Krugman Illustrates Caplan’s Point

In January 2019, co-blogger Bryan Caplan wrote:

The theory of market failure is a reproach to the free-market economy.  Unless you have perfect competition, perfect information, perfect rationality, and no externalities, you can’t show that individual self-interest leads to social efficiency.*  And this anti-market interpretation is largely apt.  You can’t legitimately infer that markets are socially optimal merely because every market exchange is voluntary.

Contrary to popular belief, however, market failure theory is alsoa reproach to every existing government.  How so?  Because market failure theory recommends specific government policies – and actually-existing governments rarely adopt anything like them.

What we also often see and, depressingly, even usually see, is that economists who are pro-government intervention to fix market failures have a much lower standard for the government than they have for the market. So the odds are that avoiding the specific government policy being proposed would get us closer to the optimum than implementing the government policy.

A case in point is Paul Krugman and his views on the recent $1.9 trillion spending bill. In Benjamin Wallace-Wells, “Larry Summers versus the Stimulus,” March 18, 2021, Wallace-Wells makes that point, although I’m not sure that that’s his intention.

Wallace-Wells, describing a recent debate between Krugman and Larry Summers about the Biden spending plan, writes:

Krugman asked, rhetorically, which elements of the package Summers would cut. Not the public goods, like vaccination and funds for school reopening, and surely not the needed income support. What was left was the part that members of Congress had most vociferously demanded: the aid to state and local governments (which Krugman agreed probably exceeded the fiscal need) and the checks to people who had not much suffered. Krugman said, “The checks, which are the least-justifiable piece in terms of standard economics, are also by far the most popular, and I don’t think we can entirely disregard that.”

Put aside the fact that the funds for school reopening are almost certainly not justified because the risks to students and teachers are so low. Notice what even Krugman admits. First, that the aid to state and local governments is too much, even by his standards. Second, the checks to people who hadn’t suffered much, which are a huge part of the package, are the “least-justifiable piece in terms of standard economics.” And what’s Krugman’s justification for those payments? That they are “by far the most popular” and, for that reason, we can’t “entirely disregard that.”

In short, in order to get hundreds of billions in spending that Krugman thinks are justified, he is willing to have the government spend other hundreds of billions for things that are not justified. Such is the nature of many, perhaps most, economists’ advocacy of government policy.

Note: The picture above is of a Rube Goldberg machine, which is what I think a lot of government policy is like. There is one difference. The Rube Goldberg machine always worked.

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White Guilt and Reparations: A True Story

Co-blogger Bryan Caplan’s post this morning on collective guilt and the subsequent discussion in the comment section reminded me of something that happened my first day of a microeconomics class in 2001. At the end of the opening class, a number of people came up to ask questions. One was a young black woman who said, “Professor, what do you think of reparations for slavery?”

I answered, “I promise I’ll answer but first I want to know what you think.”

She said, “I favor them.”

“And those reparations would be paid for by white people?”

“Yes,” she answered.

I turned to a white guy who was waiting to ask a question, and I took a risk.

“Where are your grandparents from?” I asked.

“The Netherlands,” he answered.

I then turned back to the woman who had asked and said, “I’m ready to answer you. His grandparents came to this country well after slavery had ended. I think it’s wrong for the government to tax people who didn’t even inherit wealth from slavery to give to the great, great grandchildren of former slaves.”

Note: Of course it’s possible that his grandparents inherited wealth from their predecessors having had slaves in the Netherlands. I don’t know the history of slavery in the Netherlands. But the odds that they gained big time and came to the United States as wealthy people were probably pretty low.

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Sullivan and Henderson Talk on School Shutdowns

Last Thursday, my Naval Postgraduate School colleague Ryan Sullivan and I made a case against school shutdowns in a Zoom talk to a local Monterey group called The Old Capitol Club. It’s an actual physical location in downtown Monterey and I’ve given 2 talks there in person in the last 20 years, something I refer to right at the end of this talk. This, of course, was remote.

From about 23:00 to 25:15, I handle the issue of human capital vs. signaling to explain why I think the $2.5 trillion loss of human capital is overstated. I draw on Bryan Caplan’s The Case Against Education, which I point out should be titled The Case Against Schooling.

At 32:38, a viewer named Hampton raises a question. I gave him a seat-of -the-pants answer. I later went to the data and came up with a much different answer.

Going to CDC data that updated after our talk, I found that the number of American residents below age 15 who had died of COVID-19 is 83, up from 81.

The number who had died who were between age 15 and 24 was 418. So I interpolated to get the number of between age 15 and 18, and got 0.4 of 418 = 167. This is substantially higher than the seat-of-the-pants answer I gave Hampton.

It’s also an overestimate because we know that the mortality rate rises with age. So people in the age 15 to 18 category are substantially lower risk than people in the age 19 to 24 category.

 

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Five Books for the 2020 Election

Polarized is perhaps the best way to describe our current political landscape heading into the home stretch of the 2020 election, and I have consciously tried to select five books that both provide some immediate historical context to help readers understand how we got here.  However, I also wanted to add a few historical texts to remind everyone that the political rhetoric and posturing we are experiencing today isn’t new in American history.  It is distinctly different from recent American history, but even at the beginning of political life under the Constitution, things were heated, personal, contentious, and ugly.  So while this run up to our next Presidential election is ugly, it’s not unique if you look back far enough.  I also added one book to make readers feel absolutely fine if they decide to sit this election out, and considering the world today, staying at home on election day may make more practical sense than ever before.

 

A Magnificent Catastrophe – Edward J. Larsen – America is a relatively young country, but relatively young is still 244 years old.  While it seems like 2020 has been the worst year imaginable with the worst Presidential campaign ever, the good news is that we have had worse years and much worse elections.  In 1800, two of the Founding Fathers, John Adams and Thomas Jefferson squared off in a contentious, ugly, and ultimately foundational election for President, as fans of Hamilton will know.  Larsen is a wonderful writer, and this book is a bracing reminder that politics has always brought out the worst in everyone, even the people who brilliantly crafted the United States.


Plunkett of Tammany Hall – William L. Riordan – From the election of 1800 we jump to another helpful reminder that elections and politics haven’t always been unicorns and rainbows.  Tammany Hall was the famed political club and home to the leaders of New York City’s political machine during the late 19th and early 20th centuries.  Plunkett was a prominent member of that club, and he sat down to give an entertaining and thought-provoking defense of why people get into politics, what the day to day life of a big city political leader was like during this time, and some philosophical insight into human nature generally.  As Plunkett famously said “I seen my opportunities and I took ‘em”

 

Coming Apart – Charles Murray – To get some perspective on 2020, I think it’s important to understand how President Trump won in 2016, and no book is better at explaining this than Charles Murray’s.  First, Murray doesn’t mention Trump at all, because he wrote this book in 2012 with a focus on the growing divide among white Americans.  He convincingly shows how working class whites have been left behind by more affluent whites geographically, educationally, economically, and spiritually.  It’s a powerful reminder of how radically different the lives of rural and working class Americans are from their parents and how much more challenging their futures are unless their circumstances improve.  Their support of President Trump has to be understood through the lens of Murray’s important book.

 

The Lost Majority – Sean Trende – I reviewed this book when it first came out, and again I think it provides a great context to our current political climate.  During the run-up to 2016, a number of prominent writers argued that demographics made it inevitable that the Democratic party was heading toward a sort of permanent majority status.  This became a popular talking point in intellectual circles.  Trende’s book showed the flaws in that thinking as he drilled down much more deeply into the congressional and local level data.  He showed the problems that ignoring rural America would create, a warning that rang very true in 2016.

 

Myth of the Rational Voter – Bryan Caplan – In case you were unaware, there’s a book someone named Bryan Caplan wrote that is worth a read this election season.  (In fact, there’s a three week long discussion on this books in our #EconlibReads Facebook Group going in right now.) Full disclosure, I have a fair amount of issues with the text, most notably Caplan’s unrelenting pessimism about the current state of democracy.  As several of the books I’ve listed above show, it’s not obvious that things today are “worse” by any objective measure.  But he provides a very provocative argument against the current system, and if any election deserves to be seen in the context of what’s wrong with our political leadership, decision-making process, and media, this is the one.

 


G. Patrick Lynch is a Senior Fellow at Liberty Fund.

 

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Case and Deaton on Deaths of Despair and the Future of Capitalism

In their recent book Deaths of Despair and the Future of Capitalism, Anne Case and Nobel economics prizewinner Angus Deaton, both emeritus economists at Princeton University, show that the death rate for middle-age whites without a college degree bottomed out in 1999 and has risen since. They attribute the increase to drugs, alcohol, and suicide. Their data on deaths are impeccable. They are careful not to attribute the deaths to some of the standard but problematic reasons people might think of, such as increasing inequality, poverty, or a lousy health care system. At the same time, they claim that capitalism, pharmaceutical companies, and expensive health insurance are major contributors to this despair.

The dust jacket of their book states, “Capitalism, which over two centuries lifted countless people out of poverty, is now destroying the lives of blue-collar America.” Fortunately, their argument is much more nuanced than the book jacket. But it is also, at times, contradictory. Their discussion of the health care system is particularly interesting both for its insights and for its confusions. In their last chapter, “What to Do?” the authors suggest various policies but, compared to the empirical rigor with which they established the facts about deaths by despair, their proposals are not well worked out. One particularly badly crafted policy is their proposal on the minimum wage.

This is from “Blame Capitalism?“, my review of The Deaths of Despair and the Future of Capitalism,” in Regulation, Fall 2020.

Another excerpt:

To understand what is behind the increase in the death rate, the authors look at state data and note that death rates increased in all but six states. The largest increases in mortality were in West Virginia, Kentucky, Arkansas, and Mississippi. The only states in which midlife white mortality fell much were California, New York, New Jersey, and Illinois. All four of the latter states, they note, have high levels of formal education. That fact leads them to one of their main “aha!” findings: the huge negative correlation between having a bachelor’s degree and deaths of despair.

To illustrate, they focus on Kentucky, a state with one of the lowest levels of educational attainment. Between the mid-1990s and 2015, Case and Deaton show, for white non-Hispanics age 45–54 who had a four-year college degree, deaths from suicide, drug overdose, or alcoholic liver disease stayed fairly flat at about 25–30 per 100,000. But for that same group but without a college degree, the deaths in the same categories zoomed up from about 40 in the mid-1990s to a whopping 130 by 2015, over four times the rate for those with a college degree.

Why is a college degree so important? One big difference between those with and without a degree is the probability of being employed. In 2017, the U.S. unemployment rate was a low 3.6%. Of those with a bachelor’s degree or more, 84% of Americans age 25–64 were employed. By contrast, only 68% of those in the same age range who had only a high school degree were employed.

That leads to two questions. First, why are those without a college degree so much less likely to have jobs? Second, how does the absence of a degree lead to more suicide and drug and alcohol consumption? On the first question, the authors note that a higher percentage of jobs than in the past require higher skills and ability. Also, they write, “some jobs that were once open to nongraduates are now reserved for those with a college degree.”

I wish they had addressed this educational “rat race” in more detail. My Econlog blogging colleague Bryan Caplan, an economist at George Mason University, argues in his 2018 book The Case Against Education that a huge amount of the value of higher education is for people to signal to potential employers that they can finish a major project and be appropriately docile. To the extent he is right, government subsidies to higher education make many jobs even more off-limits to high school graduates. Yet, Case and Deaton do not cite Caplan’s work. Moreover, in their final chapter on what to do, they go the exact wrong way, writing, “Perhaps it is time to up our game to make college the norm?” That policy would further narrow the range of jobs available to nongraduates, making them even worse off.

On the second question—why absence of a degree leads to more deaths of despair—they cite a Gallup poll asking Americans to rate their lives on a scale from 0 (“the worst possible life you can imagine”) to 10 (“the best possible life you can imagine”). Those with a college degree averaged 7.3, while those with just a high school diploma averaged 6.6. That is not a large difference, a fact they do not note.

And note their novel argument for why improved health care, better entertainment through the internet, and more convenience don’t count in people’s real wages:

So, what are the culprits behind the deaths of those without college degrees? Case and Deaton blame the job market and health insurance. Jobs for those without college degrees do not pay as much and do not generally carry much prestige. And, as noted above, Case and Deaton mistakenly think that real wages for such jobs have fallen. Some economists, by adding nonmonetary benefits provided by employers and by noting the amazing goods we can buy with our wages such as cell phones, conclude that even those without a college degree are doing better. Case and Deaton reject that argument. They do not deny that health care now is better than it was 20 years ago, but they write that a typical worker is doing better now than then “only if the improvements—in healthcare, or in better entertainment through the internet, or in more convenience from ATMs—can be turned into hard cash by buying less of the good affected, or less of something else, a possibility that, however desirable, is usually not available.” They continue, “People may be happier as a result of the innovations, but while it is often disputed whether money buys happiness, we have yet to discover a way of using happiness to buy money.”

That thinking is stunning. Over many decades, economists have been accused, usually unjustly, of saying that only money counts. We have usually responded by saying, “No, what counts is utility, the satisfaction we get out of goods and services and life in general.” But now Case and Deaton dismiss major improvements in the happiness provided by goods and services by noting that happiness cannot be converted to money. That is a big step backward in economic thinking.

 

Read the whole thing.

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