Not Hard Enough, Apparently

It was an interesting juxtaposition to read Blinder immediately after Barro, partially because Blinder wrote Hard Heads, Soft Hearts a few years before Barro wrote Getting It Right, but more because of the fact that both (like most academics, I would imagine) thinly veil their political tendencies behind a façade of “objective economics” or universally appealing principles. Blinder inserts his political leaning (Democratic) in his presumptively desirable principles of equity and efficiency; by claiming that the poor are “inherently needier than the rich,” Blinder skips past his assumptions of what constitutes need and how resources ought to be distributed in the first place. Sustenance, clothing and shelter may be three things most would find necessary, but beyond that, need is extremely difficult to define if you’re not a politician standing for election. As such, our hard heads have problems rationally determining how to implement what our soft hearts desire. Sadly, further inherent inconsistencies exist in such a “simple” principle; such sentiments also bear a strong resemblance to the Marxian maxim, “from each according to his ability, to each according to his need.” Blinder, not a fan of rational expectations anyway, tends to discount some of the worst psychological effects of macroeconomic policy. For example, Charles Murray’s thesis in Losing Ground (that the Welfare state caused further regression into poverty by incentivizing single mothers to stay unmarried and out of work) might apply to several policies of income redistribution. Of course, Blinder has no visible problems with Welfare, Medicare, and Social Security (the holy trinity of the Welfare state), even though he later decries programs that take the hypothetical $10 from 25 million people and give 100,000 people $1,000 each. This is not to say that the Welfare state bears similar proportions, but the action is essentially the same: one group of people subsidizes another group of people by government mandate. Blinder’s purpose in using such an example is to show that government solutions often pander to special interests; however, it also demonstrates how government solutions unnecessarily pander to the people as well. Take the 2001 Bush tax cuts, for example: everyone currently paying taxes in America stood to gain from the bill at the expense of future generations of Americans who would have to foot the bill (if we lived in a semi-Ricardian world, anyway). Such policies provide reasonable counterexamples to Blinder’s explanation that parochial politics is all to blame; even presidents have constituencies: living, taxpaying Americans. However, the process of such pandering does have immense negative economic repercussions as Blinder points out.

Blinder attributes problems in most policies to poor or unintelligent policy design, products of a political system presently incapable of sufficiently sophisticated economic policy. In this sense, Blinder is right; since Aristotle, observers have noted the failures of democracy in achieving a just or stable system of redistributive justice. As Blinder goes on to show, these failures can be traced to the Constitution itself, which establishes a geographically-defined representative democracy. Blinder then poses the idea of random representation as a supposedly more equitable hypothetical, but admits that this destroys the concept of actual representation and would lead to near uniformity in politicians. While Blinder puts stock in the idea of linkage as a potential solution, this solution relies on individual politicians to establish the links themselves, rather than mechanisms, as all good economists would prefer. Some institutional changes that might make the legislature less dominated by “ignorance, ideology, and interest groups” include the use of more bipartisan committees, such as BRAC (Base Realignment And Closure), which Congress found to be the only way to vote to stop outdated military bases from hemorrhaging funds. Another possibility would be to increase some of the secrecy of Congress, making it more independent of interest group lobbyists. By closing markup sessions of bills, congressmen would be able to edit legislation without having special interests watching their investments, ensuring their influence on policy formulation.

Blinder’s discussion of the possibilities of the hard head, soft heart combination are absurdly simplistic, given that he’s suggesting using a hard head to parse out the efficacy or desirability one’s soft-hearted emotions. For one thing, he essentially claims that the Democrats have gotten the “ends” right, while the Republicans have a good grasp on the “means” (even though this is promptly mitigated by his examples of political stupidity). Perhaps Blinder is simply wrong about a lot of his unexplained assertions. Perhaps justice in income redistribution is irreconcilable with democracies or, more contentiously, justice in general. Perhaps Blinder’s metaphor of the rich man absentmindedly losing a $100 bill and not noticing does not correspond to the reality of taxation (where, as Barro shows, people vehemently resist attempts by the government to extract resources for social programs and spending). Perhaps reality does match Blinder’s specific exception to the legitimacy of his example: perhaps the government does act as a pickpocket. Perhaps the problem is with equity itself. Blinder says, “Conservatives must come to accept the principle of equity and realize that intelligently designed policies that promote equality need not interfere unduly with efficiency,” as though efficiency were the only grounds to reject such a principle. Perhaps conservatives simply believe that the people who generate money have a right to dispense with it as they please, or that a rich person may use their money to achieve a greater social or personal good than the government could. There’s also the possibility that some prefer the value of freedom to the value of equality. In short, nothing is as non-controversial as Blinder attempts to describe it, provided your head is hard enough.

To shatter all expectations, I won't discuss the environment in this post

To begin with, I have to say I was troubled with Barro’s solutions to many problems. After expounding for paragraphs to explain an issue he quickly states the “answer” with very little factual foundation. Quotes like, “Much smaller benefits from individual currencies would be enough to outweigh the saving in transaction costs from moving to a single currency,” and “In both situations the benefits from central planning are exaggerated and the rewards from competition are underestimated” are examples of broad statements which I felt weren’t sufficiently supported.

Anyways, on to things which were adequately discussed to create a conversation. One area which I thought held interesting but unexplored applications was his analysis of sports wages. Barro claims that athlete’s competitive wages are set far above the correct wages according to a social standpoint. This is due to the unique situation of sports where relative performance is more important than absolute performance. Barro quickly notes that, “The competitive interaction of sports teams differs from that among producers of ordinary goods,” because such competition doesn’t cause economic distortions. I think Barro’s claim that there is a unique situation surrounding sports is untenable or poorly described at best. Stock holders invest in corporations depending on the relative performance of its executives among other things. If GM headhunters convinced a Ford executive to switch teams, similar distortions would be seen as in the sports world. As a result, one could argue that such executive salaries might be much higher than the socially optimal level. Barro seems to leave the door open to attack of his normally libertarian values for the inclusion of salary caps on earning in a wide variety of fields.

Another interesting area touched on by Barro was provided by his comments on diversity. One of his explanations for supporting national division was that there is a “desire to have a reasonably homogeneous population within (a country’s) borders.” This claim is later restated in defense of decentralized government when he states, “The apparent chaos from this diversity should instead be viewed as a reasonably good match between public policies and the desires of residents.” In an aside he does mention examples to the contrary such as the US, Switzerland and Belgium but I believe he doesn’t give them the proper recognition that they deserve. Three of the strongest economies of the 20^th century were based on regions of diversity. I think there is a definite possibility that diversity of individuals and preferences can help encourage competition thus increasing efficiency. In evaluating universities and colleges, it has often been shown that diversity can help the performance of all those attending the school. Why could this not hold for nations?

Paying for Freedom

Coming from the liberal-turned-libertarian(ish) school of thought, I largely agreed with most things Barro had to say throughout the book, though there were certainly contentious claims that raised some eyebrows. For one, Barro's analysis classifying political freedom as a sort of luxury good was a surprising formulation. Barro says, "Rich places consume more democracy because this good is desirable for its own sake and even though the increased political freedom may have a small adverse effect on growth. Basically, rich countries can afford the reduced rate of economic progress" (11). By this logic, it is understandable why Great Britain and its colonies readily adopted democracy: it had imperialistically acquired wealth and could now sit back and spend. Seymour Martin Lipsett (and later Larry Diamond) analyzes all of the factors to democratization, and finds that general economic welfare (greatly associated with education and elements of civil society) is the best indicator of democratization, showing that richer areas can afford to consume more democracy. However, this view is undercut by the understanding that support for economic liberalization, globalization, and free trade are requisite to being a prosperous country in today's economy; in effect, a country would need to be a democracy to be prosperous in the first place.

The recipe for economic success--the enforcement of private property rights, maintenance of free markets, and minimal government spending--has been historically shown to be best promoted by democracies. After all, these conditions do not emerge from societies at random; they require a pre-existing commitment to the principles of liberalism, or at the very least an oligarchic dedication to acquiring wealth. However, Hegelians would note that democratization becomes inevitable under even an oligarchic government, given that the ideological conditions of those societies has already been sufficiently liberalized to guarantee democratization, which one may rightly note, is at least a good. It is suspect that a country with an oligarchic attitude towards wealth creation would suffer the costs of democracy, if it were not a superlative luxury good, or simply necessary to ensure the rule of law: another key tenet of economic liberalization.
Another interesting political idea Barro mentions is the possibility of secession, on a country-wide level. I am inclined to agree with his analysis, but am skeptical of the Pandora's Box of implications the possibility of secession and country reformulation might open. Firstly, how could one establish reasonable limits on secession that would enable legitimate secessions but restrict secessions by 1 dissatisfied household, for example? At what critical mass does an ethnicity deserve to carve its own country out of the country of their residence? What would happen if Arabs in Western Europe tried to do the same thing there? For another thing, how much more difficult would globalized trade be if trade agreements needed constant reorganization and renegotiation? If countries are sovereign (which they supposedly are), there could be no contracts binding a new government, assurances of the rule of law or protection of private property, which would certainly diminish the welfare of those nascent countries' citizens and create human rights crises at the same time. Take the recent example of Palestine's new government leadership, which amounts to much less than a full secession, but is causing significant geopolitical uproar, which is more than enough to distort market forces in a disastrous way. Barro's argument for specialization is convincing, but what about the arbitrariness of new political regimes, especially when it comes to international trade that it will be forced to rely on? Who is to say that brand new governments will or could have learned all the lessons of economic stewardship by the day they seceed? For that matter, what happens to such states when they fail? Do they promote terrorism by failing to consume enough democracy? After all, Barro implies a sort of market for democracy, meaning that some will choose not to consume any at all. Are costs to induce further production increasing? It would seem that costs of democratization should decrease as history continues, since mechanisms of adaptation and the intellectual foundation for such social organization has become more streamlined and widely tested. However, those in charge of making decisions concerning the consumption of democracy (the autorcrats currently in power) may view democracy as a bad and ignore market forces altogether.

Well, that's probably more than we'll have time for anyways, but it's a start.

Tutorial Schedule

Thursday (2/16/06):

9:25-9:45 – Zafar presenting on “An Affluent Society?” with Craig critiquing

9:50-10:10 – Sam presenting on “Medicare Reform” with Susie critiquing

10:15-10:35 – Chris presenting on “Medicare Reform/Affluent Society” with Evan critiquing

10:40-11:00 – Katy presenting on “Welfare Reform” with Jonathan critiquing

11:05-11:25 – Rick presenting on “Health Care Alternatives” with Robert critiquing

unemployment sanctions? (juicy enough to demand your attention for 580 words?)

Sam, I have to say I’m a bit disappointed that you feared I might not defend Galbraith. On that note, on to further defense.

I have to second Sam’s feelings that Rick and Jonathan might be giving Galbraith short shrift. The most important point which I took from his production discussions was that there truly is a hierarchy in the usefulness of production. If one accepts the idea of decreasing marginal utility, it doesn’t seem like too much of a stretch to accept the idea the production itself might have a decreasing marginal utility. This explains comments like, “The effect of increasing affluence is to minimize the importance of economic goals.”(134) Thus one could acknowledge that goods are indeed always going to be good but this increased good may just be incremental.

In general, I thought Galbraith really touched on an underlying fear/thought I’ve had over the past few years. Our society seems to be entirely fixated on growth. This thought has created the part of conventional wisdom that claims, “Any action which increases production from given resources is good and implicitly important; anything which inhibits or reduces output is, pro tanto, wrong.” (130) Such an attitude ignores the fact that there are positives (lets not get confused with goods) to social, communal and personal welfare which are not produced. In fact, many such positives might be negatively impacted by greater production. As a result, there is the possibility that after marginal utility of production has dropped low enough, increased production might not be implicitly important. Whether due to conventional wisdom’s inability to recognize that later production may be of lesser value to society than immediate needs or the complexities of externalities shrouding the total costs to society, we still find ourselves in a society which demands growth to settle our animal spirits.

This demand for constant production and growth has resulted in highly distorted situations which highlight the twisted necessity for new demand. Once again, I revert to readings for my International Politics of Food and Agriculture readings. This week descriptions of the dust bowl showed some of the development of farm subsidy programs. Accounts are detailed of government programs which would buy cattle only to have government marksmen shoot them; of crops being burned off to raise total prices. Currently subsidies have raised crop production to levels much higher than the market demand. Thus, the excess is shipped to other countries in the form of food aid. The libertarian economist may argue that such government intrusion distorts the system and is thus an invalid example. However, one must consider that our eternal search for reasons to produce, for sources of growth and for new markets may lay at the root of such government programs.

Whenever such thoughts have occurred to me, the nagging problem which came up was the need for the employment which production provides. Although many would gladly forgo the landscaping and housekeeping our school spends some of our tuition on, the liberal mind becomes troubled when one considers the lost jobs which would result from the termination of these services. It is for this reason that I think Galbraith’s discussion of unemployment insurance is incredibly interesting. If it is acceptable to society to pay owners of agricultural land (such as Scottie Pippin) not to produce in order to promote soil conservation, why are present attitudes so averse to government sanctions of selective unemployment? (Government created sabbaticals?) Hopefully lots to talk about tomorrow. . .

I Can't Get No

While Galbraith's book was "entertaining," I found several of his arguments to be inappropriate caricaturizations of the actual situations he describes.

In particular, Galbraith's critique of consumer demand theory was especially unconvincing. Discussing the principles of consumer demand, Galbraith declares, "Production only fills a void that it has itself created" (125). This attitude, first elaborated by Jean-Jacques Rousseau, is simply inconsistent with many basic tenets of economic theory. For one thing, goods are desirable and good, by definition; Galbraith asserts that there is nothing inherently advantageous about a society being able to produce or acquire an absolutely larger number of goods than at another point in time or compared to another society. For Galbraith, because the introduction of new goods necessarily increases the envy and desire for those goods, a society can never come closer to reconciling its desires and its ability to achieve those desires. However, this ignores the possibility that a society can ever increase the productivity of the basic goods, such as food, shelter, and clothing; these desires are at some level are essentially the same, regardless of Galbraith's assessment of the artificiality of a desire for a specific type of food or clothing.

For another thing, Galbraith/Rousseau's view also assumes that "demons" are the cause of desires; according to this attitude, envy and irrational passions are the reasons people seem to desire more goods as time progresses, not the ever-increasingly wider availability of several goods that individuals would rather have than not. It seems to me that there are some goods, which can be objectively desirable without having envy play the only role in its demand. A primitive or hermetic man, living outside social interaction, would probably have some demand for a hammer or aspirin without having seen any advertisements for either. Additionally, people are capable of acting on the behalf of their own true desires (such as a desire for knowledge or things of a purely aesthetic quality), rather than externally motivated desires. In a sense, Galbraith denies existentialism; he finds it untenable for people to legitimately satisfy exclusively artificially created desires: "the case cannot stand if it is the process of satisfying wants that creates the wants." According to Galbraith, people in general are incapable of satisfying their desires fully; however, this focus is on the macro scale, rather than on an individual level.

Galbraith all but proves that our artificially stimulated desires are the direct cause of the phenomenon of ever-increasing quality of life found in modern economic states, yet concludes that because production creates its own wants, no intrinsic change in satisfaction could have possibly occurred (Galbraith ignores the possibility that increasing quality of life could accrue benefits greater than the associatedcosts of increased desire). However, this claim comes with no actual argumentation or analysis; rather, Galbraith rhetorically asserts that his assumptions "would be regarded as elementary by the most retarded student in the nation's most primitive school of business administration." Of course, this comes after he had previously noted, "if the individual's own real income is rising, the fact that unknown New Yorkers, Texans or West Coast computer entrepreneurs are exceedingly wealthy is not, probably, a matter of prime urgency" (71). Current trends in the boom-bust business cycle, the solvency of free markets, and the ideas of increasing real income and purchasing power parity seem to undermine Galbraith's argument; it seems that happiness can be achieved through production, and the enjoyment of goods equal to the value of one's production. More on this in class...

Interview with Milton Friedman

Here's a fairly recent interview with Milton Friedman. He discusses issues such as the Euro, inflation, U.S. debt, and more. Enjoy!

Tutorial Schedule

Tuesday (2/7/06):

9:00-9:20 – Katy presenting on “Japanese Macroeconomy” with Ryan critiquing

9:25-9:45 – Justin presenting on “Depression?” with Susie critiquing

9:50-10:10 – Sam presenting on “European Macroeconomy?” with Craig critiquing

10:15-10:35 – Zafar presenting on “Economic Freedom” with Jonathan critiquing

10:40-11:00 – Rick presenting on “Government Waste and Fiscal Policy” with Evan critiquing

11:05-11:25 – Chris presenting on “Deflation?” with Robert critiquing

Thursday (2/9/06):

9:00-9:20 – Craig presenting on “Iraq” with Katy critiquing

9:25-9:45 – Rob presenting on “Developing World Environmental Policy” with Zafar critiquing

9:50-10:10 – Ryan presenting on “Econ related” with Justin critiquing

10:15-10:35 – Susie presenting on “Transitioning economies” with Sam critiquing

10:40-11:00 – Jonathan presenting on “Indian economy development” with Chris critiquing

11:05-11:25 – Evan presenting on “vouchers” with Rick critiquing

Internal Externalities

I think one interesting point in considering Friedman's analysis of money allocation and spending is that it is in strong contrast with a Rawlsian view of justice as fairness. The idea that anyone can rationally determine a responsible spending schedule that will allow them to live freely in the manner of their choosing for the rest of their lives has won support from those who identify with that supposition. However, we can see many examples of this ideal of rationality failing to materialize: people go bankrupt all the time in this country; people trained in a particular field lose their entire profession to machines; and as Rob ought to have pointed out, children are subjected to parental abuse and mismanagement all the time. These people do not choose their fates freely, they have probably failed to gather adequate education or information to make a rational choice. Let's face it: does anyone on this planet have any legitimate reason for being born into the family they were, or having the traits and capacities they have? Does anyone have an entitlement to their natural strength, intellect, or charisma? Even something as basic as one's will or determination may not be traits that are consciously chosen. The idea of personal responsibility absolves those who benefit from the system itself of blame, cost or responsibility, and punishes those who end up as victims of the system. Indeed, the economic assumption of rational action and choice is taken to avoid this serious internal externality.

On this point, what would happen if we decided to remove all systems of wealth redistribution and left people to make their own economic mistakes? Would we see great growth and a rise in conditions overall? No, probably not. We'd see rampant poverty, starvation, and almost certainly an increase in crime, if not outright communist revolution. We'd probably see a great rise in the number of children born to poor mothers (in an attempt to pay for their old age?), and greater pressure on the middle class by the poor for private handouts, which probably wouldn't be provided by the morally indifferent elite. I should think this sort of denigration of a nation would be enough detriment to the welfare of a nation that it would eliminate any benefits accrued by punishing mistakes and poor conditions. Therefore, I will revert to my earlier assertion that income redistribution seems to me a way of correcting for the externality of inequality that capitalism overproduces.

All this is not to say that I agree with Rob that the estate tax is the greatest thing in economic justice since the invention of the market. The idea that it is unfair for parents to consume their income by developing their child is absurd; for one thing, it would probably remove the primary motivation for most people's work in the first place. For another, it is absolutely illegitimate to mandate what people spend their own money on. Even though this income inequality creates disproportionately high opportunities for those with wealth, this itself does not create injustice. Injustice is only created when opportunities are actively denied to those without wealth. One might argue that a smaller amount of available slots at a school like Harvard or CMC might be a form of penalizing those without money, though in this day and age, colleges clamor to give every benefit possible to those who may have had a disadvantage. Given the choice between a student who went to Andover with a SAT of 2000 (is that a good score these days?) and a student from Compton who got an SAT of 1800, I'd certainly take the kid from Compton; he or she has to be more brilliant.

Anyways...plenty more to say, but maybe another time.

To offer a contrast to Chris' expansive post, I will once again attempt magic by tying way too many topics together in one cohesive tract. . . Ready. . . Set. . . GO!

This past week I had to read two extremely different yet influential books stemming from Chicago authors. The Jungle, the socialist mantra of Upton Sinclair, paints a bleak image of near slavery at the hands of capitalism. Milton Friedman, however, declares that capitalism and democratic freedom are necessary complements. The question that I was constantly troubled with while reading Friedman is whether one can truly be considered free if struggling merely to survive in the presence of pure capitalism. The Jungle highlights situations in which individuals are faced with a dearth of choices due to their financial dependence on a single job, in a single location and to a single system. Dissent, morality and illness all lead to the suffering of families. Although many may claim that current conditions are nowhere near as bad, there are still those individuals tied to their jobs, hometown etc, in order to merely survive. If there are many individuals struggling to survive, as seen in the Jungle, one would wonder whether a social welfare system's constraints on economic freedom might be offset by the freedom gained through the freedom to focus on issues beyond mere subsistance. Although Friedman's dependance on equality of opportunity could theoretically offer the potential for freedom, many individuals seem to be left so far behind that almost all free options are revoked.

Friedman's defense of inheritance in particular seems to create hypocrisy with his liberal dependence on equality of opportunity. In our current system, the ability to pass on inheritance directly limits the equality of opportunity. Few individuals attending CMC would contest that they had equal opportunities to the children of migrant farm workers. As wealth aggregates from generation to generation (wealth breeds wealth/access to capital; lower reproduction levels among the wealthy) opportunity diverges as well. The problem with Friedman's argument is that freedom of opportunity and freedom of rights are not synonymous. (195) Currently, capital holdings of one's parents play a great role in opportunity. Friedman, however, argues that the government should merely guarantee the same rights among individuals. Such a system promotes the wage dependence which limits freedom within capitalism, which Friedman seems to ignore.

In his second to last chapter, Friedman does recognize that poverty is something which should be alleviated by the society as a whole. However, two omissions are of particular note in this chapter. First, Friedman fails to note that freedom of the impoverished is actually hampered due to their state of poverty, as discussed above. Instead, poverty alleviation is desired because "I (Friedman) am distressed by the sight of poverty." The second omission is related; Friedman argues that he will not attempt to set a level for the required support. The level of such support would differ greatly if one were to follow Friedman's reasons than if one were to attempt to ensure freedom by the impoverished. If one is merely trying to reduce visible poverty, poverty alleviation programs would be set at a much lower level than if one attempted to provide true freedom of information, mobility and self-determination required for proper participation in capitalism and democracy.