!):

When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness. 

But I’ll try to help a little. What that means:

In the mid 20th century, economists decided:

It’s impossible to measure absolute utility. We can’t say what the value to you is of a heart bypass for your mother, or the value of a college education for your kid, or the value of (you or someone else) buying a third or fourth Lamborghini.

So we’re simply going to punt, and only talk about ‘preferences’. For our discipline, in its scientific impartiality, absolute utility — because we can’t measure it — will effectively not exist.

Inside our hermetic logical construct, we not only aren’t able to think about absolute utility — actual human value — we are forbidden to do so. Barred.

And with this spectacular piece of rhetorical legerdemain, the discipline disavowed itself of any responsibility for the implications and effects of that rhetorical legerdemain. (It’s hard not to be impressed.)

The effects? Economic analysts must assume, prima facie, that a billionaire buying a third or fourth Lamborghini delivers the same value as buying a college education for your kid or a heart bypass for your mom.

Who are we to second-guess preferences? They’re all the same price, right?

The (inexorable) implications? Concentration and distribution of wealth and income not only don’t matter. For economists who aren’t willing to tear open the prison door (at serious risk to tenure and employment), they can’t matter.

Steve explains it all far better, with circles and arrows and a paragraph on the back of each one explaining how each one is to be used as evidence against us. But I hope this little summation helps.

Cross-posted at Angry Bear.

When Do Humans Want to Share the Wealth?

March 16th, 2012 1 comment

Jonathan Haidt reports an interesting experimental result:

Two three-year-olds walk up to a marble-delivery machine that has two bins. Each stands in front of one bin. Three scenarios:

1. One bin has three marbles in it, the other has one: the winner is unlikely to share to equalize the takings.

2. There are two ropes to pull; one delivers one marble, the other three: the winner is unlikely to share to equalize the takings.

3. Two ropes, but both must be pulled together to deliver the one/three marbles: the winner is likely (75%!) to share to equalize the takings. (Either spontaneously, or on request from the loser.)

If people feel that they must work together to get the goods, they also feel that they should (or even want to) share the goods.

Haidt’s take (my emphasis):

If there’s a problem with the ultra-rich, it’s not that they have too much wealth, it’s that they bought laws that made it easy for them to gain and keep so much more wealth in recent decades.

Sarah Palin gave a speech last September lambasting “crony capitalism,” which she defined as “the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys.” I think that she was on to something and that she was right to include big government along with big business and big finance. The problem isn’t that some kids have many more marbles than others. The problem is that some kids are in cahoots with the experimenters. They get to rig the marble machine before the rest of us have a chance to play with it.

Now add this:

The losers know the game is rigged, so their innate intution tells them that the winners should share.

The winners refuse to know that the game is rigged — deny it vehemently — so they think the losers are unreasonable in their expectations of sharing.

Contributing: The American cult of individualism — the widespread belief among the successful that their success is a result of their efforts only, so they deserve their winnings — means that their natural human work-together-share-together instincts aren’t invoked. This even when they’re wrong about the relative contribution of their individual efforts.

So the winners are deluded about two things: 1. the relative contribution of their individual efforts (compared to A. luck and B. the rules/playing field), and 2. the (rigged) state of the playing field.

Here’s the problem: the losers are also deluded about #1 (because the rigged game provides the winners with the necessary resources to delude them through tens of billions of dollars of propaganda and economist-buying).

So here’s the rhetorical challenge faced by those who seek greater equality: convince the losers that much or most of the winners’ success is in fact the result of everyone pulling on ropes together (and luck), not just the winners’ industrious rope-pulling. Not an easy task, but one worth focusing on.

To add, a problem with Haidt’s analysis: if big business and big finance (and rich people) couldn’t buy big government to rig the game in their own favor, big government wouldn’t be the problem. Absent that buy, government is essentially indifferent to relative distributions — or arguably even more inclined to sharing the wealth widely to garner lots of votes — one person one vote versus one dollar one vote.

He suggests a three-way symmetry for a situation that is not symmetrical.

Cross-posted at Angry Bear.

 

Why Doesn’t Warren Buffett Give All His Money to the Government?

November 4th, 2011 1 comment

Psychohistorian’s comment over at Modeled Behavior gives the best answer I’ve seen to this question (a specious rhetorical question that — since it ignores the obvious issue of collective action — Tyler Cowen acknowledges to be worthy of a fifteen-year-old).

If I say, “We should all bring a dish so we can have a potluck,” but people don’t agree, I am not a hypocrite if I later fail to show up with food. If I suggest to my two brothers that we should all pitch in to buy our parents a vacation, I am not morally obligated to pay for a third of a vacation regardless of their decision. If I advocate that our cities zoning laws should limit houses to three stories, there’s nothing hypocritical about building a 4 story house if that ordinance fails – doubly so when all my other neighbors are building four story houses.

There is nothing inconsistent about being willing to bear a larger part of a reciprocal burden, but being unwilling to pitch in absent a larger framework. This is particularly true at the high reaches of wealth, where income is significantly positional. If other people’s incomes are also reduced by taxes, there’s an overall downward shift in the demand for certain luxury services. If I pitch in without this reciprocation, my ability to pay shifts, but the equilibrium price does not.

Nor is there anything hypocritical about adopting that stance.

Update: Steve and Barry Ickes give more great examples in the comments to Tyler’s post:

Barry: “So I believe in a draft for national service and we don’t have one I suppose I must volunteer for the army. I should serve while others skate. I don’t buy it.”

Steve: “I don’t think being ONE soldier landing in Normandy did anything for anyone.”

Tyler suggests at the top of his post that he grasped this fairly simple and obvious issue when he was in high school. So why does he now feel the need to obfuscate it with contortionate logicalizing? I would suggest that it’s a form of false signaling, a behavior that is collectively corrosive, and cheap or free if we don’t all punish it.

Proofiness!

May 5th, 2011 1 comment

Intolerable Socialism

March 12th, 2011 No comments

Best line of the week (with a couple of elisions by moi):

Any effort to reduce government spending on health care … is intolerable socialism, and any effort to increase government spending on health care … is also intolerable socialism.

via Yglesias » Making Sense of the Rationing Switcheroo.

Pacifism: Bryan Caplan Gets It (Almost) Totally Right

November 24th, 2010 3 comments

I often disagree with Bryan Caplan — often quite vehemently — but not always, by any means. He’s one of the people who I’m constantly testing my thinking against.

He gets it so right with the following post that I’m going to make an exception (first time?) and reproduce his whole post here.

Cliches of Anti-Pacifism

I’m a pacifist.  I realize that it’s an unpopular position, but I’m still surprised by how quick people are to dismiss the position with cliches.  Here are three of the most common.

1. “If you want peace, prepare for war.”  This claim is obviously overstated.  Is North Korea really pursuing the smart path to peace by keeping almost 5% of its population on active military duty?  How about Hitler’s rearmament?  Was the Soviet Union preparing for peace by spending 15-20% of its GDP on the Red Army?

No on all three counts.  The truth is that preparation for war often causes war by frightening and provoking other countries.  That’s why the collapse of the Red Army made the inhabitants of the former Soviet Union safer from nuclear attack than they’d been since 1945.  This doesn’t mean that disarmament always makes countries safer.  But it does mean that military preparation frequently has the perverse effect of making countries less safe.  Discovering the conditions under which this occurs takes a lot more than a one-liner.

2. “Those who beat their swords into plowshares, will plow for those who don’t.” In earlier centuries, this was usually true.  But almost all rulers treated their subjects like chattel in those days.  The main reason to fear war wasn’t that policies would change if “your” government were defeated, but that you’d suffer or perish before the conflict was resolved.  From the point of view of the ruled, pacifism would usually have been an improvement.

In the modern world, the plowshares cliche is even more misguided.  Take a look at this list of military spending by country.  The U.S. naturally leads the pack, but is any sensible person worried that the U.S. will invade their country in order to take their stuff?  While the U.S. has the power to literally enslave most of the world, most Americans think it would be wrong, so it’s not going to happen.  The same clearly holds for five of the other top-ten military powers: the UK (#3), France (#4), Germany (#6), Japan (#7), and Italy (#9).  Even China, at #2, has far less awful intentions than the plowshares cliche suggests: While it might invade a totally disarmed Taiwan, the next step would be One Country, Two Systems – not mass enslavement of the Taiwanese.

3. “Pacifism didn’t work with Hitler.”  True enough.  But then again, nothingworked with Hitler.  The man was a monster.  Poland tried resistance, and was virtually destroyed.  Stalin tried alliance, and was stabbed in the back.  The Allies tried unconditional surrender, and left most Europe in ruins, and half under Stalinism.  Sure, with 20/20 hindsight, Britain and France could have invaded Germany in 1933 – or interrupted his parents a few minutes before his conception in 1888.  But two can play at the hindsight game: Pacifism could easily have prevented World War I, leaving no room for the likes of Hitler to rise to power.

I would add my pet concept of “mercenary morality”: Adopting a truly superior moral position — in deeds as well as words — in many cases delivers true power: the ability to convince your friends and coerce your enemies (and vice versa). The Bush administration’s words and deeds post-9/11 epitomize the squandering of such a morally (or in rhetorical terms, “ethically”) superior position, and the power that accrues to it.

Which points out one key place that Bryan gets it less than totally right:

is any sensible person worried that the U.S. will invade their country in order to take their stuff?

C’mon! Are you serious? Does any sensible person — even the nuttiest neocon — believe that the Halliburton presidency would have chosen to invade Iraq if Iraq didn’t have oil? How does that look if you’re not an American? It’s not crazy to understand why other countries have reasonable concerns on that point.

Is the Social Security Trust Fund a Liberal Own-Goal?

November 12th, 2010 13 comments

The Social Security trust fund is one key rhetorical crux of our budget debates. (I’m punting on Medicare here for the moment; it’s obviously the elephant in the room.)

• Liberals think of the trust fund as a big national savings account. They point to the trust fund’s promises to future retirees, their multi-decade contributions to the trust fund, its solvency (it’s been banking >$150 billion in surplus revenues every year [except -- for obvious reasons -- 2009]), and its projected longevity, to assert that Social Security is in great shape. Just some slight tweaks needed.

• Conservatives say the trust fund is a sham, because it contains nothing but promises from the government. Social Security is just a(n unaffordable) transfer program — from younger working people to retirees, the disabled, and widow(er)s and orphans.

Who’s right?

• Liberals are totally correct that minor tweaks in revenues and/or spending are all that’s needed. (75-year projected deficits are about 2% of future payrolls, .6% of GDP. Since our country currently taxes about 30% less than most other prosperous countries — 28% of GDP compared to 40% — filling that .6% gap would not be onerous.)

• Conservatives are right that the trust fund is basically a chimera. Social Security is for all purposes (you can argue intents amongst yourselves) a transfer program.

If we eradicated the trust fund today (along with the debts that government owes to that trust fund), arithmetically it would change exactly nothing. We’d still have revenues and outlays for Social Security. Subtract outlays from revenues, and you’ve got the SS surplus or deficit. It just doesn’t matter whether those revenues and outlays pass through the trust fund, shifting its balances up and down. It’s the same thing as shifting overall government debt up or down.

All of a sudden you’d see $1xx billion dollars a year in additional government revenue (the current annual Social Security surplus). But the government would spend all that instantly, right? We’d owe it to future generations, because we have promised it to them. But that’s exactly what’s happening today. The government is spending those revenues and issuing bonds a.k.a. promises to the trust fund. That’s already a fact, as embodied in the unified budget (combining “on-budget” revenues and spending with the trust funds for Social Security, Medicare, etc.)

But here’s what really bothers me: by insisting on the reality of the trust fund, liberals are putting themselves in a rhetorical trap.

Want to make the Social Security trust fund sustainable long-term without cutting benefits? The obvious solution is to increase its funding source: payroll taxes. The only alternative is for general government to pay for future shortfalls, which would mean admitting that … it’s a transfer program.

But this is an illiberal proposal because payroll taxes are horribly regressive. 1) They only tax earned income — which people presumably actually worked to acquire, and 2) You don’t pay payroll taxes on earned income above $106,800/year.

There is one progressive solution even within this rhetorical box: Remove the $106,800 cap. But once again the liberal rhetorical position precludes it: that cap only justifiable if you buy into the trust-fund/savings account concept. “People shouldn’t have to put in more than they take out.” If you acknowledge that Social Security’s a transfer program — and that people’s inputs don’t necessarily match their eventual receipts (they don’t, even now, especially if you compare generations), there’s no a priori reason to retain the cap.

Simply removing the earnings cap on payroll taxes would fill the .6% Social Security gap beyond the predictable future. To 2083, to be (falsely) precise. See the CBO’s July 2010 Social Security Policy Options (PDF), pages xi and 18. (Thanks, Bruce.)

It sounds reasonable given that our tax system (state, local, federal combined) is currently not progressive at all above about $60,000 a year in income.

But still: you’re only taxing earned income. And — conservatives will be happy to point this out, correctly — taxing earned income discourages people from working and building overall prosperity. Acknowledging that Social Security is a transfer program lets us fund it with more economically efficient and more equitable taxes like carbon taxes or even — gasp — increased taxes on investment income.

Am I Channelling David Stockman, or Is He Channelling Me?

September 30th, 2010 No comments

He could have written my last two posts, or I could have written the script for this:

Media Player | WBUR and NPR – On Point with Tom Ashbrook.

The Stockman interview starts at 12:03. It would be uncanny, if both of us weren’t simply stating the obvious.

He got two things wrong — it’s the last thirty years, not the last forty (he corrects himself later), and yes, there is a responsible party, that consistently pays its bills.

The Reaganomics Strategy: A Legacy of Debt

September 28th, 2010 No comments

I’ve laid this out before, but I wanted to give it its own post so I could refer to it — notably in my next post.

The Reaganomics Strategy is a brilliantly effective (and profoundly irresponsible) political strategy. It goes like this:

Borrow money from our children and from abroad, and use the money to buy votes here with the world’s oldest political pander: “I’ll cut your taxes.”

Just tell the people they don’t have to pay for the government they insist on receiving. Borrow to pay for it instead. It gets you elected, right? Deficits be damned.

When Cheney said “Reagan proved that deficits don’t matter,” he was making a political, not an economic statement. People (especially Republicans) love to self-righteously complain about deficits and debt, but they vote for the person who promises to cut their taxes.

Here’s the legacy of The Reaganomics Strategy:

After declining steadily for 35 years after WWII (from 120% to 35% of GDP) — with Republicans and Democrats alike responsibly paying off the debts of that war during a multi-decade economic boom — in 1981 debt started spiking, and has been doing so ever since (except under Clinton).

The Bush II spike in particular is simply stupefying, and we know the four sources of that spike: two wars, Medicare Part D, the economic bailout, and — of course — massive tax cuts.

Is it any wonder that Democrats complain of hypocrisy, when Republicans — supposed “fiscal conservatives,” vilifiers of Keynesian stimulus — have been engaged in a nonstop thirty-year binge of deficit spending and Keyensian stimulus gone wild — in both good times and bad? (Keynes advocated deficit spending during recessions, and building surpluses during expansions — straightforward stuff that both economists and everyday people see as being sensible, prudent, and the best path to growth and prosperity. Maybe Republicans don’t really believe in sensible, prudent policies that yield growth and prosperity.)

But even with that endless flood of government stimulus, Reaganomics-driven government- and regulation-slashing — supposedly such spurs to growth — have resulted in only tepid economic growth compared to the pre-Reagan era — and little to no growth in middle-class incomes. (Trickle-down is supposed to … trickle down, right? Eventually?)

We’ve done the experiment. It failed.

Now don’t get me wrong. I don’t blame all this on what Ronald Reagan did. He was a pretty good Keynesian compared to today’s lot — he raised taxes when times got good, to the tune of about half his bad-times tax cuts. I blame it on the ideology he promulgated.

Reagan loved to spout the Government Is Bad gospel — it was good rhetoric, good politics — but he didn’t actually live by it. He spent half his life in government. But his dee-sciples, they’re another story. With the wild-eyed (glassy-eyed?) zealotry of typical disciples, they’ve translated that rhetoric into a childishly simplistic and unabrogatable gospel that is a cartoonish caricature of Reagan’s relative pragmatism.

That’s the legacy that Obama is saddled with — thirty years of profound fiscal malfeasance. He’s set to flatten out the debt curve (once again, responsible Democrats cleaning up after Republican profligacy), but he won’t be delivering robust economic growth, much less a balanced budget, any time soon. That opportunity was squandered long ago.

Reagan was able to come off looking pretty good, because Volcker was able to turn on the monetary tap in ’83. The economy — including the unemployment rate — turned around within months.

Bernanke and Obama don’t have that luxury. The Republicans have had the tap wide open for thirty years.

So while Obama’s popularity ratings seem to be tracking Reagan’s almost perfectly right now, don’t expect that to continue. He’s in the unhappy position of dealing with a fiscal time bomb that was planted starting in 1981.

Do Experts Know Better?

April 14th, 2010 9 comments

My friend Steve likes to proclaim the value of casual intuition — based on one’s day-to-day observations over the course of life — and downplay the value of expertise, analysis, and data in making good judgments. Among other things, he defends Sarah Palin and other less-thinkerly politicians on these grounds.

He also points to Robert McNamara — the king of data analysis — as having failed utterly in his judgments on Vietnam. This putting aside the facts that 1. Steve’s casual intuition would have led him to exactly the same policies (if not worse), and 2. McNamara’s data was not the driving force behind the big decisions and judgments on Vietnam. They were at best excuses, self-justifications, rationalizations, or simple thumb-twiddling. McNamara actually manufactured a system that delivered systematically false data.

Also: systematic, in-depth knowledge — rooted in research, analysis, and frequently, data — is obviously not sufficient to guarantee good judgment. But it is arguably necessary. Or at least, it (greatly?) improves the odds of making good judgments. If the Bush administration, for instance, had had some basic knowledge of the difference between a Shiite and a Sunni…

One of the key books on this field is Philip Tetlock’s Expert Political Judgment. He argues — based on analysis of 82,000 predictions by 284 experts — that political experts perform only slightly better than random dart throws. It’s a pretty damning condemnation of experts.

But as Bryan Caplan has pointed out, there are two fatal flaws in Tetlock’s argument:

1. He only examines questions that are highly controversial among experts. (If 50% believe each way, 50% will inevitably be wrong.) Tetlock explicitly ignores the “dumb” questions that seem to the experts to have obvious answers, but which everyday folks might consider controversial.

2. He doesn’t compare the the experts to the average person on the street. The only such comparison in the book is between experts and Berkeley undergrads — who are darned high on the elite/expert spectrum, in absolute terms. And even in that comparison, the experts win in a landslide. The undergrads aren’t even as good as chimps or dartboards.

This suggests that if you looked at those “obvious” questions — which are often not at all obvious to non-experts — and compared casual to expert opinion, you’d see experts being right far more of the time. As they say in the biz, “more research needed.”

Tetlock does reveal another fact, however, that serves to seriously undermine one’s confidence in the intuitionally inspired beliefs of Sarah and similar: among the experts, “foxes” — those who in Nicholas Kristof’s words are “are more cautious, more centrist, more likely to adjust their views, more pragmatic, more prone to self-doubt, more inclined to see complexity and nuance” — resoundingly beat out the “hedgehogs” — those who “have a focused worldview, an ideological leaning, strong convictions.”

Is this also true of everyday folks? Based on my many years of decidedly non-systematic observation, I would suggest that it is.

Update: Chris’ comment,

This worked well enough back when virtually all information of note was controlled by experts.  Now they’re forced to compete with everyone, which has the nasty side effect of forcing people to become steadily more extreme and loud just to be heard.

Reminds me of another takeaway from Tetlock’s research. Again quoting Kristoff because he summarizes it well:

the only consistent predictor [of accuracy] was fame — and it was an inverse relationship. The more famous experts did worse than unknown ones. That had to do with a fault in the media. Talent bookers for television shows and reporters tended to call up experts who provided strong, coherent points of view, who saw things in blacks and whites.

In other words, the loudest, most simplistic, and most dogmatic “experts” — the extreme hedgehogs — 1. are the least accurate, and 2. get the biggest megaphone.