The Sunk Cost Lesson Stuck

On Friday, the president of the Naval Postgraduate School, Dr. Ann E. Rondeau, announced that Captain Raymond (“Pancho”) Barnes, Military Associate Dean of the Graduate School of Defense Management (the new name for the school I taught at before retiring in 2017) is leaving his position for a new Navy posting. I haven’t met him during his tour because the in-person part of the School is pretty skimpy and so my biweekly visits to my former colleagues haven’t happened for about a year. But I’ve often enjoyed his emails to the faculty, which include the emeritus faculty.

So I emailed him Friday to wish him well, even though, I said, I hadn’t met him. Well, it turns out that I had. I received this email back.

Prof. Henderson,

Oddly enough, if we go back to Winter Quarter 2005, you were my GE3070 instructor during quarter two of my EMBA [Executive MBA.] I thoroughly enjoyed that course (and your instructional methods), so much so that it is honestly but one of the few courses I actually remember. Economics has always been an interest of mine (if my wife hears me talk about sunk costs one more time during a movie, I think she will divorce me), especially as it relates to everyday life. I particularly enjoy Stephen Dubner’s “Freakonomics” podcast; very interesting and entertaining content.

Thanks for the note; it has been a great tour at NPS. All the best to you as well.

V/R,

Ray

 

I love it when students remember, and apply, important things I taught them over a decade ago.

 

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Sunday assorted links

1. Rohit Krishnan reviews Stubborn Attachments. 2. “South Korea was the only country in the Organization of Economic Cooperation and Development (OECD) that had total fertility rate below 1 for two consecutive years.” 3. Israel-Syria barter markets in everything prisoners for vaccines (NYT). 4. “Mary Beard, a professor of classics at Cambridge University, posited that […]

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Dean Baker on wealth

In the past, I’ve poked fun at progressives who don’t seem to know what they want. The wealth tax on luxury yachts was repealed partly at the behest of progressive politicians that worried it might cost jobs in the yacht building industry. But unless you destroy jobs producing consumption goods for the rich, it is literally impossible to use their resources to help the poor.

Dean Baker is one progressive who does understand this point:

If we think of the prospects of reducing consumption with a wealth tax, they don’t look very promising. Consider our latest round of incredibly rich people, like Elon Musk, Jeff Bezos, and Mark Zuckerberg, all of whom have over $100 billion in wealth. While I am sure these people all live very well, I doubt they spend substantially more on their own consumption in a year than your typical single-digit billionaire. There are only so many homes you can live in, cars you can drive, trips you take, etc.

This means that if we taxed away 10 percent, 20 percent, or even 50 percent of their wealth, it will have very little impact on their consumption. This means that it will not get us very far in freeing up resources for an expanded social welfare state. We will not be able to pay for Medicare for All or free college by taxing away these people’s wealth, we will have to focus on policies that reduce the consumption of a far larger group of people.

Of course just because a wealth tax is bad doesn’t mean that taxing the consumption of the rich is necessarily any better.  I favor a progressive consumption tax, but there are also reasonable arguments against the idea.  My point is that the rich basically can do three things with their wealth: consumption, investment and charity.  Progressives tend to deny that government spending crowds out investment, and they presumably don’t want the funds to come out of charity.  So that leaves consumption.  Either accept that you are trying to destroy jobs in the production of luxury goods, or else give up all hope for economic redistribution.

The essay is full of lots of other great observations:

If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.

Do we really want a definition of economic wellbeing that says a recent HBS grad is much poorer than homeless person in Calcutta?

And this:

The money in a retirement account is included in standard calculations of wealth. Traditional pensions generally are not. (We can impute values for these pensions, but this is generally not done in most wealth calculations.) This leads to a story where we would say that a person with a 401(k) is much wealthier than a person with a traditional pension, even if they have no better prospects for retirement income.

PS.  I have a new piece in The Hill on asset price bubbles.

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The equitization of human labor, Fernando Tatis Jr. edition

Fernando Tatís Jr. was 18 years old, just a low-level prospect from the Dominican Republic trying to work his way up in the San Diego Padres farm system, when he made a financial deal that would impact his entire baseball career. And it wasn’t with the Padres. Tatís signed a contract with Big League Advance, […]

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