Steven Landsburg and the Casually Tossed-off Limiting Principle

March 29, 2012

This week’s Supreme Court Oral Arguments over, among other things, the constitutionality of the Individual Mandate to purchase health insurance did not go so well for the government and Solicitor General Verrelli. From the gun, General Verrelli was beset by conservative justices questioning him on the limiting principle of the mandate. In other words, if the government can mandate the purchase of health insurance then can’t they just as easily mandate the purchase of broccoli, cars, burial insurance, or any commodity at all. Unaccountably, the SG seemed somewhat unprepared for such interest:

Scalia: Wait. That’s — it’s both “Necessary and Proper.” What you just said addresses what’s necessary. Yes, has to be reasonably adapted. Necessary does not mean essential, just reasonably adapted. But in addition to being necessary, it has to be proper. And we’ve held in two cases that something that was reasonably adapted was not proper, because it violated the sovereignty of the States, which was implicit in the constitutional structure.

The argument here is that this also is — may be necessary, but it’s not proper, because it violates an equally evident principle in the Constitution, which is that the Federal Government is not supposed to be a a government that has all powers; that it’s supposed to be a government of limited powers. And that’s what all
this questioning has been about. What — what is left? If the government can do this, what — what else can it
not do?

Verrilli: This does not violate the norm of proper as this Court articulated it in Printz or in New York because it does not interfere with the States as sovereigns. This is a regulation that — this is a regulation -­

Scalia: No, that wasn’t my point. That is not the only constitutional principle that exists.

Verrilli: But it -­

Scalia: An equally evident constitutional principle is the principle that the Federal Government is a government of enumerated powers and that the vast majority of powers remain in the States and do not belong to the Federal Government.

This is the ultimate challenge for the government. They must be able to demonstrate a limiting principle or they will never get all four conservative justices they need. This Court is not going to give plenary police power for the federal government to enact any law.

Over at The Big Questions Steven Landsburg stumbles onto a perfect economic and legal argument for distinguishing the Individual Mandate from other potential mandates that Congress might constitutionally pass:

The Supreme Court has been a veritable festival of economic ignorance the past few days, but if I had to pick a prize specimen, I think it would be Paul Clement’s response to Justice Kennedy’s observation that the uninsured — given our unwillingness to turn them away from emergency rooms — impose a burden on the rest of us. Mr. Clement (the plaintiff’s attorney) tried to argue that the same is true in any market:

“When I’m sitting in my house deciding whether to buy a car, I am causing the labor market in Detroit to go south…”

thereby blurring the key distinction between a pecuniary and a non-pecuniary externality.

The point is that Mr. Clement’s decision not to buy a car (and therefore to drive down the price) is bad for Detroit auto workers only to the extent that it’s good for other car buyers. It is therefore in no sense a net burden on the rest of society. Contrast that with the clear burden imposed by the uninsured fellow who wants you to pick up his hospital tab.

Brilliant. As his commentors point out, Steve is wrong to criticize Clement since he arguing against the mandate’s constitutionality and it is not his job to point out economic flaws that will only hurt that case. However, he is right that this, at least to my ears this is a home run response to the question, “where is the limiting principle?” The distinction SL has pointed out seems to me to be exactly the kind of bright line distinction that the government has been failing to express. Yet I can’t find anyone else discussing this distinction, economist or otherwise, even though it seems to me to clearly separate health care from broccoli, cars, and gym memberships, though perhaps not caskets and burial insurance.

Read this crucial interaction between Kennedy and Verrelli and you’ll see the difference a more principled argument would have made:

Kennedy: Your question is whether or not there are any limits on the Commerce Clause. Can you identify for us some limits on the Commerce Clause?

Verrilli: Yes. The rationale purely under the Commerce Clause that we’re advocating here would not justify forced purchases of commodities for the purpose of stimulating demand….

Kennedy: But why not? If Congress says that the interstate commerce is affected, isn’t…that the end of the analysis?

Verrilli: No….The difference between those situations and this situation is that in those situations, Your Honor, Congress would be moving to create commerce. Here Congress is regulating existing commerce, economic activity that is already going on, people’s participation in the health care market, and is regulating to deal with existing effects of existing commerce.

General Verrelli is forced to adopt the opposition’s framing of the question, activity vs. inactivity, since the Court seems to have all but accepted it too. So, the question is whether those who refuse to purchase insurance are participating in the market such that they can be “regulated.” Verrelli says yes they are participants. Clement says: Well then that means everyone in the world is participating in every market by not making purchases. Good point, say the conservatives, that can’t be right that’s just unlimited power. Now, just insert Steve Landsburg’s distinction between pecuniary and non-pecuniary externalities and you’ve answered that challenge very well I think. If you were Verrelli you could literally have just read his last three sentences there and had a substantial challenge to the other side. Instead Verrelli just insisted that people who don’t buy insurance really are participants in such a “special” health care market.

As a general class of argument this one conforms to the kind mandate advocates have been relying on, namely the “health care is special.” There are in fact many ways in which health care is special: you don’t know when you’re going to need it, its very expensive, people spend the most on it right at the end of their lives, and as a society we largely refuse to refuse it to anyone. Some of those distinctions are not legally relevant and many just as easily apply to other commodities. Essentially the government is asking the Supreme Court to distinguish health care by listing its various aspects and qualities. Hopefully if they describe it closely enough this constitutional exception will only apply to this one market. But this is not the way we ought to make legal distinctions, carving out exceptions one at a time.

The pecuniary/non-pecuniary distinction, however, credibly makes the case that health care REALLY IS special because it creates “real” not merely pecuniary externalities. It diverts real resources (doctors, medicine, etc.) to sick, poor people who will never pay for those resources. This means less medical care for the rest of us. If I’m forced to buy broccoli all we’ll have is a pecuniary externality which (maybe) raises the price of broccoli. Which, as Steve points out, is equally good for producers of broccoli as it is bad for consumers of broccoli. Under complete markets pecuniary externalities offset each other. But real externalities like pollution misallocate real resources or incentivize destruction of real resources. That’s why it is proper to mandate the purchase of health insurance.

This is pure gold for mandate defenders, all they ever needed was a little something to hang their distinction on and this seems like alot more. But literally no one else is talking about this? Why? Am I missing something?

 

Edit: Commenters over at The Big Questions, especially Ken B, have provided some answers for me. First, it seems that the Supreme Court in Wickard v. Filburn already accepted arguments that blur the distinction between pecuniary and non-pecuniary externalities by accepting the government’s argument that home-growing wheat for one’s own consumption interferes with interstate commerce. Apparently this occurs because if Filburn had not used home-grown wheat he would have had to buy wheat on the open market. This is a textbook definition of a pecuniary externality. Filburn depresses the price of wheat by not buying enough of it. The Court accepted this argument and went on to get distracted by a local/non-local distinction that they ultimately decided didn’t matter. Filburn was forced to stop growing his own wheat. In the meantime, the Supreme Court essentially defined externality in the broadest possible way. Pecuniary externalities occur whenever we do (or don’t do) literally anything at all. Buy wheat or don’t buy wheat, either way you affect the interstate market for wheat. So, obviously the government could not go back and attempt to unscramble this particular egg (nor would they really want to, I suppose) and that is probably why we never heard such an argument.

 

The Nation is Not A Family

November 9, 2011

From Obsidian Wings, this:

Imagine a group of five people. They’re in a room on the third floor of a building with no elevator, and they have 1000 pounds of assorted stuff to bring downstairs and stack outside the building. What’s the fair way to do this?

1. Everyone could bring down their own stuff. If the stuff is such that it’s really easy to tell what belongs to whom, then maybe that would be the fair thing to do. This doesn’t correspond to taxation at all, but to purchasing. No-one’s life is easier, there are no burdens shared or economies of scale, but it’s easy and fair.

2. Now suppose the group is a band: 2 guitarists, bassist, drummer with a full kit, and the guy who plays the harmonica.

Clearly the equipment burden is distributed very unevenly, and they’ll never get to the gig on time if everyone is only responsible for their own instrument. So they decide that each person takes down about 200lbs of stuff, to distribute the work more evenly than the burden. This is the flat tax: one-fifth of the population (by wealth) takes down one-fifth of the stuff, the taxes. It looks fair: the burden is equally shared, everyone pulls their own weight.

3. But now, suppose the five people are a family:

  1. grandma, age 75
  2. dad, age 45
  3. mom, age 45
  4. son, age 20
  5. daughter, age 10

and they’re taking the stuff downstairs to load into the van and go on a trip together.

The 20-year-old son is probably *much* stronger than anyone else. Grandma may have trouble getting down with much more than herself, and while the 10-y.o. is pretty bouncy, she can’t really take all that much in any one trip. The parents fall in between.

Is it fair if the son ends up bringing down 600lbs of the stuff, while Grandma brings only 30lbs and the others divide up the rest? Yet I assume we’d all agree that this would be the *reasonable* thing to do, even though it means everyone doesn’t “pull their own weight”.

In this metaphor, the strong healthy young son represents the wealthy, the people with the most money=strength. This is *progressive taxation*: we’re all on this trip together, so we help each other out.

The post goes on to explain a completely different justification for progressive taxation, namely the declining marginal value of money. This strikes me as a pitiful defense of progressive taxation and I can’t believe that it is the best or true rationale.

In this analogy the rich are the young twenty year old. They must carry the weight “because they can.” It is fair to ask the able-bodied to do the most because in a sense they are the only ones who can. But 1. think again about what happens in the situation described and 2. think about whether or not a nation is anything like a family.

1. When the five-person family goes up to move the furniture is the son assigned his burden? Do the parent turn to him and say, “You’re the strongest, get to work kid.” Not in my experience. The young son steps up himself. Or rather, you might say that he is influenced to carry the lion’s share. We rely on cultural and social norms to enforce his sacrifice. How is this an argument for forcing his counterparts to sacrifice themselves?

2. A reasonable response, one that exposes the insufficiency of the entire analogy, is that we can’t rely on shaming and cultural pressures because large nations are not families. They cannot be run like families, though many have tried. Organizing large groups of people on the premise that all 350 million of us are one big family creates problems. That goes both for relying on unreasonable expectations of social responsibility to do the social safety net heavy lifting and for pointing to social responsibility to justify use of force. The family is a poor model for a nation.

Fellow countrymen are really strangers, not family or friends. If you are going to expect people (regardless of their ability to do so) to help perfect strangers just because they are on the same side of an imaginary line as you, then you’re going to have to force them to do it. But what you can’t do is justify that force by an appeal to family responsibility. You need a better justification and a probably a better analogy.

 

Who gets the Next Fruit?: Stagnation in Real Inequality

October 24, 2011

I have previously written about the fact that the rich have the same stuff as the middle class and even the poor. There are very few commodities that the 1% have that the rest don’t; things like private jets and swimming pools. My new question is is this a problem? You’ll often hear libertarians praise the wealthy as commodity producers but they are also championed for being at the forefront when it comes to consuming. High end consumers and early adopters play the unique role of testing out new technology and products for the rest of us. They usually pay a considerable premium to have new products first, often only several months before severe price drops. They often get products with bugs and flaws that are remedied for later customers because they are discovered during the roll-out.  This phenomenon has slowed.

Currently, it would seem that the wealthy have hit something of a ceiling when it comes to making purchases and living lives that allow them to distinguish themselves from everyone else (and I imagine this must be rather frustrating for persons who have 1. worked rather hard and taken unique risks their whole lives and 2. who are very aware of fact 1. and feel rather entitled to their spoils). This is certainly true when today’s rich are compared to the wealthy of the early part of the 20th century who could travel in cars, to Europe, and air-condition their homes, unlike their counterparts. As I have written, these seem to me like wide, fundamental disparities between the rich and the rest. Indeed, it seems reasonable to conclude that the rich lived essentially different lives in the past, as though they were from another planet. Today’s rich cannot say as much. They make their progress primarily along the axis of quality. They own Iphones, like everyone else.

This disparity (or lack thereof) is circumstantial evidence of Tyler Cowen’s “Great Stagnation” hypothesis. We have picked all the low-hanging fruit and found ways to make the jam cheap and widely available. Where is the next fruit and who will get to eat it first?

The innovation frontier appears to be on the internet where overhead costs are low and early adopters don’t have to be rich. Also the returns to internet innovation are not so great as returns were to things like electricity or television. Those new commodities created new industries that employed millions and still do. The internet is doing alot more job destruction (at least in the US) by making information cheaper and its aggregation more efficient. If the rich live lives so much like the rest what does that mean for product development? Will there ever be another car or television, a new product that we can’t all have right away? Scarier still, today’s highest prices are all focused in healthcare. High prices could lead to some incredible advances in health technology that might allow us to live far longer. I would call “longer lives for the rich” a fundamentally unique commodity. I would also be less certain of our economic systems’ ability to handle such a shock without falling completely apart and spilling lots of jam.

Coyote Charity

October 23, 2011

Many of the OWS protesters have made a principled point of not making any demands with their protests. The reason people have protests is a frustration with their representation-in and functionality-of the system (OWSers prefer the term system to government, but its the same thing). They don’t see another way to affect change. There’s nothing left to do but howl one’s protests into the abyss. In the present case the OWS protesters see the GOP as obstructionist and Wall Street as a too heavy thumb on the opposite side of the scales. “The system is broken and so we have to work outside it to change it” has been an extremely effective populist message for approximately the last 7 years. So, many have begun discussing the ways in which change can be affected outside the traditional political channels. But protests and community organizations are ineffective, unimaginative, and stupid. And in the end they are still appeals to government.

I’d like to add what I think is a more useful (if illegal) proposition to the list of extra-governmental, civil disobedience tactics. Matt Yglesias and the boys at EconLog have also talked about how desirable it would be if we could open the borders quite a bit more. More legal immigrants would mean young workers who would buy and rent housing, reduce unemployment, and require almost no social services. There is even a bill currently being introduced by Senators Lee and Schumer that awards an immigrant a visa for investing $500,000 in housing. I tend to agree with Bryan Caplan and Arnold Kling that this is a second best option to openning borders without charging a fee. But, if legal immigrants who can afford half a million bucks in housing are great, I’d like to suggest that illegal immigrants who can afford an often similarly priced coyote are even better.

Have a look at this graph from Havascope.com, a website that tracks blackmarkets:

  • PRICE
  1. Afghanistan$11,900 to Australia
  2. Africa$2,200 to Americas / $692 to Europe / $203 to other Africa
  3. Americas$4,528 to Europe / $2,984 to other Americas / $8,500 to U.S.
  4. Asia$9,374 to Europe / $26,041 to Americas / $12,240 to other Asia
  5. China$75,000 to USA / $41,800 to UK/ $15,000 to Italy
  6. Cuba$10,000 to USA
  7. Europe$6,380 to Americas / $2,708 to other Europe
  8. Guatemala$7,000 to USA
  9. India$277,000 to UK
  10. Iraq$10,500 to United Kingdom
  11. Israel$1,500 from Africa
  12. Malaysia$450 from Thailand
  13. Mexico$4,000 to USA / $5,000 to USA by boat
  14. Morocco$24,000 to Europe
  15. North Korea$6,000 to South Korea
  16. Somalia$10,000 to USA
  17. Thailand$21,000 to Japan
  18. Vietnam$28,500 to Europe

Those are exactly what they look like, going rates for smuggling a person from one country into another. If you want to give real charity; I mean truly change and better the life of a poor person and their children forever, without diminishing anyone else’s quality of life and in fact improving the receiving country’s economic situation, then what you want to do is help these people out. Pay to smuggle someone into your preferred first world country. That’s right. Because here’s the thing, if legal immigrants area good deal, illegal immigrants are even better! They don’t cost anything. They often pay Social Security and payroll taxes that they will never collect services on. They don’t collect welfare or medicaid or food stamps. They are employed at a high rate and often in jobs Americans won’t work. Their children born in, say America, become citizens in every sense.

If you really think its important that these people pay some sort of fee for entry, that they need to compensate displaced American workers, then you’re just plain mistaken but that’s okay because you can still take my advice. Just make it a loan and have them pay it back when they get here. As you’re paid back you can give the proceeds to the US government or perhaps the local unemployment charity.

Expert Failure and The Recognition Heuristic

October 19, 2011

Libertarians have a real fear of technocratic expertise and top-down control, especially of complex systems and especially when there is no metric for success or failure. This message can be well articulated but it can also turn into hamfisted anti-elitist nonsense. It is a complex point and complex messages lose their force and complexity in any game of telephone.

For an example here’s part of a conversation between Bill Simmons and Malcolm Gladwell on ESPN.com a few years ago. At the time Isiah Thomas was running the New York Knicks into the ground with poor trades and draft picks and Gladwell attempts here to explain how this could happen:

Gladwell: Here’s the real question. If I was GM of the Knicks, would I be doing a better job of managing the team than Thomas? I believe, somewhat immodestly, that the answer is yes. And I say this even though it is abundantly clear that Thomas knows several thousand times more about basketball than I do. I’ve never picked up a basketball. I couldn’t diagram a play to save my life. I would put my level of basketball knowledge, among hard core fans, in the 25th percentile.

There’s a famous experiment done by a wonderful psychologist at Columbia University named Dan Goldstein. He goes to a class of American college students and asks them which city they think is bigger — San Antonio or San Diego. The students are divided. Then he goes to an equivalent class of German college students and asks the same question. This time the class votes overwhelmingly for San Diego. The right answer? San Diego. So the Germans are smarter, at least on this question, than the American kids. But that’s not because they know more about American geography. It’s because they know less. They’ve never heard of San Antonio. But they’ve heard of San Diego and using only that rule of thumb, they figure San Diego must be bigger. The American students know way more. They know all about San Antonio. They know it’s in Texas and that Texas is booming. They know it has a pro basketball team, so it must be a pretty big market. Some of them may have been in San Antonio and taken forever to drive from one side of town to another — and that, and a thousand other stray facts about Texas and San Antonio, have the effect of muddling their judgment and preventing them from getting the right answer.

I’d be the equivalent of the German student. I know nothing about basketball, so I’d make only the safest, most obvious decisions. I’d read John Hollinger and Chad Ford and I’d print out your mid-season NBA roundup and post it on my blackboard. I’d look at the box scores every morning, and watch Charles Barkley and Kenny Smith on TNT. Would I have made the disastrous Marbury trade? Of course not. I’d wonder why Jerry Colangelo — who I know is a lot smarter than I am — was so willing to part with him.

Would I have traded for Curry? Are you kidding? All I know is that Chicago is scared of his attitude and his health, and Paxson knows way more about basketball — and about Eddy Curry — than I do. Trade for Jalen Rose? No way. One of the few simple facts that basketball dummies like me know is that players in their early thirties are pretty much over the hill. And Jerome James? Please. I have no idea how to evaluate a player’s potential. But I’d look up his stastistics on NBA.com and see that’s he’s been pretty dreadful his whole career, and then I’d tell his agent to take a hike.

Now would I be as good as GM as Jerry West or Joe Dumars? Of course not. But just by sitting on my hands, and being scared of looking like a fool, and taking only the safest, most conservative steps, and drafting only solid players that everybody agrees are a can’t miss, I could make the Knicks a vastly better team than they are today — as could any reasonably cautious and uninformed fan… The point is that knowledge and the ability to make a good decision correlate only sporadically, and there are plenty of times when knowledge gets in the way of judgement. That’s Thomas in a nutshell: He knows so much about basketball that he believes that he knows more than anyone else about the potential of previously undistinguished players. He thinks he can see into the true basketball soul of Jerome James. The truth is, of course, that James doesn’t have a basketball soul.

By the way, while we’re on this topic, let’s play a real world application of this. Let’s say I’m so dumb about basketball that all I know is that the best college programs in the country are Duke and UConn, and so as a GM my rule is only draft and/or trade for the first and second team players, in any given year, from those two schools. So I fire all my scouts. I disband my front office, and basically say that I cede my basketball judgment to Jim Calhoun and Mike K. What’s my team? It’s some combination of Elton Brand, Emeka Okafor, Ben Gordon, Luol Deng, Shane Battier, Mike Dunleavy, Rip Hamilton, Corey Maggette, Jay Williams, Caron Butler, Donyell Marshall and Grant Hill — which is a really wonderful team. Now, of course, in the real world I couldn’t get all those people, because lots of them were really high draft picks. But let’s say I got Brand in a trade, after Chicago soured on him, and I was lucky enough to be in the lottery for Okafor. Maggette was a 13; Hamilton and Deng were 7s; and Butler was a 10 — so at least some of them are doable, particularly since in off-years for Duke and UConn I can trade down and stockpile picks. Battier I wine and dine in the free agent market, because who wants to be stuck in Memphis? Ditto for Gordon, who, it seems, Chicago is thinking of moving anyway. Is that the best team in the league? No. It is better than the Knicks? Absolutely. The point is that clinging to a very simple rule of thumb here — that doesn’t require knowing much about basketball — can leave you looking pretty smart.

Read Goldstein’s Models of Ecological Rationality: The Recognition Heuristic for more on the mechanism being proposed here. Abstract:

The recognition heuristic, arguably the most frugal of all heuristics, makes inferences from patterns of missing knowledge. This heuristic exploits a fundamental adaptation of many organisms: the vast, sensitive, and reliable capacity for recognition. The authors specify the conditions under which the recognition heuristic is successful and when it leads to the counterintuitive less-is-more effect in which less knowledge is better than more for making accurate inferences.

There are plenty of nits to pick here. One can imagine phrasing questions to Germans that would expose their vague familiarity with US geography as much as exploit it. However, the idea that knowledge and expertise can hit a point of diminishing and even negative returns to prediction and decision-making propositions seems intuitively correct. This is exactly what we ask our experts to do in government. It is costly for a coach like Thomas to believe he knows more than the collective rest and to act on those beliefs. It got him fired. Herd conservatism and some Bayesian skepticism would have served everyone better (except the corpse of Eddy Curry). But if he hadn’t been fired Thomas would have continued his path and walked the Knicks off a cliff. He believed, that’s what believers do. We knew he failed because the Knicks lost. How will we know when government experts fail?

Automation and Rational Unemployment

October 18, 2011

Imagine that your industry was revolutionized overnight by some “you substitute” that cost 1/4 your yearly wage to produce and maintain. Tomorrow morning you wake up with the choice of continuing your work a 1/4 your salary or not. You’d probably quit, right? Now imagine this is happening on a weekly basis to various people in various industries. Do you immediately start re-training for a new job? Let’s say you do some research to try to train for a job in the field least likely to be hit. You’ll probably come up with unionized, government jobs that are politically well-connected and take longer to respond to market forces. So will your compatriots. When there aren’t enough of those jobs you will need to have more created for you. This is how libertarians see the shift from productivity to dependency.

Progressives blame greed and the businesses for squeezing workers for lower wages. But net greed has not increased.

Libertarians blame the government for enabling the workers to seek shelter in less productive jobs in exchange for political support. But government desire to satisfy constituents has remained constant.

Businesses would certainly like out of this hassle. They seek a low maintenance money-machine and the cogs that keep gumming up the works are made of labor. The prospect of an automated laborless (or labor-light) business strategy is on the horizon, not just for tech firms, not just in manufacturing and farming but in information and soon knowledge industries. We are running out of useful faculties that people value that cannot be replicated by far less annoying entities. This should be the dawn of the age of leisure but it isn’t clear that this all goes down so peacefully.

Given the unpredictability of the future of employment because of the phenomenon Brian Anders points to, isn’t it possible that investing in job skills is a dicey proposition with little long-term chance of success? Unemployed workers have just witnessed the destruction of manufacturing jobs and now look on as the college-educated wither under student loan debt. Now we’re told that the “second economy” of computer intelligence is only just starting. Which way should we turn? It is reasonable to choose less work if you see no future in it. Better to sit back and wait for something that looks more like a safe play.

A Multiplier of One: Mission Accomplished?

October 13, 2011

Karl Smith very clearly explains what stimulative multipliers really mean:

A multiplier of zero implies complete crowding out of the private sector by government. The government spends more and the private sector offsets this exactly by spending less.

A multiplier between zero and one means that there is some crowding out by the private sector. The government spends more, the private sector spends less but not enough to offset government spending.

A multiplier of 1 would suggest no crowding out. The government spends more and private spending is unaffected on net.

A multiplier above one would suggest crowding-in. The government spends more and this increases private as well as public spending.

He then takes issue with Russ Roberts’ claim that a multiplier of 1 means there is no stimulative effect:

As for the total cost, it depends in large part on whether you place any value on those expenditures. So if we are buying roads and schools, you may not believe that are as useful as private construction spending might be, but are they 100% useless? If they are even only 50% useless then you have come out ahead.

Being unschooled in these matters my question is this: If the roads and schools were useful wouldn’t they increase (multiply) private spending? That is, isn’t the usefulness of the commodities produced by government spending already “baked in” to the multiplier? The fact that the multiplier is 1 or less seems like evidence that on net extra roads don’t create extra private production or investment. I’d like a better definition of “useful” from Prof. Smith. Is he arguing that the roads and schools stimulate the economy by creating something else? Subjective well-being perhaps? I get that they create jobs but he also seems to be arguing that new roads and schools have value even when they don’t increase overall production, when all they do is transfer money from taxpayer to unemployed worker, without further benefit (or cost). This is the digging and filling holes examples that Keynesians often stubbornly subscribe to. Why, after all, do we want to invest in infrastructure if we are fairly certain it won’t increase growth and productivity?

Smith goes on to sweeten the deal. The government won’t even have to pay the bonds back:

…note that the government does not ever have to pay the bonds back and in general does not even have to tax the population in order to service them.

I don’t really care what explanation you follow that with it is patently false if you stop and think about what you’re saying. There’s no such thing as a free lunch. I’m not sure I understand how Smith explains this fantasy (I think by presupposing a recovery) but as Bob Murphy points out in the comments: “In principle then, a government could eliminate all taxes and slash its budget, but still maintain a constant level of spending…that it never has to finance in any way?” Call this the Greek Gambit it is true until it is horribly, disastrously false.

There is a cost to investment in roads and schools. They consume real resources not just idle labor resources. They bid up the price or or reduce the quantity of those resources. This is bad for the private sector even if the net effect isn’t negative on private production because it perturbs the valuation of those resources in ways that mislead everyone. When the government bids up house prices or the price of education it might seem like a relatively way to advantage obviously beneficial industries. But lost in the fray are real demand price signals from the private sector, both for resources and laborers. Resources that go to schools and roads are necessarily diverted from somewhere else. Workers too, train and gain experience in the wrong lines of work. Resources and workers should go to their first best use and discovering what that is is an extraordinarily difficult task. Stimulus spending only makes that job harder.

Why Make Berkeley More Like Kaplan?

October 12, 2011

What surprises me most about the UC-AFT’s recent agreement with the university system, that they claim will give them the power to veto expansion of online programs, is how blatantly protectionist they are of their members. Quote:

We believe that if courses are moved online, they will most likely be the classes currently taught by lecturers, and so we will use our collective bargaining power to make sure that this move to distance education is done in a fair and just way for our members.

There is not much of a nod to the larger societal concerns, nor any real attempt to argue that online courses would be bad for anyone other than members of the UC-AFT. The approach is typical of unions, eliminate employer opportunities that might threaten current jobs. But in a market with high competition this will not work for long, only weakening the UC system to the advantage of its competitors. That is assuming there is something to be gained by offering online education. When’s the last time anyone heard of a prestigious online university? And what would that even look like?

There’s a huge difference between offering courses for credit and not-for-credit. Stanford and MIT already offer extensive, free online courses. Harvard has placed one of its most popular classes ever on YouTube. Many universities are happy to give away education, just not credit. Harvard has in fact attempted to sell only some of its prestige by offering an extension program which confers a less prestigious online Masters in Liberal Arts degree for less, but still with the name Harvard at the top of a diploma.

The UC fight is over who gets what portion of the rents of an accreditation monopoly. Currently college professors and administrators split the lion’s share. However, administrators have a rare opportunity to make the college process cheaper by adopting a new technology. This is not something you often hear about administrators. Adminstrators are the closest thing to “management” a college has, but that does not mean they should be entrepreneurial in the same way. Administrators are known, by professors and students alike, for being rather wasteful of resources but perhaps there’s good reason. Perhaps what looks like waste in to the entrepreneur is exactly the point at a university, and vice versa.

For one thing, attempting to cut costs on teachers in an industry like education seems to misunderstand what a college education is all about. The signal is the important thing and giving the same degrees to online students will dilute that signal. Students go to Berkeley because that’s where the best and brightest people in the world do their research. Not because that’s where the most skilled teachers do their teaching. Plenty of professors don’t teach at all and arguably confer more prestige (and add more value) than a dozen teaching professors do. College education isn’t about learning its about associating with greatness and sending a signal to employers and the wide world that you can be associated with such brilliance. It also sends the signal that you have the social and financial capital to take four of your most productive years and devote them to study. So the two most important dates in a college career are acceptance and graduation. Beautiful campuses with columned buildings and manicured lawns also seem to confer prestige via signalling.

In sum, in higher-education value is added the same way a peacock adds value through wasteful signalling. This is what the schools are doing and what the students are doing with all that money. Universities do not add value by improving teacher quality or by cost cutting in ways that send the signal that the need to cut costs, and online education for credit is just such a signal. Online learning is easier and more convenient than traditional college and requires less sacrifice from the student. The student need not ever meet their professors or their classmates and can be conveniently forgotten by the institution entirely.

I predict that online courses will not actually save the university money or shift profit-shares over to administrators, at least not in the long run. The modern resort-hotel university should be plenty of evidence that schools can never quit buying prestige and certainly not by cutting costs. The surplus must be spent on ever brighter feathers and online education not only fails to confer prestige, it wrecks the signal already in place.

What Can the Rich Do that the Poor Can’t?

October 8, 2011

There is currently quite a lot of consternation over the ever widening income gap between the richest and poorest citizens in first-world countries like the US. Consternation that I think entirely misses the point of what it means to be rich and to be poor. In short, green pieces of paper do not themselves do much for the people who own them. It is the consumption of resources that make one rich and others poorer. Consumption is of course only one half of the story, most produce more than they consume, especially the rich, and thus add to net societal wealth. It is easy to see why most people produce a net surplus (even without accounting for externalities) in a world where the marginal value of extra green pieces of paper basically falls off a cliff at what, in the first world, is a relatively modest level. Consumption naturally gets less substantive and becomes more expressive as income rises. In such a world the term ‘poor’ has lost much of its traditional meaning and the rich have a natural incentive to consume less themselves.

I’d like consider whether it really pays dividends to earn great wealth, considering all the work it entails. As far as I can tell, the difference between what the rich can have and what the poor can have has gotten so small as to be almost gone. And I think most will agree that this is, broadly speaking, a good thing.

I am not here to refute arguments that the rich-poor income gap is growing or take issue with the evidence in support of them. My contention is that the effect of such income differences is more than mitigated by the diminishing returns to income. After a consumer has earned a very low middle class income of say $40,000 he is able to acquire virtually every modern commodity available to the wealthiest consumers.

I began investigating this claim in an earlier post by claiming that a majority of the lowest quintile own a whole host of staple consumer products such as washing machines, TVs, and cellphones. But, I want to press that claim further. There is a very high floor in the first world and it is very close to the point on the utility graph where returns to extra cash start dropping precipitously.

Alarmists about the rich-poor income gap can often be found pointing out that the rich are usually just engaging in conspicuous consumption. For example, owning a luxury car, a mansion, or most egregiously a private jet. They see this as competition amongst the upper class and mostly a wasteful use of resources. Such consumption is often used as a justification for taxing high incomes or at least luxury purchases. However, the flipside of this astute observation is that the rich are not so distinct from the middle class in terms of what they consume. Rather today it is how they consume that distinguishes rich from middle class from poor. So much so that the wealthiest must resort, almost entirely, to consumption as expression.

So what can the rich do that you and I can’t? If you are in the middle-class, ask yourself what you would buy with a significant raise in your income. And be honest. If you would engage in what could be deemed expressive or conspicuous consumption, that is you wouldn’t begin consuming any truly new product, then you are already at the point where extra income doesn’t get you a substantive improvement in your standard of living. Let’s examine the ways you might spend your newly-earned income:

Ownership: You might go from lessor to owner of some of your products. When it comes to the highest priced consumables like, a house or car, the rich are more likely to own and the poor more likely to rent or lease. But, both typically enjoy homes and cars that include luxuries-of-the-past such as solid construction, climate control, and relative safety. For the most part all classes enjoy the same commodities.

Quality: You might buy a nicer car or move to a nicer house, but you probably currently already have the use of both. The rich consume higher quality “fancier” versions of the same things the poor consume. Fancy refrigerators are decked out with more features but still basically do the same job: they keep your food cold. In modern America most features and new technologies trickle down into lower priced versions and become standard at a remarkable speed.

Travel: The rich are able to travel more and to farther more exotic places than the poor. The difference between rich and poor travel might be considered a quality difference, after all a weekend vacation upstate to the national park is travel just not as high-quality as a week in Fiji. But, this seems a bit uncharitable and the two can reasonably be considered fundamentally unique commodities. So let’s say the rich can afford to travel to some places that the poor cannot. The middle class on the other hand are probably capable of going everywhere in the world if they so desire.

When you compare the modern gap between the richest and poorest to the gap a century ago the difference is stark. Being rich around the turn of the 20th century meant having only one working household member, having indoor plumbing and electricity, domestic servants, a college education, being able to travel beyond one’s city limits and often internationally, and possibly owning a carriage or automobile. Whereas the poor or even middle class had NO access to any of that before 1910.

The difference between rich and poor used to be fundamental. Two completely different lives. Today the difference has shrunk. There are almost no fundamental experiences or products that the rich can have but the poor cannot. The thanks for this does not belong to progressive policies of equalizing opportunity by force but rather to the ever equilibrating effect of capitalism. Luxury consumers help bring innovations to market by consuming new products at high prices. Those innovations, however, quickly become widely dispersed as producers streamline their mass manufacture and competitors force prices to shrink. If you want to know what being middle class will look like in the future, look at what the rich enjoy today. Thanks to technology and an ever growing consumer population the lapse between initial availability of a product and its almost universal availability continues to shorten.

Some might complain that the poor still find some basic necessities beyond their reach, things like education and health care. Robin Hanson would tell you that there is actually quite alot of expressive consumption going on in both these areas. And some resources really are zero-sum (e.g. real estate) in that there is a fixed amount. When competing for property, relative wealth matters more since we can’t make new land. Prices must go up when supply cannot, and the poor end up on the same property at a higher price. They can never move up to the “rich property” because if they did where would the rich be? Educational quality is, of course, tied to real estate (both for political and practical reasons) which only compounds the unfairness. I’m not claiming that ALL of the substantive difference between rich and poor have evaporated, although I do find it curious that the industries under the most government control (education and health care) also reflect the most class inequality (somehow, in order to provide access to education and health care to the poor we have paradoxically spiked the price of both). I am claiming that the differences have shrunk and that money really doesn’t matter if you can bring yourself to stop caring what other people think, stop trying to signal your values to the world, and just enjoy the ride.

The larger point is that it is somewhat irrational to put forth the enormous amount of effort it takes to rise into the ranks of the rich just for the money. Money loses its utility fast. After a point it is basically just a way to express yourself. This point is especially near in the modern world where the average salary is around $45,000 and where even the lowest quintile own virtually every modern product from cellphones to TVs.

My prescription is not just that you shouldn’t try to become Warren Buffet but that the $10,000/yr. promotion you’ve been working for will also do alot less for you than you think. How much do you really value a newer nicer car? Or a bigger TV? Or an Iphone? If you said alot, then let me counsel you to wait 3 or 4 years when these things drop into your price range. A few years later they’ll be in everyone’s, and soon after that it will be either illegal or unheard of to not provide them. If waiting for prices to fall removes all the value then you might question whether your consumption is purely an act of expression. And from there you’re only one step to realizing that your new phone, car, or house is just a very expensive statement that you may easily be able to do without making.

Why Does KIPP Work?

September 21, 2011

This morning I was given a tour of the East Nashville KIPP Academy Middle School. KIPP stands for “knowledge is power program” and is one of the most successful charter school franchises in the country. KIPP schools can be found in almost every low-income area of every major city in the US and they usually have a very high success rate raising student test scores.

My impressions:

1. Charter school critics often accuse schools like KIPP of skimming the best students off the top of failing neighboring schools, thereby inflating their results. However, one of the things KIPP brags about most is their ability to poach the very best young teachers (despite the NCLB evaluation conundrum, KIPP is remarkably confident in its ability to tell good teachers from bad before many of them have been in a classroom). They seemed confident in their ability to identify and recruit the best teachers from around the country (even going so far as to fly recruits out to KIPP schools). This should be at least as worrisome to public school supporters/charter school critics as the siphoning of students.

2. I was curious to discover the mechanism by which KIPP achieves its results (though charter schools generally don’t produce higher test scores, KIPP schools, in particular, do). I was struck by the amount of what educators call “structure” and what a parent might call hand-holding. KIPP believes fundamentally that its students must have as much attention and engagement as possible at all times. One teacher could be seen waiting outside the boys bathroom door, apparently unable to trust the student to simply walk to the bathroom and return himself. KIPPsters have a longer school year, beginning  in July, and longer days, 10 hours, than most public schools.

KIPP has effectively done what public school advocates have recommended for years: smaller classes, more individual attention, and more time with teachers. Unlike at public schools, at KIPP these excesses go straight to the children, with little wasted. KIPP is obsessed with being an efficient learning (and socializing) machine (there are only 2 minutes between classes and the teachers walk them there). KIPP abandons what does not increase test scores and multiplies what works, and I do mean multiply. KIPP isn’t interested in too much variety. They have a handful of tricks that they know work well, like repetition and a set of classroom norms and behaviors to encourage engagement, and they wear them out. This is not to say that KIPP teachers don’t have freedom to experiment, because apparently they do, but in order to receive funding they need test results to continue to climb.

Philosophically, however, this highly structured engagement approach shouldn’t give educators much confidence in the power of education to change kids’ lives, at least not long-term. As has been noted by Prof. Caplan, getting marginal students to learn in the short-term is difficult and labor intensive, but even the best teachers can’t stem the inevitable long-term fade-out of knowledge. Education policy makers openly admit and lobby for year-round schools but fail to recognize the implications of fighting summer learning loss the way KIPP does.

Caplan:

Unless a high school diploma magically locks in knowledge, anyone who believes in severe summer learning loss should also expect kids in year-round or Saturday school to quickly lose their extra knowledge after graduation.  Strange as it may seem, then, summer learning loss is an argument for less education.  Why make the poor kids suffer if they won’t retain what they learn anyway?

As Caplan makes clear, children are less like clay that can be permanently molded into a new shape and more like plastic that responds to applied pressure but eventually snaps back into place when the pressure is removed.


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