Archive for the 'Economics' Category

The Sin of Wages

How dire is a government shutdown? Respectable people have made respectable arguments on all sides of that issue. But there’s nothing respectable about the chorus of voices pointing to the pain of furloughed government employees — and pretending this is a reason to end the shutdown, whereas it’s clearly a reason to prolong it.

The more painful the furlough, the more overpaid the worker must have been in the first place. People who are paid fair market wages don’t get nearly so upset about losing their jobs — or losing a few weeks of work — as do people who are paid more than their skills reasonably command. Of course there’s always pain associated with an unexpected disruption in your work schedule, even if when your wages are entirely reasonable. But cries of extreme pain amount to admissions that these workers have been ripping the public off for years.

Even without that observation, the pain of interrupted wages cannot by itself be a reason to restart the government, because it is exactly offset by the relief of those who pay those wages.

To make an honest argument in favor of a government operation, you’ve somehow got to point to the social benefits of that operation. In some cases that might be easy. In other cases, it’s hard but possible. But those who shirk the task completely, by focusing not on lost productivity but on lost wages, are just making themselves ludicrous.

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A Curious Oversight

Got a great idea but don’t want to start a business? The Wall Street Journal offers a menu of strategies — but omits my favorite: Buy a whole lot of stock in a company that you believe could profit from your idea, and then give them the idea for free. It’s imperfect, but so’s everything else, including starting a business.

Most great enterprises require plenty of innovation, hard work and risktaking. One of the reasons capitalism works so well is that it enables the innovators, the hard workers and the risk takers to be different people, by providing institutions that allow them to coordinate their efforts. The stock market is one of those institutions. This isn’t something I’d have expected the Wall Street Journal to overlook.

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RIP, Ronald Coase

ronald-coase1
Ronald Coase has died at the age of 102. I am therefore reposting, with minor changes, the appreciation I wrote a few years ago for his 99th birthday.

In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.

Pigou’s solution—and it’s often a good one—is to make sure that people do feel the costs of their actions, via taxes, fines, or liability rules that allow the victims to sue for damages. Do a dollar’s worth of damage, and you’re charged a dollar.

Pigou endorsed this policy not because it seems fair, though it does seem fair to many, but because it yields, under what he believed to be very general conditions, the optimal amounts of damage. We don’t want too much pollution, but we don’t want too little, either, given that pollution is a necessary by-product of a lot of stuff we enjoy. Pigou offered a proof—now standard fare in all the textbooks—that his policies lead to the perfect compromises, in a sense that can be made precise.

The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out that Pigou’s argument runs both ways. If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.

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Rational Riddles

Many years ago, when soft pretzels were available on every street corner in downtown Philadelphia at the going price of

Ten Cents Apiece/Three for a Quarter
there was one vendor who occupied a prime location in the City Hall courtyard, and was therefore able to command a premium price. His sign read
Ten Cents Apiece/Two for a Quarter

I always thought we could explain that one away as a case of poor math skills. But now our frequent (and frequently brilliant!) commenter Thomas Bayes sends along this photo of a sign that he recently spotted at a gas station convenience store, and which I’m finding a little harder to get my head around:

Thomas reports:

I asked the person behind the counter if she could sell me one pack for $1. She said no. I asked if she would throw one of the packs away for me if I bought two. She seemed genuinely puzzled. I drive an SUV, so I wish they’d apply this scheme to the gas they sell.

Here’s your chance to get creative. Give me an explanation consistent with rational behavior and orthodox economic theory.

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Destruction Paper

It’s well understood that if you see the world through sufficiently Keynesian eyes, you might welcome a destructive hurricane or the threat of an alien invasion (together with the frantic spending it would stimulate) as just the ticket to lift the economy out of a recession.

What seems to have been largely overlooked is that even in a thoroughly non-Keynesian world where markets work perfectly (or as perfectly as they can in the presence of a distortionary income tax), and recessions cure themselves, we might still want that hurricane.

Or, because we can’t always call forth hurricanes when we need them, we might want our government to simulate their effects by diverting funds from useful to destructive spending projects — or just occasionally showing up at people’s houses and trashing their furniture.

Here’s why: Hurricanes make us collectively poorer. When we’re poorer, we work more. When we work more, the government collects additional income tax revenue. But — taking total government spending as given — the government can’t continue to collect additional revenue forever; sooner or later it must lower tax rates. (This assumes we’re on the good side of the Laffer curve, where the way to collect less revenue is to lower rates, not raise them.) When tax rates fall, labor markets work more efficiently. So much so, in fact, that the efficiency gains can more than compensate for the initial destruction.

I only realized this recently, and it surprised me (along with several others I showed it to) enough that I wrote it up as a short paper. (Update: A more recent version of the paper is here.) I also looked back through my blog archives to see how badly I’d gotten this wrong in the past.

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Multiple Comments

Following up on yesterday’s Keynesian Cross post:

  1. The point, for those who missed it, is that using exactly the same reasoning that we find in Eco 101 textbooks to derive the Keynesian multiplier, we can conclude that sending all your money to me will make everyone rich. The conclusion is absurd; therefore the reasoning is invalid. And reasoning that’s invalid in one context is also invalid in another.
  2. Some commenters thought that my version of the Keynesian cross argument was an unfair caricature. I invite those commenters to peruse some actual Eco 101 textbooks. For example, they might browse through the section labeled “The Income-Expenditure Model” in a widely used textbook called Macroeconomics. The authors are Robin Wells and Paul Krugman.
  3. Let’s review the logic of that model. (See yesterday’s post for explanations of the notation.)

    Step I: Start with an accounting identity (in this case C+I+G).
    Step II: Throw in an empirical regularity (in this case C=.8Y).
    Step III: Combine the two equations to get a third equation (Y=5(I+G).)
    Step IV: Do a thought experiment involving a policy change (e.g. an increase in G) and predict the outcome by assuming that your equations will continue to hold after the policy change.

    By contrast, my alternative model starts with an accounting identity (Y=L+E), throws in an empirical regularity (Y=.999999E), combines these equations to get a third (Y=1000000L) and then predicts the outcome of a thought experiment (send me your money!) by assuming that the equations will continue to hold. In other words, yes, exactly the same logic.

  4. The problem with the Landsburg multiplier story is that after you send me your money, the equation Y=.999999E is not likely to remain true. The problem with the Keynesian multiplier story is that after you increase government spending, the equality C=.8Y is not likely to remain true. Why not? Well, for one thing, if the government buys you a bowl of Wheaties, you’re correspondingly less likely to go out and buy a bowl of Wheaties for yourself. For another, if the government spends wastefully, you, as a taxpayer, are going to end up poorer, which means you’ll probably consume less. The exact nature of the change depends on the exact nature of the government spending. But there’s surely no reason to buy into the model’s assumption that there will be no change at all.
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The Landsburg Multiplier: How to Make Everyone Rich

Today’s lesson is about the Keynesian multiplier.

If you studied economics from one of the classic textbooks (like Samuelson) you might remember how this goes. We start with an accounting identity, which nobody can deny:

Y = C + I + G

Here Y represents the value of everything produced in (say) a given month, which in turn is equal to the total income generated in that month (because producing a $20 radio allows you — or perhaps you and your boss jointly — to earn $20 worth of income). C (which stands for consumption) is the value of the output that ends up in households; I (which stands for investment) is the value of the output that ends up at firms, and G (which stands for government spending) is the value of the output that ends up in the hands of the government. Since all output ends up somewhere, and since households, firms and government exhaust the possibilities, this equation must be true.

Next, we notice that people tend to spend, oh, say about 80 percent of their incomes. What they spend is equal to the value of what ends up in their households, which we’ve already called C. So we have

C = .8Y

Now we use a little algebra to combine our two equations and quickly derive a new equation:

Y = 5(I+G)

That 5 is the famous Keynesian multiplier. In this case, it tells you that if you increase government spending by one dollar, then economy-wide output (and hence economy-wide income) will increase by a whopping five dollars. What a deal!

Now, though I cannot seem to find a reference, I have a vague memory that it was Murray Rothbard who observed that the really neat thing about this argument is that you can do exactly the same thing with any accounting identity. Let’s start with this one:

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Cato Unbound: The Political Economy of Recycling

Here’s why recycling poses a policy dilemma: To keep people from dumping their trash on their neighbor’s lawns (or, when they burn it, in their neighbor’s lungs), we have to keep the price of landfill space artificially low. But once you’ve made landfill space cheap, you weaken the incentive to recycle, so arguably we get too little recycling. One solution is to pump up that incentive by casting recycling as a moral imperative. Unfortunately, once people believe recycling is a moral obligation, we’re liable to get too much of it.

This month’s issue of Cato Unbound is titled “The Political Economy of Recycling”, with a lead essay by Michael Munger of Duke University expanding on these and related points, with responses by Edward Humes, Melissa Walsh Innes and myself.

Over the course of the next month or so, we’ll be posting responses and re-responses to each others’ essays, as the mood strikes us. The best of your comments here might well find their way into some of my posted responses there.

Below the fold, a brief teaser from my essay:

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What’s a Bitcoin Worth? (Wonkish)

This might be one of those questions I’ll eventually be embarrassed for asking, but…..

Imagine a future in which Bitcoins (or some other non-governmental currency) are widely accepted and easily substitutable for dollars, at an exchange rate of (say) $X per Bitcoin.

Then if there are M dollars and B bitcoins in circulation, the money supply (measured in dollars) is effectively M + X B .

Money demand is presumably P D, where P is the general price level and D depends on things like the volume of transactions and the payment habits of the community. (If it helps, we can write D = T/V where T is the volume of transactions and V is the velocity of money.)

Equilibrium in the money market requires that supply equals demand, so

M + X B = P D

Now M is determined by the monetary authorities; B is determined by the Bitcoin algorithm, and D, as noted above, is determined outside the money market.

That leaves me with two variables (X and P) but only one equation. What pins down the values of these variables?

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To Hold You Over….

Sorry to have been so silent this week; various deadlines have kept me away from this corner of the Internet. I’ll be back in force next week for sure. Meanwhile, if you’re looking for some good reading, this is the best thing I’ve seen all morning.

Edited to add: “Best all morning” was not intended as damning-by-faint-praise. It’s actually the best of many mornings.

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Friedman on Psychic Harm

Four terrific posts by David Friedman, partly on psychic harm, partly on talking about psychic harm. I’d recommend these highly even if they hadn’t invoked my name.

Landsburg v Bork: What Counts As Injury?

Response to Bork and Landsburg

Frightening Ideas

Why Landsburg’s Puzzle is Interesting

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Missed It by *That* Much

Why do senior citizens get so many discounts? A lot of it is because they have the time to shop for bargains — so if you don’t give them a bargain, they’ll find someone else who will.

We talked about this and other forms of discounting (or, in economic jargon, “price discrimination”) in my Principles class just last week, emphasizing that it does no good to hand out discounts willy-nilly; instead you want to target them to the most price sensitive customers. That’s why you sometimes have to jump through hoops (like filling out a rebate form) to get your discount — the customers who are motivated to fill out a rebate form tend to be exactly the same customers who are most likely to look elsewhere for a good price.

We talked too about how the airlines have always strived to separate business travelers from leisure travelers so they can charge the business travelers more and the leisure travelers less — the leisure travelers being more likely to take the train (or just stay home) if they don’t get a bargain. The problem, though, is that it’s hard to tell who’s a business traveler and who’s a leisure traveler. So historically, there have been devices like discounts for those who stay over a Saturday night, which is something a business traveler is unlikely to want to do.

Now I can go back to my students and tell them something about the value of staying awake in their economics classes. Because someone who’d obviously absorbed this lesson well has started a new site called GetGoing that takes this idea and runs with it. Here’s how it works: You book two conflicting itineraries, say a trip to San Francisco and a trip to Atlanta on the same date. You are quoted prices that are typically about half what you’d get elsewhere. You agree to fly. And then it books one of the trips, chosen randomly.

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Legal Problems

Economists often say that the law should be written to promote efficient outcomes. That’s more ambiguous than it sounds.

Suppose I want to take an action that causes you harm; for example, I want to cut down a tree that you like looking at. How do we tell if that action is efficient?

Definition 1. The action is efficient if my willingness to pay exceeds your willingness to accept. For example, if I’m willing to pay $100 for the privilege of harvesting the tree, and if you’d accept less than $100 to part with it, then the tree-cutting is efficient.

Definition 2. The tree-cutting is efficient if it would occur in a world with no transactions costs (i.e. a world in which there are no impediments to bargaining).

In many circumstances, these definitions are equivalent, and economists often pretend they’re equivalent always — but sometimes they’re not.

Example 1. I want to punch you in the nose non-consensually. (The non-consensuality is a big part of my enjoyment.) I’d pay $100 to punch you in the nose, and you’d accept $50 to take the punch. By Definition 1, the punch is efficient. But the punch would be unlikely to occur in a world with no transactions costs, because it would require bargaining, hence consensuality on your part, which kills my interest. So by Definition 2, the punch is inefficient.

Example 2. I am willing to pay $100 to cut down a tree; you are willing to accept no less than $150 to part with it. By Definition 1, the cutting is inefficient. But part of the reason I’m willing to pay only $100 is that I’m credit constrained. In a world with no transactions costs, I’d borrow more, and would be willing to pay $200 to cut down the tree. So by Definition 2, the cutting is efficient.

Example 3. I am willing to pay $1000 to cut down a tree; you are willing to accept $500 to part with it. By Definition 1, the cutting is efficient. But the only reason I’m willing to pay so much is that I make an excellent living in my job as a mediator who helps people overcome transactions costs. In a world with no transactions costs, I’d be much poorer and would be willing to pay only $200 to cut the tree. So by Definition 2, the cutting is inefficient.

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How Markets Work

A while back, I posted a link to the first of my four talks at the 2012 Cato University. Today, I’m posting the second talk, titled “How Markets Work”, with the others to appear eventually.

Incidentally, I won’t be at the 2013 Cato U, but other stellar speakers will be. This really is an extraordinarily well run event, and I’ve met many fascinating people every time I’ve been there. It’s not too late to register!

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Debt and Growth

Is the public debt a drag on economic growth? Economist Salim Furth reviews the evidence here and finds cause for alarm.

My own instincts are substantially less alarmist, but it should be noted that unlike me, Furth (and those he quotes) have spent substantial time thinking hard about this question.

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Romer on Minimum Wages

Christy Romer, writing in the New York Times, deems the Earned Income Tax Credit a more palatable alternative to the minimum wage. So do I. (So, I feel confident, do the great majority of economists). But there is almost no overlap between Romer’s reasons and mine. I believe her reasons are wrong.

First, Romer observes (correctly) that while the minimum wage tends to reduce employment (though perhaps not by very much), the EITC has the opposite effect. That’s because the minimum wage is essentially a tax on hiring unskilled labor, while the EITC is a subsidy. When you tax something you get less of it; when you subsidize something, you get more.

But, contra Romer, that’s no reason to prefer the EITC. Since when, after all, is it automatically better to have too much of something than too little? Underemployment and overemployment are both bad things. Indeed, if the minimum wage (for whatever reason) has very little effect on employment while the EITC increases it substantially past the efficient level, that’s a good reason to prefer the minimum wage.

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Thoughts on the Minimum Wage

The usual case against the minimum wage has three components:

  1. Minimum wages reduce employment among unskilled workers.
  2. Therefore minimum wages are bad for unskilled workers.
  3. Therefore minimum wages are bad policy.

The problems with this case are that

  1. Minimum wages might not reduce employment very much.
  2. Even if they do, that doesn’t make them bad for unskilled workers.
  3. Therefore we cannot conclude (via this route) that minimum wages are bad policy.

Minimum wages are bad policy, though — but for entirely different reasons.

I’ll get to those reasons shortly, but first let’s examine the traditional argument a little more closely. I’ll number my paragraphs to make it easier for commenters to respond.

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Paul Krugman Hopes You’re Stupid

Paul Krugman, apparently relying on the stupidity of his readers, opens with this quote:

“At some point, Washington has to deal with its spending problem,” Speaker John A. Boehner of Ohio said Wednesday. “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.”

Then Krugman comments as follows:

22 years, huh? Indeed, Boehner was elected in 1990, and entered the House at the beginning of 1991. So what kind of can-kicking was going on during his first, say, decade in office? Here’s the picture:

Hmm — it sort of looks as if the US was sharply reducing its debt during the presidency of a guy named, I don’t know, Bill something or other.

See what he did there? Boehner says something about spending; Krugman responds with an irrelevant chart depicting debt, and hopes you won’t notice he’s completely changed the subject.

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Stress Test

A man applies for a job, which requires him to undergo three days of testing. But just before the testing period begins, he gets another good job offer. How does this affect his effort and performance?

If you’ve got your economics-blinders on, you’ll probably answer: Once he’s got an offer in hand, he won’t try as hard and therefore won’t do as well. But Michigan grad student Susan Godlonton decided to put that theory to the test. She was here in Rochester this week to tell us what she learned.

Godlonton did her research in Malawi, where her research funds went a long way. 278 job applicants were recruited for a three-day training program, with job offers contingent on their performance. At the beginning of the training period, about 20% of the applicants (randomly chosen) were offered an alternative job; another 20% were randomly told they’d not be getting the alternative offer. (Still others were told they had various probabilities of receiving the alternative offer, but let’s concentrate on the extremes.) These alternative offers were kept secret from the evaluators at the training session.

The result: After controlling for background characteristics such as performance on standardized tests, previous experience, age, and so forth, applicants with no outside offer perform considerably worse in the training sessions, as measured by written exams, and the quantity and quality of their verbal participation. Those with alternative offers are 11.3% more likely to make verrbal contributions, and their verbal contributions are better.

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Why The Debt Ceiling Matters

A number of commenters (at least one here and several elsewhere) have asked why we need a debt ceiling. If the Congress wants to spend less, why don’t they just go ahead and spend less?

The answer is that different spending programs command different majorities. Snip and Snap vote to fund rabbit hospitals; Snap and Snurr vote to fund trapeze subsidies; Snurr and Snip vote to fund lava lamp research. Plausibly, they’d all prefer to eliminate all these programs. Even if Snap thinks rabbit hospitals and trapeze subsidies are both great bargains, he might not be so happy about getting two for the price of three.

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I Don’t Get It

The frequently brilliant David Henderson seems to me to have fallen off a cliff in his (limited) defense of the recent tax bill. David thinks it’s a (relatively) good thing that under the new bill, income taxes rise only for those making over $400,000 and the estate tax is locked in only for estates over $5 million. (Relative, that is, to an across-the-board increase.)

David, in other words, seems to be saying that it’s a good thing that the tax code just got more progressive, and that a very small number of people are now going to bear a significantly greater share of the burden. I disagree.

Taxes are too high because spending is too high. But taking the path of spending as given (and David is right when he says that the delay of the sequester bodes very ill for that path), the question is not “how high should taxes be?”; that question is settled. Over time, taxes will be high enough to cover the spending. The only question is “how should the tax burden be distributed?”. The answer the politicians have agreed on is “a whole lot less equally”. They’re taking less now than they might have, but they’ll have to take more in the future, and when that time comes, they’ll have set a precedent that the rich should bear a greater fraction of the burden than they did a month ago.

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Merry Christmas

I think I’ll make the reposting of this an annual tradition:

What I Like About Scrooge

scroogeHere’s what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.

Scrooge has been called ungenerous. I say that’s a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?

Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that’s fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.

Dickens tells us that the Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his 50 cooks and butlers to keep Christmas as a Lord Mayor’s household should—presumably for a houseful of guests who lavishly praised his generosity. The bricks, mortar, and labor that built the Mansion House might otherwise have built housing for hundreds; Scrooge, by living in three sparse rooms, deprived no man of a home. By employing no cooks or butlers, he ensured that cooks and butlers were available to some other household where guests reveled in ignorance of their debt to Ebenezer Scrooge.

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Carbon Tax Policy: No Simple Answers

Assuming carbon emissions damage the environment, should they be discouraged through taxation? And if so, should the tax revenue be earmarked for damage abatement, or should it be paid into general funds?

Elizabeth Kolbert, writing in the New Yorker, suggests that economic theory decides this question in favor of a carbon tax. As I pointed out last week, she’s plain wrong. As a followup to some of the discussion on that post, here’s a simple example to illustrate that no policy can be infallible:

A steel mill pollutes the air, causing $24 worth of damage to the business of a laundromat next door. (Or if you prefer, read $24 worth of expected damage to the owners of oceanfront property or farmers in currently temperate zones.)

If the steel mill is forced to bear the consequences of this damage, it reduces its output. This cuts the pollution damage by $12, and cuts the profits of the steel mill by $17.

Question: Which is the best policy?

  1. The steel mill incurs no penalty for polluting.
  2. The steel mill pays a tax (or fine) equal to the damage it causes; the revenue is used to reduce the national debt.
  3. The steel mill is required to reimburse the laundromat for all damage.

Answer: It depends. Consider the following scenarios:

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A Little Knowledge Is A Dangerous Thing

Writing in The New Yorker, Elizabeth Kolbert illustrates the power of analogy:

A man walks into a bar. He orders several rounds, downs them, and staggers out. The man has got plastered, the bar owner has got the man’s money, and the public will get stuck with the tab for the cops who have to fish the man out of the gutter.

…..

The man pulls into a gas pump. He sticks his BP or Sunoco card into the slot, fills up and drives off. He’s got a full tank; the gas station and the oil company share in the profits. Meanwhile, the carbon that spills out of his tailpipe lingers in the atmosphere, trapping heat and contributing to higher sea levels. As the oceans rise, coastal roads erode, beachfront homes wash away, and, finally, major cities flood. Once again, it’s the public at large that gets left with the bill.

In both cases, Kolbert endorses the “fair and logical” solution: The man should be taxed to incorporate the costs that his choices impose on the rest of society.

I like this game. Can I play too?

A man chooses to build his house on the oceanfront instead of 100 miles inland. This makes him especially vulnerable to rising sea levels and therefore leads him to lobby for a carbon tax. The man gets his house; the builders and contractors share in the profits, and the public at large bears the consequence of higher gas prices.

Or even:

Some people want to burn a lot of carbon, which raises global temperatures, imposing costs on owners of oceanfront property. Other people want to protect their oceanfront property, imposing costs on the people who want to burn a lot of carbon. A journalist at the New Yorker convinces her readers that the only “fair and logical” solution to this conflict of interests is to come down entirely on the side of the property owners, leading to the implementation of suboptimal policies. The journalist gets paid, the magazine editors congratulate themselves on the influence of their writers, and the general public suffers the consequences.

Should the property owner and the journalist be taxed for exerting their malign influences?

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How High Should Taxes Be?

How high should taxes be? High enough to cover expected outlays going forward — but no higher.

That’s because any additional revenue would be used to pay down the federal debt, which is a bad idea. It was almost surely a mistake to run up this much debt in the first place, but now that we’ve got it, the best thing to do is to keep it forever.

Here’s why:

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Sandy and the Ants

I was asked in another thread to refute the notion that Hurricane Sandy is “good for the economy” because at least it will create a lot of construction jobs.

I — and so many others — have so thoroughly debunked this notion in so many venues over the years that I fear I can find nothing new to say, so I’ll leave you with this:

If you find yourself in an argument about this, ask your opponent whether it’s “good for the ants” when you put a stick down their anthill, wiggle it around and destroy their infrastructure. Go ahead and acknowledge that this can sure put a lot of ants to work.

Or, for that matter….

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Kidney Failure

So Alvin Roth wins the Nobel Prize for, among other things, figuring out the best way to allocate kidneys subject to the constraint that you’re too damned dumb to use the price system.

Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.

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Krugman — So Right and So Wrong

Paul Krugman offers a nice thought experiment to illustrate why government debt, in and of itself, does not make the country as a whole any poorer:

Suppose that … President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?

The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.

OK, you can see what’s coming: a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.

Two comments:

Continue reading ‘Krugman — So Right and So Wrong’

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Aaagh!

I am buying a house, and am therefore faced with the choice between a 15 year mortgage at 2.875% and a 30 year mortgage at 3.49% (as of a couple of days ago; those rates have probably changed a little by now).

The main advantage of the 15 year mortgage is that it comes with a lower interest rate and, because I’m making larger monthly payments, it keeps my money out of the stock market, which is good if the market tanks. The main advantage of the 30 year mortgage is that it allows me to keep more money in the stock market for a much longer time, which is good if the market does well.

How should I weigh those factors? Economics tells me that I will solve this problem by forecasting the return on equities over each of the next 30 years, and computing, on the basis of my forecast, which mortgage will leave me richer in the long run. No, that’s not quite right. Actually, economics tells me that I’ll make many forecasts, assign each one a probability, and thereby compute two probability distributions for my future net worth and then choose the distribution I prefer.

Now let’s get serious.

Continue reading ‘Aaagh!’

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Enough Already!

Today’s email brings a gripe from Mark Skousen, the irrepressible impresario behind FreedomFest, who could have avoided this problem by being born in the old Soviet Union:

I was in the large Stop & Shop grocery store here in New York to buy some items, including a new tube of toothpaste. I like Colgate, but I can never seem to get the same toothpaste product.

Now I know why. Guess how many different types and sizes of toothpaste Colgate sells?

Ready?

Continue reading ‘Enough Already!’

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