Hidden Subsidies

A common issue in international trade is the deleterious effects of discriminatory health and safety standards. The idea is that one government can specify a standard that cannot be met by those outside the borders. The classic example is that of northeast butchers seeking to prevent the import of beef from western states made possible by the advent of refrigeration. Massachusetts, New York, and Pennsylvania, for example, required that meat sold within their borders be inspected by local authorities. The Commerce Clause of the US Constitution prevents such policies when they obstruct interstate trade. Another example is that of Thailand, which forbid the sale of American cigarettes on the grounds of health and safety, when domestically produced cigarettes, which were no safer, were permitted. 

This has Ricardian implications, it seems. The potential elements of comparative advantage are myriad, but one argument is that these elements include labor force preferences.  Specifically, that different working-condition standards provide opportunities for some nations to gain comparative advantage over other nations. 

It could be argued that a nation, by allowing poor working conditions, is providing an implicit subsidy, especially to labor-intensive industries.

The Rotten Eggs of the Ostrich

There's an old economists' joke about three people, a physicist, a chemist, and an economist, marooned on a deserted island. They've got three cans of food and have set themselves to getting them open. The physicist says that they could try to drop rocks onto the cans from a tree and hope to break open the cans. The chemist wonders if they could light a fire and burst open the cans with the heat. The economist, however, knows the true solution. 'Assume a can opener,' he says...

The can opener cited by the ostriches of libertarianism is the even distribution of power between the parties to trade. In their magical worldview, every transaction is entered into with complete knowledge by two rational parties operating on a level playing field. From this fantasy flows the article of faith that all transactions are to the equal benefit of all parties, and that all parties of interest are directly represented in the transaction. The only friction possible is the result of evil coercion or bumbling inefficiency by the dreaded government.

That this is not true is hardly the point. Frictions are everywhere. Coercion can be committed by private parties. There is indeed a commons. All of these simple truths are outside the libertarian's model. Indeed, they are sacrificed on the holy altar of property rights and individual liberty, during the libertarians' mass, immediately before the blessed incantation, 'You're on your own, pal.'

That which is tidily dressed up as liberty and freedom is, at the end of the day, simply a desperate grip on the status quo, the maintenance of which is the only firm belief of this species of ostrich. What is left to inference is that liberty and freedom, to the libertarian, are commodities like any other, the just allocation of which can be only be to the highest bidder.

There consists a slight variant on the 'level playing field' canard. Some libertarians welded to a particularly acute manifestation of the fantasy argue that those who wield mighty economic power over their fellows, and are thus able to transact in a manner which is spectacularly self-advantageous, can only do so because society, in its only true libertarian expression, the market, has deemed them to be of greater value than their fellows. Such is the moral bankruptcy endemic to this worldview.

The libertarian ostrich is a hearty beast, however. It attaches itself like a barnacle to economic power, and is staggeringly resilient in the face of such natural predators as downturns, empiricism, and moral reasoning. It's found the can opener, it's sure to tell you. If you can't see it, your head must be above the sand.

The Shallow End of the Charles

It seems the sort of people who whine about overpaid government employees are the same sort of people who claim executive compensation is driven by market forces.

A better explanation of how all of this tricky business works can be found here.

Quote of the day - Bailliol

"The quad at Balliol is the scene of the well-known limerick that parodies the immaterialist philosophy of Bishop Berkeley:

There was a young man who said, God

Must think it exceedingly odd

If he finds that this tree

Continues to be

When there's no one about in the Quad

and also of the response, by the Balliol-educated Catholic theologian and Bible translator Ronald Knox, which more accurately reflects Berkeley's own beliefs:

Dear Sir, your astonishment's odd:

I am always about in the Quad.

And that's why the tree

Will continue to be,

Since observed by, Yours faithfully, GOD.

via

[Full Disclosure Announcement]

I took part in a seminar on deficits and debt this last Friday at NC State. The seminar was made possible by a grant from the Koch Foundation. As a participant, I received a modest stipend. In accordance with previously stated policy, I am disclosing that fact.

Quote of the day - Mackay

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

MLK Day Every Day

Today, our nation honors its single greatest citizen, Dr Martin Luther King, Jr. Dr King seized upon the ideals of the founders and sought to bring intellectual honesty to the precept, "Justice for all." Like so many people of beneficent conscience, he sought to remake the world in the image of what it could be. Unlike so many before or since, he succeeded, at least in moving our society toward that goal, chiefly through the relentless courage of his convictions.

In the immediate aftermath of the Second World War, black Americans who'd served overseas began to agitate for the sort of equality to which they'd been exposed in Europe. They came to realize that, if they were to fight and die for the American cause, perhaps that cause ought to include their interests. From this burgeoning movement emerged Martin Luther King. A young minister with a degree in divinity, he was radicalized by the rampant culture of abuse inflicted upon American blacks, particularly in the south. His expansive philosophical interest led him to, among others, Henry Thoreau, whose views on the tyranny of the majority were the intellectual foundation of Dr King's interpretation of the problem faced by black Americans, and Mohandas Gandhi, whose philosophy of non-violence was the inspiration for Dr King's solution.

The importance of the cultural shift under way in the 1950s to the effectiveness of Dr King's message cannot be overstated. In the years after the Second World War, Americans collectively enjoyed a growth in prosperity previously unseen. As more and more white Americans escaped poverty and enjoyed President Roosevelt's "freedom from want," it became increasingly clear to non-whites that they were not to be included. The expansion of radio and the advent of television hammered home the point that economic security and middle class luxury in 1950s America were monochromatic. Radio and television also provided the viscerally powerful orator an audience wider than that enjoyed by earlier prophets.

In 1965, Dr King's focus on social improvement expanded to include the economically disadvantaged, regardless of race. The escalation of the war in Vietnam struck at the heart of Dr King's fervent belief in non-violence. He also came to see conscription, as practiced in 1960s America, as an unfair burden upon the less fortunate, and blacks in particular. His inclusion of poor whites in the pantheon of the dispossessed whose lot he sought to improve posed a particular threat to the political and economic establishment because then, as is still so sadly the case now, this establishment relies upon poor whites as their agents of oppression, forming a bulwark against the political and economic gains of poor minorities.

That Dr King was killed before his job was done is not to be mourned. It is not appropriate, either, to draw primary inspiration from his tragedy. It is a disservice to his legacy to focus our attention too greatly on any aspect of his story beyond his message. Dr King was no utopian; he lived in, and was of, our time. He did not advocate equality of result, merely equality of opportunity. Much of the last forty years has seen the rise of philosophies committed to the maintenance of the status quo, such as free-market fundamentalism. While this would surely sadden Dr King, it is important to take a long view, as Dr King acknowledged when he observed that “The arc of the moral universe is long, but it bends toward justice." To recognize that our society has come so far in furtherance of the betterment Dr King envisioned is not to blindly settle for what progress has been made, but rather to understand how much more is possible.

The holiday in honor of Dr Martin Luther King, Jr comes once a year, in January. Every day that we consider the plight of the poor and of the disadvantaged and work toward improving our shared prosperity, however, is Martin Luther King Day.


"True compassion is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring."

Quote of the day - Krugman on fantasy

"There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs." 


-Paul Krugman

Robin Wells on Mankiw and the Future of Economics Education

We Are Greg Mankiw… or Not?
by ROBIN WELLS

On Nov. 2^nd, a group of students in Harvard University Ec10, the introductory economics class taught by Greg Mankiw, staged a walk-out. In an open letter, the students lambasted Greg’s course and his textbook for “espous[ing] a specific – and limited – view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today…..There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.” 

I am sure that many of us who have taught introductory economics or who have written an intro economics textbook (a much smaller subset, and I fall into both) felt a pang of sympathy for Greg when we heard about the walk-out.  If you have ever faced a large lecture hall of restive intro econ students, or coped with a voluble student with an ax to grind, you can feel some solidarity: we are Greg Mankiw too. 

But just how far should that sympathy extend?  Is Mankiw simply the target of fuzzy-minded youth who are more intent on making a statement than engaging in reasoned inquiry? Or, is Mankiw – and much of the profession, for that matter – getting a needed reality check about the need to re-orient the way we teach economics? 

First, let me say what this essay is not.  It is not an attempt to promote my textbook over Mankiw’s nor an exercise in partisan jousting.  I don’t find a walk-out a useful way to communicate displeasure with an instructor – better to invite him or her to a friendly debate with opposing views. This essay is not a critique of Mankiw’s teaching approach: I was not there to witness it, and every instructor will differ in political preferences and emphasis.  And neither will this essay advocate a root-and-branch re-think of how to teach introductory economics for both pedagogical and practical reasons.  I consider standard microeconomics to be an invaluable introduction to how to reason about the allocation of scarce resources.  Moreover, most intro econ instructors are stretched far too thin to contemplate a wholesale revision of their courses.   

But what I will say is this: something is shifting out there, and we ignore it at our peril. It would be very easy to dismiss the student walk-out as an exercise in intellectual laziness and grandstanding.  (After all, as many have pointed out, Keynesian models can’t be taught until second semester of Harvard Ec10.)  But perceptive instructors know that sometimes a stupid question is more than a stupid question.  And a really perceptive instructor will take a seemingly stupid question and turn it into the insightful question that the student should have asked. 

Right now the general public views the economics profession with a large measure of distrust and in some cases outright contempt. Students are entering the worst job market in well over a generation, without much prospect of improvement.  Many of them have seen their parents’ lives turned upside down by financial troubles.  They face being members of the first generation in American history with a lower standard of living than their parents.  Income inequality has reached levels not seen since the Gilded Age.  There are over 4 million long-term unemployed.

In this environment, instructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics.

But how does an instructor do this in an introductory economics?  I think it’s largely a matter of shifting our perspective to let go of the certainties that were part of our economic training and admit to the painful economic uncertainties that many Americans now inhabit.  Here are four ways to help bring that shift to the classroom:

Provide Context.   Compared to past years, instructors need to acknowledge the limits of free markets earlier in their courses. Students should understand the difference between the conceptual importance of free markets and their real world limitations. Explain that much of the current economic distress arises from markets that don’t behave competitively — the labor and financial markets.

Build Trust.  Trust is built when the instructor compensates for the one-sided nature of the relationship by treating students’ viewpoints with respect.  And this is where the art of the perceptive instructor is most likely to be needed.  For example, to the microeconomics student who protests that Keynes and Adam Smith should be given equal time, respond that the issue boils down to why some economists believe that the labor market doesn’t always clear while others believe that its does.  Then take a few minutes to discuss each side of the debate.   Yet, also make clear that valuable class time won’t be wasted on debating viewpoints that are contradicted by the data.

Address Distributional Issues.  The dramatic rise in U.S. income inequality compels us as instructors to address it.  While international trade and educational differences have clearly contributed to some of the rise, it’s clear that they are only partial explanations: they can’t explain the explosion of income gain at the top 1% of the income distribution, and particularly at the top 0.1%.  We shouldn’t extol the benefits of markets while ignoring today’s highly skewed distribution of the benefits.  While there is no single definitive explanation, there are many factors that are feasible topics in class: moral hazard and the setting of CEO compensation, the decline of countervailing forces such as unions and higher marginal tax rates at the top end, deregulation, asset bubbles and the financialization of the U.S. economy.  And then discuss: to what extent is the level of income inequality a legitimate policy target?

Finally, Adopt Some Humility.  It’s true that those of us who weren’t in the business of teaching Gaussian pricing formulas for CDO’s or touting the benefits of homeownership via sub-prime mortgages aren’t directly responsible for the economic mess we’re in.  But in the eyes of many students we are culpable to the extent that we dismiss the need for some re-think of the deference accorded to free markets in how we teach economics as applied to the real world.  Again, I want to emphasize that we make the distinction between communicating the importance of free markets as an intellectual building block and the frequent mis-use of free market concepts when it comes to making real world policy choices.  Lastly, in a world of liquidity-trap macroeconomics, soaring income inequality and an exploding Eurozone, we are going to have to admit that there are areas in which the profession just doesn’t know what the right answer is.  

And remember, there is such a thing as a first-mover advantage.  So schedule a teach-in before your classroom is occupied.

via INET blog

One of the central issues here is that many economics departments are the unabashed representatives of business interests. The austerity in academia advocated by, among others, the Wall Street Journal has allowed powerful captains of industry to step in and provide much needed research funding. That largess comes with a quid pro quo, of course. Thus, economics departments begin to offer courses focused on "economic freedom," "free exchange," "morality of markets," "spontaneous order," and other such Orwellian shorthand for "you're on your own."

For those with a genuine interest in expanding students' understanding of markets, their interactions, and their failures, Dr Wells offers a sober and sane prescription. Unfortunately, at the institutions most in need of her advice, this essay is likely to be regarded as collectivist noise.

Latest Class Warrior

Step right up, Alan Reynolds!

According to Alan Reynolds in the WSJ, those drawing attention to heartbreaking income-inequality statistics should be in favor of recessions. Why might this be? Take it away, Mr Reynolds:

But here's a question: Why did the report stop at 2007? The CBO didn't say, although its report briefly acknowledged—in a footnote—that "high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009."

No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.

The larger truth is that recessions always destroy wealth and small business incomes at the top. Perhaps those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce "inequality." [emphasis added]

So the lesson is that rational poor people would rather go hungry, and rational middle-income earners would rather join the rational poor, so long as they can shaft the saintly Job Creators™. Just to make sure the lucky-duckies know who is really hurting right now, Mr Reynolds tells readers that, "The latest cyclical destruction of top incomes has been unusually deep and persistent..." Rumors indicating that hordes of hungry millionaires are emerging angrily from gated hilltop communities in order to establish posh gated shantytowns cannot be confirmed at this time.

In all seriousness, the households we're talking about here earn north of $150,000/year. While it is true that reductions in income and wealth are relative, and a 30% reduction in income or wealth for a millionaire is far larger in absolute terms than a 30% reduction for a household earning less than $30,000, only one of those households is likely to go hungry in that situation, however. Not to mention the reduction in consumption by poorer households has a measurably significant impact on the economy, while the corresponding reduction in saving by wealthy households has very little relative impact in a downturn.

There was once a time in this country when the well-off observed a duty to contribute a fair share to the common good, and would be ashamed to be caught in open defiance of their responsibility. It should be no surprise to learn that Alan Reynolds is a senior fellow with the Cato Institute, an organization of ill repute committed to the notion that there is no common good, and the goal of making that so.

I am a Job Creator.

Hope, Updated