Chicago, Athens, and Jerusalem

Economics/Politics, Math/Sci/Tech, and Religion/Music/Arts

Archive for the ‘Economics’ Category

Timeless Wisdom

Posted by Eliot Weinstein on November 30, 2011

Economists are quick to speak of ‘market failure’, and rightly so, but a greater threat comes from ‘government failure’. Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with agencies to extract more money form taxpayers for their members. Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.

That is from The Rational Optimist: How Prosperity Evolves by Matt Ridley (page 182 of the US paperback edition), which I recently finished reading, and which economist David Henderson likes for other reasons. World-renowned economist Gary Becker expounds upon these same ideas on his blog.

Ridley’s astute observation could and should be a rallying cry for today’s free-market economists, moderate libertarians, economic conservatives, and centrist pro-market incrementalists. It’s certainly a much better starting point for lovers of liberty than the scorched-earth, radical sham-libertarianism of Ron Paul and his followers. Unfortunately, Ron Paul’s version of libertarianism is currently receiving much national attention, and as Will Wilkinson discusses in this article for The New Republic, the Paulite creed is both embarrassing and counterproductive to the cause of liberty (incrementalist or otherwise). Do read the whole thing, but Wilkinson is right on the money when he says,

If you were an evil genius determined to promote the idea that libertarianism is a morally dubious ideology of privilege poorly disguised as a doctrine of liberation, you’d be hard pressed to improve on Ron Paul.

I’m sure to get some flack for condemning Ron Paul (or I would, if anyone actually read this), but between Wilkinson’s TKO of the Paulite ideology and Ridley’s positive alternative, I am content to do so.

If, on the other hand, you enjoyed this criticism of Ron Paul, stay tuned for my upcoming post on what I think of the Republican Party’s 2012 presidential candidates, which will be posted in time for the start of the primary election season.

Posted in Economics, Politics | 2 Comments »

Obama’s Tax Proposals

Posted by Eliot Weinstein on October 30, 2011

President Obama has been touring the country to promote his “American Jobs Act“, along with a package of tax increases designed to pay for that jobs bill. Pundits have been debating Obama’s proposals for the last few months, but the best commentary on the president’s tax plan comes from the September 24 issue of the British newsweekly The Economist.

On taxes, Mr Obama has stapled together a clutch of previous proposals: returning tax rates on the wealthy to where they were before Mr Bush cut them in 2001, and curbing deductions such as those for municipal-bond interest, mortgages and charitable giving. He proposes a new “Buffett” tax, named after the billionaire investor who has protested against the injustice of paying a lower tax rate than his secretary. It would require anyone earning more than $1m to pay a tax rate equal to that of the middle class, though how that could be done is completely obscure.

Republicans accused Mr Obama of class warfare; he responded that “this is not class warfare. It’s math. The money is going to have to come from someplace.” But that is disingenuous. Maths demands that substantial money should be raised, not that it should all come from the wealthiest 2% of citizens, nor that Mr Obama should stick to his promise that 98% of households must never pay higher rates.

[emphasis added]

As I will (probably) say several times in future posts over the next few years, America is in deep fiscal trouble and to get out of it we will all have to bear some of the burden of higher taxes and reduced spending. Those on the left shout that we can’t “balance the budget on the backs of the poor”, but it is equally true that we can’t balance the budget on the backs of the rich. (As this article explains, it is not only true that we shouldn’t balance the budget on the backs of the rich, for reasons of economic efficiency and growth, but it is also true that we literally can’t balance the budget by hiking taxes on the rich, as the amount that would be raised by Obama’s potential tax increases is only a small fraction of what is needed to close the US budget deficit.) While wealthier Americans will pay proportionally more under any revenue-increasing tax reform (just as they pay proportionally more under our current system), Obama’s idea is to force high earners, small-business owners, and large corporations to bear virtually all of the burden of paying for our nation’s out-of-control spending. As The Economist continues,

Billionaires and secretaries will both surely have to pay more taxes; record deficits have long since replaced the surpluses of 2001, thanks in large part to Mr Bush’s across-the-board tax cuts. Yet Mr Obama is going about it in a clumsy way. Consider those millionaires he is insisting should pay more: there are 433,000 of them, or 0.3% of all taxpayers, according to the Tax Policy Centre, a non-partisan research outfit. On average they pay 20% of their income in federal income and payroll taxes, while the median taxpayer pays 11%. Just under a quarter of the millionaires pay as little, or less, than that median, a phenomenon almost entirely due to the lower rate levied on capital gains and dividends.

A far more efficient way to collect more taxes would be a genuine tax reform that maintained or lowered marginal rates while curbing the exemptions, credits and deductions that cost $1 trillion a year, including the lower rate for capital gains and dividends. This would boost productivity by making the tax code more efficient, while shifting more of the tax burden to the rich who now benefit disproportionately from such exemptions and account for Mr Buffett’s sub-secretarial tax rate. A lower corporate rate would offset the harm of higher capital gains and dividend taxes.

Or, as they will teach you in any public economics class, the solution is to “broaden the base and lower the rate”. While I don’t agree completely with The Economist‘s prescription (Milton Friedman persuasively argued that corporate income should not be taxed at all), it is far more reasonable than Obama’s proposals. The president can say a million times that his ideas represent “common sense” or the “balanced approach”, but that doesn’t make it true.

Posted in Economics, Politics | 1 Comment »

Thomas J. Sargent and Christopher A. Sims share Economics Nobel

Posted by Eliot Weinstein on October 10, 2011

The 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was jointly awarded today to Thomas J. Sargent and Christopher A. Sims “for their empirical research on cause and effect in the macroeconomy”.

Thomas J. Sargent, currently a professor at New York University, is a macroeconomic theorist who has contributed substantially to the fields of pure macroeconomic theory, monetary theory, and economic history. He was one of the leaders of the “rational expectations revolution” in macroeconomics and his work helped to establish the New Classical School of economics. More recently, Sargent has also developed economic models that incorporate learning and bounded rationality. Here is Tyler Cowen explaining Sargent’s contributions to economics.

Christopher A. Sims, currently a professor at Princeton University, is a macroeconometrician who led the profession in applying the technique of Vector Auto-Regression (VAR) to empirical macroeconomics. He also pioneered the use of impulse response functions in macroeconomics. Here is Tyler Cowen explaining Sims’s contributions to economics.

Although it is sometimes a mistake to interpret the Sveriges Riksbank Prize through a political lens, in my opinion today’s award represents a partial vindication of the free-market “freshwater approach” to macroeconomics (associated with the University of Chicago, the University of Minnesota, Carnegie Mellon University, and the University of Rochester) whose reputation has been unfairly dragged through the mud during the recent financial crisis. It equally represents a rebuke to the dirigiste “saltwater approach” to macroeconomics (associated with Harvard, MIT, and Berkeley, among others) and especially to the pre-1980s “dinosaur Keynesianism” espoused by Paul Krugman, who was awarded the Sveriges Riksbank Prize in 2008 amid what many said was an ideological victory for Keynesian Economics over Classical Economics. With today’s prize award, the wheel has turned. The “rational expectations” economists, led by Sargent and his allies Robert E. Lucas, Nancy L. Stokey, and Edward C. Prescott, proved that Keynesian Economics had an unsound theoretical foundation, while Sims demonstrated empirically with his VARs that the prevailing (Keynesian) economic models of the 1970s had mediocre predictive power. Today’s prize honors the contributions of two preeminent economists, and reflects the shift in the economics profession ushered in by their contributions.

[cross-posted at erweinstein.tumblr.com]

Posted in Economics | 4 Comments »

Festival of Links: The Best of March

Posted by Eliot Weinstein on March 31, 2011

The top stories from this past month that you probably didn’t hear about from your other blogs:

1. The King James Version of the Bible turns 400.

2. Will Wilkinson gives “A Scornful Review” to the new David Brooks novel The Social Animal.

3. “Illinois has 11 working nuclear reactors at six sites, more than any other state [in the USA]…”

4. Soon there will be no hiding place for Jacques Chirac.

5. Megan McArdle argues that “We Don’t Need More Stigma for Overweight Kids“. Excerpt:

But it seems to me that we frequently mix “healthy” up with “thin”.  Most people who switch to eating an actual healthy diet–little processed food, a lot of fresh fruits and vegetables, less salt and sugar–won’t end up thin.  Most people who exercise won’t lose much, if any weight without calorie restriction.  And most people who try to restrict their calories below what their body wants fail over the long term–eventually, their appetite wins.

6. A study released by a think-tank affiliated with the German Social Democratic Party (Germany’s large center-left party) reveals that nearly half of Germans believe that Israel is attempting to exterminate the Palestinians, and a slightly larger proportion of Germans agree with the statement “Jews try to take advantage of having been victims during the Nazi era”. As Tyler Cowen would say, “Yikes!”

7. Scott Adams gives his assessment of Charlie Sheen. That’s all the Charlie Sheen blogging you will get from me.

8. Rabbi Richard Jacobs is elected as the next president of the Union for Reform Judaism.

9. Economist Steven Horwitz, whose writings on cell phones I have previous blogged, cites telephone service as an example of an industry where cost has fallen and quality has risen (both dramatically). In other words, there is no great stagnation.

10. Vanity Fair’s offbeat interview with Paul Simon.

11. Very short Newsweek interview with Larry Summers. As some other bloggers have noted, the best line from Summers is, “I’m one of the few people who went to Washington to get out of politics.”

Posted in Arts and literature, Economics, Festival of Links, Music, Politics, Religion, Technology | Comments Off on Festival of Links: The Best of March

Remark of the month

Posted by Eliot Weinstein on January 31, 2011

Happy 2011, everyone!

The best remark made on the blogosphere this month comes from Russell Roberts, professor of economics at George Mason University. He writes:

We do not expect a biologist to forecast how many squirrels will be alive in ten years if we increase the number of trees in the United States by 20%. A biologist would laugh at you. But that is what people ask of economists all the time.

I find this idea to be a very useful corrective to the sentiments of many (including some economists) who have condemned the entire discipline of economics for, say, not predicting the recent financial crisis. However, Roberts makes a larger point that economics has gone astray though pretensions of “scientism”–the belief that economics resembles hard sciences like physics. As he says in his follow-up post,

The problem is that too many economists and others treat it [economics] as if it were like physics.

I think that Roberts overstates his case, but it certainly is interesting to read his half-defense, half-indictment of economics. Roberts repeatedly asserts that economics is closer to evolutionary and ecological biology than to physics. I find this argument particularly appealing because, as readers of my post on Leigh Van Valen will recall, evolutionary biology was my first intellectual love. At this point, I can’t directly rebut Roberts’s argument comparing economics to evolutionary biology, but I can say that there is another possibility, namely, that economics is  young science, closer to physics in the late 19th Century than to modern physics.

Here is Arnold Kling commenting on the same Roberts post.

In somewhat related news, here is an online mini-symposium, hosted by The Economist, regarding whether or not the economics profession should adopt a code of conduct.

Posted in Economics, Random Thoughts | Comments Off on Remark of the month

QE2 Roundup

Posted by Eliot Weinstein on November 30, 2010

A prominent topic of conversation among the political and economic cognoscenti is the second round of major quantitative easing recently enacted by the US Federal Reserve under the leadership of its chairman, Ben Bernanke. This second round has been (somewhat humorously) nicknamed QE2. Below are some collected links of interest regarding QE2, with brief comments.

1. Robert Barro, a Harvard University economics professor, offers a brief explanation of QE2 followed by a critique of the Fed’s proposed “exit strategy”, hosted by The Economist.

2. Greg Mankiw, also a Harvard economics professor and one of the most popular economics bloggers, has a short post that places him mildly in favor of QE2.

3. Megan McArdle, business and economics editor for The Atlantic, explains why China doesn’t like QE2, and why they’re being hypocritical (and we are too).

4. Scott Sumner, an economics professor at Bentley University and a standard-bearer for mainstream (albeit slightly-right-of-center) monetary economics, provides seven reasons why conservatives should support QE2.

5. Gary Becker, economics professor at the University of Chicago, and Richard Posner, judge on the 7th Circuit US Court of Appeals, offer some contrary opinions here and here.

6. A handful of conservative economists signed an open letter to Ben Bernanke opposing QE2. This is primarily what Sumner is reacting to in the link above. Paul Krugman, a Princeton economics professor and New York Times contributor, attacks these signatories from the left, here and here. John B. Taylor, a Stanford economics professor and the most influential monetary economist among the signatories, defends the letter here.

7. Also from The Economist‘s Free Exchange blog, here are two short posts, the first on why QE2 skeptics are wrong to worry about runaway inflation (at least so far), and the second about some “inside baseball” at the Fed, particularly whether or not support for QE2 will remain when a new group of officials rotates onto the Federal Open Market Committee next year.

8. Paul Krugman also notes that inflation is low, and seems alarmed, here and here.

My own position on QE2 is closest to Sumner’s. While Becker and Posner make pretty convincing arguments that QE2 will have little positive effect, I prefer Sumner’s reasoning that nominal GDP growth is too low, and that QE2 is a relatively low-risk way of addressing that problem. However, part of me disagrees with Sumner in that  I suspect that the current recession has a large real component, as Arnold Kling and (to a lesser extent) Tyler Cowen have argued.  I think that one’s position on QE2 is largely influenced by whether one believes inflation is a bigger threat than deflation, or vice-versa. If you believe that (potentially massive) inflation is lurking in the US monetary system, then you are likely to oppose QE2 on the grounds that it might unleash inflation that the Fed will be unable or unwilling to rein in. Those who worry more about deflation tend to favor QE2, even if (like me) they are also concerned that real aspects of the downturn make government policy–both fiscal and monetary–nearly useless. As you may have gathered from the links I chose above, I am not concerned about short- or medium-term inflation, so I view QE2 as a low-risk method of potentially boosting the economy.

Posted in Economics | Comments Off on QE2 Roundup

More Kling on Social Security

Posted by Eliot Weinstein on October 24, 2010

Last month, I highlighted the comments of economist Arnold Kling regarding the Social Security (and Medicare) trust fund. I recently finished reading Kling’s book Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy. Chapter 1 of that book contains the best discussion of the causes of the financial crisis that I have read, and I highly recommend it, even though I do not endorse all of Kling’s diagnosis of or prescription for what is wrong with American democracy. Today, I am more interested in his comments on Social Security, which appear on pages 99-100 of the hardcover edition of Unchecked and Unbalanced.

Social Security does not incur investment risk. That is because Social Security taxes are not invested at all. They are paid to beneficiaries. Until this point, taxes have exceeded benefits, and excess revenues have been spent on other government programs. This excess spending is tracked in an account called the Social Security Trust Fund, which can  be thought of as a collection of IOUs from the rest of the Federal government to Social Security recipients.

Within a few years, Social Security benefits will start to exceed tax revenues, and the government will have to make good on its IOUs. Later this century, depending on how demographic and productivity trends play out, the Trust Fund will be exhausted, and the government will have to raise additional taxes to pay for Social Security benefits.

I would go so far as to say that thinking about Social Security with the image of money (or bonds) in a trust fund somewhere is downright pernicious. There isn’t any money stored away to pay for Social Security–just a promise by the government to repay the money it “borrowed” from Social Security excess revenues and in fact spent on other things. As I wrote in my previous post on this subject, Thomas Sowell once said that no one can borrow and save the same money simultaneously. To the extent that the Social Security Trust fund exists, it is a promise by the government (specifically Congress) to take money out of general revenues and spend it on Social Security benefits when the time comes that–as Kling described–benefits start to exceed revenues. I will conclude by stating what many others have written, namely that if you’re in your twenties or younger, don’t expect the government to keep its Social Security promise to you. One or both of the following will be the experience of my generation: 1) substantially higher taxes during our peak earning years as we (via the government) pay for the retirement and health care of our Baby Boomer parents, and 2) drastically reduced benefits from government programs like Social Security and Medicare when we’re old enough to receive those benefits.

ADDENDUM: Gregg Easterbrook lays out the facts on Social Security here. Also, in the October 2010 issue of The Atlantic, Michael Kinsley argues that the Baby Boomers should redeem themselves by turning down the Social Security largess about the be lavished on them and by helping to pay the way out of our nation’s fiscal hole.

Posted in Economics, Politics | Comments Off on More Kling on Social Security

Remark of the Week

Posted by Eliot Weinstein on September 5, 2010

This week’s Remark of the Week comes from economist Arnold Kling, who previously won Remark of the Week in June of last year. Kling writes, regarding the Social Security and Medicare trust funds:

In fact, we could immediately put $100 trillion gazillion dollars in the trust funds from the general budget, and then they would have enough money to pay Social Security forever. Supposedly.

The trust fund is a measure of what we are promising to pay future Social Security recipients. To me, it is nothing more than that. But what is going to fund Social Security down the road is not the promises that we pour into it today. It is the taxes that people will pay in the future.

Kling simply and eloquently makes a point that I have often found myself struggling to articulate–that the trust fund is an accounting fiction. As for Kling accusing Paul Krugman of not understanding the overlapping generations model, remember that–to paraphrase Thomas Sowell–no entity, not even the government, can borrow and save the same money simultaneously.

Posted in Economics, Politics, Random Thoughts | 1 Comment »

Paul Ryan is not a fraud

Posted by Eliot Weinstein on August 9, 2010

Paul Ryan is a Republican United States Congressman representing Wisconsin’s 1st congressional district. Over the past two years, he has become a leading voice among the Republicans on the subject of fiscal policy (government taxation and spending). Yesterday, superblogger Andrew Sullivan echoed economist Paul Krugman by accusing Ryan of being a fraud, writing:

I have to say that Paul Krugman made a very strong case that the young GOPer is still drinking supply-side Kool-Aid.

…I remain pretty much persuaded by Krugman’s broad critique, however. Cutting taxes at this point in American history, in the face of this much debt, strikes me as loony.

From my vantage point, it is Sullivan who is drinking Krugman’s hyper-partisan left-wing Kool-Aid. I understand that Sullivan is angry about Republicans who propose tax cuts without recognizing the need for substantial spending cuts and tax increases to put America’s fiscal house in order (and on that account I agree with him). But that’s not what Ryan is doing. Ryan developed his plan for across-the-board reductions in government spending as a way to ease the US debt burden without having to employ extremely high tax rates. Ryan further contends that we can climb out from under the debt through economic growth if we stimulate the economy with carefully-targeted tax cuts. There is a legitimate debate to be had about whether we could bolster economic growth and help claw our way out of the current recession with tax cuts, just as there is a continuing debate about the need for additional stimulus in the form of increased government expenditures (some in the form of aid to the states, which Congress is considering this week). While I am probably closer to Sullivan than to Ryan on the subject of whether or not we need tax cuts right now, it inefficient, ignorant, and just plain rude to label anyone who favors tax cuts as “loony”–we are, after all, still reeling from the effects of one of the largest recessions in history. It may be silly to think that we can tax-cut our way out of a recession, but from the standpoint of economic theory it’s no sillier than thinking we can government-spend our way out of a recession, which has been the policy of the Obama Administration and the Democrat-controlled Congress for the past two years.

Furthermore, Paul Krugman’s attacks on Ryan are at least somewhat spurious. Krugman alleges that Ryan was being disingenuous by having the Congressional Budget Office (CBO) only score the part of Ryan’s “Roadmap” involving spending cuts, while ignoring Ryan’s proposed tax cuts, which would understandably eat away at much of the savings that Ryan’s spending reductions would create. The only problem with this line of attack is that the CBO doesn’t, as part of its operations, score tax cuts. As Megan McArdle, the business and economics editor for the Atlantic, points out in an excellent blog post entitled “Krugman is Wrong on Ryan and the CBO”, scoring tax cuts is the responsibility of the Joint Committee on Taxation (JCT). And Ryan did ask the JCT to score his tax cut proposals, although the JCT turned him down–possibly due to its heavy workload scoring the tax provisions of healthcare reform.

As an aside, I should say that I agree with a few of Krugman’s criticisms of Ryan’s plan, notably that Ryan fails to specify precisely what programs he would cut to achieve some of his spending reductions, and that other spending reductions rely on cuts in politically-sensitive Medicare, which are unlikely to ever be enacted.

However, Krugman writes:

The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future.

This, of course, is just partisan vitriol. Ryan’s plan makes several useful contributions to the debate, even if it is not the most realistic or workable plan that has ever been proposed. Paul Ryan may not be the fiscal prophet that some on the right wish him to be, but he certainly doesn’t fit Paul Krugman’s caricature of a scammer, charlatan, or “flimflam man”.

Posted in Economics, Politics | 1 Comment »

Remark of the Week: Theory and Policy Edition

Posted by Eliot Weinstein on July 18, 2010

In a week relatively devoid of memorable quips (post a counterexample in the comments if you think I’m wrong), this week’s Remark of the Week goes to George Loewenstein and Peter Ubel, writing in the New York Times:

As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.

The op-ed is filled with interesting (if perhaps overstated) examples, so read the whole thing.

Here is Tyler Cowen on Loewenstein and Ubel. Tyler writes,

Often there is no nudge-based free lunch and we need a straightforward relative price shift

Here is Erik Voeten from The Monkey Cage on Loewenstein and Ubel. Erik elaborates,

Ultimately, changing relative prices is much more likely to meaningfully impact behavior deemed socially undesirable. So, making healthier foods cheaper is much more important than labeling unhealthy food.

Loewenstein and Ubel’s op-ed is mostly aimed at warning people that behavioral solutions are no panacea.…Yet, it strikes me that if they are right, their argument is really quite damning for the behavioral economics revolution. Essentially, they assert that traditional economic analysis has ultimately much more relevance for the analysis of major social problems and for finding solutions to them. Behavioral economics can complement this but cannot be a viable alternative. Within political science and other social sciences the insights of behavioral economics are sometimes interpreted as undermining the very foundations of classical economic analysis and warranting an entirely different approach to social problems. At the very least, the op-ed is a useful reminder that careful scrutiny of effect sizes matters greatly.

Although Loewenstein and Ubel may not have intended it as such, their op-ed provides even more evidence that mainstream economics offers useful and robust solutions to many pressing policy issues, and that challengers such as behavioral economics serve up “corrections” to the mainstream models that are limited in practical use. While there are some insights to be gathered from behavioral economics (especially when combined with experimental methods, such as John List‘s tests of prospect theory), as a movement it is unlikely to do much to revolutionize economics because it does not posit critiques of mainstream methods that are both novel and useful, especially concerning policy applications.

Posted in Economics, Random Thoughts | Comments Off on Remark of the Week: Theory and Policy Edition

The deed is done

Posted by Eliot Weinstein on March 23, 2010

After its passage by the House of Representatives Sunday night, President Obama signed the health care bill into law earlier today, declaring,

We have now just enshrined, as soon as I sign this bill, the core principle that everybody should have some basic security when it comes to their health care.

Meanwhile, fourteen states have filed suit in federal court to challenge the constitutionality of the new law, and the Republican National Committee has already raised over $1 million in donations by vowing to unseat congressional Democrats who voted for the bill, and to regain control of the House in the November elections.

Reuters has a good fact sheet on the provisions of the health care bill. Even more interesting are the predictions made by some of the leading lights of the economics blogosphere.

Bryan Caplan predicts that the health reform package will essentially not work, as families and firms game the system.

In contrast, Tyler Cowen predicts that the law, while working, will lead to a series of unintended consequences.

Megan McArdle offers eight predictions (more here) about how some of the putative goals of the new law will not be met.

Last but not least, Greg Mankiw muses on the trade-offs inherent in the health care legislation, and concludes,

My judgment is that this health bill adds significantly to our long-term fiscal problems.

Posted in Economics, Politics | Comments Off on The deed is done

Opportunity costs

Posted by Eliot Weinstein on January 26, 2010

From Reuters:

Bill Gates worries climate money robs health aid

Discussing the money pledged at the Copenhagen climate change summit last month, Gates wrote,

“I am concerned that some of this money will come from reducing other categories of foreign aid, especially health…If just 1 percent of the $100 billion goal came from vaccine funding, then 700,000 more children could die from preventable diseases.”

Also,

Taking the focus away from health aid could be bad for the environment in the long run, said Gates, “because improvements in health, including voluntary family planning, lead people to have smaller families, which in turn reduces the strain on the environment.”

Another discussion of Gates’ letter can be found here.

For more information about the trade-offs inherent in trying to solve global problems, read How to Spend $50 Billion to Make the World a Better Place, edited by Bjorn Lomborg.

Posted in Economics, Politics | Comments Off on Opportunity costs

Anecdote of the week

Posted by Eliot Weinstein on January 24, 2010

Earlier this month, economist Steven Horwitz and his wife went shopping for new cell phones. Here is an amusing (to me, at least) anecdote taken from Horwitz’s blog post about the cell-phone-buying experience:

We were talking with the salesman (from whom we have bought every cellphone we’ve ever owned) about the pricing of Blackberrys and he pointed out that Jody’s Storm was half the price of my Tour, even though the Storm is the fancier model with a touch screen and the whole iPhone feel to it.  He said “it might seem strange that the newer, fancier phone is cheaper” but before he could say anything, I quickly said “well I’m sure the Tour is in demand from business users who don’t want to learn the touch screen and want the latest of the more ‘traditional’ BB, while the Storm is for people like Jody who might get an iPhone or Droid instead.”  He said “yup.”

I quickly replied:  “it’s just like staying over a Saturday night for plane tickets – segmenting your market by price elasticity.”  He gave me that sad, shake of the head that economists often get from people when we go geek.

Posted in Economics, Random Thoughts | 1 Comment »

The Baucus health care bill

Posted by Eliot Weinstein on October 7, 2009

A few weeks ago, Senator Max Baucus (D-Montana), the chairman of the Senate Finance Committee,  introduced a wide-ranging proposal to reform the US health care system. Today, the independent Congressional Budget Office released their score of the Baucus bill, as Marc Ambinder reports. The upshot is that the bill will cost $829 billion. That is less than expected, and if implemented, the Baucus plan would actually reduce the federal deficit by $81 billion.

Sounds like a great deal then? Not so fast, says leading macroeconomist Greg Mankiw. Mankiw and Jim Capretta note that the Baucus plan structures subsidies to purchase insurance in such a way as to impose an effective tax on middle-income families. Under the Baucus plan, all individuals without health insurance would be required to purchase health insurance or pay a fine. The subsidies are designed to alleviate the financial strain of this requirement on the poor, but the subsidies phase out as family income increases. This creates a marginal tax on income, which Capretta calculates could reach 30% for families with incomes equal to twice the poverty line. Add that to existing income taxes, and the result is a strong disincentive towards higher income-earning for middle-class workers.

Do the benefits of covering millions of uninsured Americans at a reasonable price outweigh the costs of imposing a large tax burden on middle-income families? Decide for yourself, but let’s hope that the members of the Senate are being so measured in their deliberations.

Posted in Economics, Politics | 1 Comment »

More healthcare tidbits

Posted by Eliot Weinstein on July 27, 2009

1. Greg Mankiw points to a CBO report regarding the impact on the deficit of the healthcare reform bill currently working its way through the House of Representatives.

2. Marc Ambinder reports on Bill Clinton’s criticism of the CBO’s recent healthcare analysis, and on the new US obesity findings.

3. Bryan Caplan explains why health insurance companies don’t, as a rule, cheat–or provide substandard care to–the very ill.

4. Megan McArdle questions the conventional wisdom that adverse selection causes market failure for health insurance.

Posted in Economics, Politics | Comments Off on More healthcare tidbits

More from Scott Adams

Posted by Eliot Weinstein on December 31, 2008

Scott Adams, cartoonist and humorist best known as the creator of Dilbert, commissioned a survey of economists’ attitudes on current US political issues. The results came in just before the election (also see this CNN piece about the survey and Tyler Cowen’s quick summary and comment), and they don’t surprise me, but I am more interested in Adams’ continued small revelations about what he really believes (as opposed to irony or devil’s advocacy, tools he uses frequently). Here’s his personal view, also written shortly before the election:

I should pause here and confess my personal biases, since the messenger is part of the story. On social issues, I lean Libertarian, minus the crazy stuff.

Moneywise, I can’t support a candidate who promises to tax the bejeezus out of my bracket, give the windfall to a bunch of clowns with a 14 percent approval rating (Congress), and hope they spend it wisely.

Unfortunately, the alternative to the guy who promises to pillage my wallet is a lukewarm cadaver. I’m in trouble either way.

I wonder if Adams is pleased with the outcome of the election…

Posted in Economics, Politics | Comments Off on More from Scott Adams

More financial crisis links

Posted by Eliot Weinstein on September 24, 2008

1. Arnold Kling offers some very astute play-by-play commentary on the developing US financial crisis, here, here, and here. He has more detailed posts on specific issues here and here.

2. Jim Manzi’s long but helpful overview.

3. Analysis from University of Chicago professors Douglas Diamond and Anil Kashyap, in “Frequently Asked Questions” format.

4. Tyler Cowen presents arguments against and for the the bailout. See also his own thoughts on the bailout proposals.

5. The Wikipedia article on credit default swaps.

Posted in Economics, Politics | 1 Comment »

The cloister bell is ringing

Posted by Eliot Weinstein on September 15, 2008

The metaphor.

The reality:

Lehman Bros files for bankruptcy

Fed holds fresh AIG crisis talks

Dow Drops 500 Points

Wall Street mauled by Lehman bankruptcy, AIG fears

It’s not quite the (financial) end of the world, but we need to brace ourselves and think very carefully about what we (and our policy-making leaders) do next.

Posted in Economics | 1 Comment »

Remark of the Week

Posted by Eliot Weinstein on September 1, 2008

This week’s winner is previous winner Tyler Cowen, a prominent blogger and economist specializing in government, culture, and the arts.

I don’t have a lot of faith in the exact predictive powers of climate models, or for that matter economic models, but uncertainty about outcomes should make us worry more not less.  Uncertainty usually has two tails, not just one.

Cowen’s comment illustrates why, although I am somewhat skeptical of many claims associated with anthropogenic climate change and very skeptical of the specific predictions of most climate modelers, I favor moderate but immediate action to reduce carbon emissions and to prepare fail-safe measures for climate-related natural disasters. Provided, of course, that we can listen to economists as well as climate scientists and design policies with cost-benefit analysis in mind. On this subject, see William Nordhaus’ excellent book A Question of Balance: Weighing the Options on Global Warming and Freeman Dyson’s comments in his essay/review of that book.

Happy Labor Day to all my readers, and on this US holiday the thoughts and prayers of myself and my relatives go out to the residents of the Gulf Coast who have been separated from their homes, friends, and families by the hurricane-related evacuation.

Posted in Economics, Random Thoughts, Science | Comments Off on Remark of the Week

Remark of the Week: “Peak Oil” Edition

Posted by Eliot Weinstein on May 18, 2008

There is also every reason to believe that gas prices will be lower in the future than they are now, in spite of the peak oil rhetoric.

Steven Levitt, the Alvin H. Baum Professor of Economics at the University of Chicago and author of Freakonomics, discussing a scheme through which Chrysler pays for some of its customers’ gasoline. Here is more of Levitt criticizing the “peak oil” assertions.

Posted in Economics, Random Thoughts | Comments Off on Remark of the Week: “Peak Oil” Edition

Agreement with Me and Gintis RE: Krugman

Posted by Eliot Weinstein on May 18, 2008

One of Andrew Sullivan’s readers wrote:

Obama is an historic opportunity for the Dems of FDR proportions, a chance to remake the political landscape for a generation or more. And people like Krugman and his proxy Hillary, who want only political war, narrow short term score settling, are the alternative. If the Dems don’t nominate Obama, and go for Hillary…they will have shown themselves to be as corrupt, opportunistic, hypocritical, and small minded as the Republicans.

I say this as a life long Democrat who in 40 years of voting has only voted once for a Republican (who was running against Phil Gramm for congress)… [emphasis added]

Compare this with what I wrote about UMass professor Herbert Gintis, discussing Gintis’ critical review of Paul Krugman’s latest book:

[In contrast to Krugman, Gintis] is however, an insightful and fair-minded thinker who has repeatedly demonstrated that he doesn’t care about developing good rhetorical points for political debates, but rather about studying social problems such as poverty and poor schooling so that these problems can actually be ameliorated.

Posted in Economics, Politics | 1 Comment »

Remark of Last Week

Posted by Eliot Weinstein on February 11, 2008

“And when rational individuals face a miserable set of choices…they cannot do better than pick the best of a bad lot. We will not solve social problems if we pretend that they are caused only–or mostly–by the mad, the stupid, and the morally degenerate. But nor should we shrug our shoulders and declare that all is for the best in the best of all possible worlds. I hope that this book will show that although people tend to make smart choices, it is possible to offer them better ones.”

Tim Hartford, from his insightful and engaging new book The Logic of Life: The Rational Economics of an Irrational World. Hartford, a Financial Times columnist and editor and formerly an economist for the World Bank and Royal Dutch/Shell, draws on recent and important research from economics, psychology, sociology, and history to explain the social-scientific logic behind problems ranging from gambling and annoying coworkers to racism and political instability. As they say, read the whole thing.

At Marginal Revolution, Tyler Cowen is hosting an online book forum about The Logic of Life. Cowen gave the book as favorable review, as did Nobel Prize winners Gary Becker and Tom Schelling.

Note: posting will continue to be light due to a combination of a heavy workload and some ill health the past two weeks that put me behind on said work (don’t worry, it’s not anywhere near as bad as the bizarre and debilitating intestinal infection I had a year ago). There may be a few more short or pre-written pieces like this, but mostly I’ll be busy. Have a nice week everyone!

Posted in Economics, Random Thoughts | Comments Off on Remark of Last Week

Remark of Two Weeks Ago

Posted by Eliot Weinstein on February 11, 2008

Many people are holding out the hope that the government can somehow substitute for the pharmas, bolstered by the ludicrous claim that the government really discovers all the drugs. This is arrant nonsense; government-funded research discovers targets that might someday turn into drugs, if the Big Pharma chemists can: find a molecule synthesis can be economically mass produced; keep the molecule from killing rats, mice, dogs, or humans; get the molecule into a form that does not have to be directly injected into the bloodstream; tweak the molecule so that the liver doesn’t immediately chew it into pieces that no longer affect your target; and shepherd the entire thing through years of clinical trials. That’s just off the top of my head; research chemists will undoubtedly have more.

Megan McArdle, as part of her excellent continuing series on pharmaceutical companies and US policy regarding them.

Posted in Economics, Politics, Random Thoughts | 1 Comment »

A well-designed auction can benefit everyone

Posted by Eliot Weinstein on January 23, 2008

A very important auction will be held tomorrow.

Unlike some who doubt the utility of highly mathematical theoretical microeconomics such as auction theory and mechanism design (for which the Alfred Nobel Memorial Prize in Economics was recently awarded to Hurwicz, Maskin, and Myerson), consider the case of the 700 MHz wireless spectrum auction, which begins tomorrow. Don Dodge, a Microsoft employee (formerly of AltaVista and the original Napster) and technoblogger, explains why competition for the spectrum between Google and the existing cellphone companies combined with the US government’s apparently clever policies will lead to higher quality wireless service, and possibly open access to cell phone networks.

Posted in Economics, Technology | Comments Off on A well-designed auction can benefit everyone