Three Economists Walk Into a Discussion, Part 1

On September 15, the Stanford Institute for Economic Policy had a virtual discussion about both Covid-19 and the views of the two major presidential candidates. The moderator was Gopi Shah Goda of SIEPR and the two interviewees were Kevin Hassett, who had been chairman of the Council of Economic Advisers under President Trump and Austan Goolsbee, who had had the same job under President Obama.

I watched it live.

I’ll hit some highlights and make some comments. This is Part 1.

At 4;24, Goda asks: “What are the right economic policies to provide relief to those whose livelihoods have been adversely affected by the pandemic and stimulate the economy? How much spending should we do in the short run on Covid relief issues like extended and extra unemployment and stimulus payments?”

She started with Kevin, and I got my first big disappointment. Notice that she asked two questions. Kevin, though, answered only the second. He gave a big number for spending and didn’t mention any other means of relief: deregulating, letting people work in occupations without having to get a license, allowing restaurants to sell food, allowing restaurants to open, getting the FDA to allow people to use home tests for the coronavirus.

And his number for additional federal spending was big: $1.5 to 2.5 trillion.

Goolsbee’s answer was what I would have predicted: lots more federal spending and a big bailout of state and local government.

14:50: Kevin defines classical liberals like me out of the discussion with “I don’t think there’s anyone who thinks there shouldn’t be state and local aid.”

15:10: Austan gets it right: There are a great number of people who are opposing state and local aid.

17:10: Austan has a funny line that riffs on the old can opener joke: “This is not just ‘assume we have a can opener; let’s assume we have the greatest of all can openers.’” Then he says that you wouldn’t want to use the price system to allocate the vaccine.

23:43: Goda asks about the differences between the two candidates’ tax policies.

24:20: Austan says that Biden wants to raise taxes on high-income people and on corporations. What’s important, he says, is what the money is used for. If the added revenue were used to provide universal child care, that would be very pro-growth, says Austan.

But wait. This is not a discussion between politicians. This is a discussion between economists. What’s the market failure that would justify government provision of child care? Austan doesn’t  even mention one. If my wife and I, when we were younger, had wanted to hire child care so she could work, we would have compared her after-tax income to our net-of-child-care-tax-credit cost of hiring child care. I showed in a piece in the Journal of Policy Analysis and Management in the late 1980s that the structure of the tax credit at the time could be seen as a way of offsetting the distorting high marginal tax rate of the second earner, typically the women. But Austan isn’t making that argument; in fact, for high earners, he wants an even higher marginal tax rate. Moreover, various changes in the tax law have been the tax credit much less pro-growth.

At about the 25:00 point, they get into a real substantive discussion about what happened to real wages and real family incomes after the tax cut. They literally disagreed about what the numbers were. Austan said that the effects of the tax cut on real median family incomes were disappointing. Kevin said that in a debate with Austan in Philadelphia a few years earlier, he had predicted that real median family income would rise by $4,000 and that the data that just came in (which were pre-pandemic), the number was actually a $4,900 gain. Kevin also pointed out that over 6 million people had moved out of poverty, the biggest drop since the War on Poverty had begun under LBJ. Kevin also pointed out that he had predicted that income inequality would fall as a result of the 2017 tax cut and that it had fallen.

Aside for non-economists: Why would reductions in income tax rates on corporations and on high-income individuals even be expected, at a theoretical level, to increase real wages? By increasing the incentive to invest in capital. The greater the capital to labor ratio, the higher are real wages.

29:10: Kevin catches Austan’s characterization of the proposed Biden tax hike as an increase in taxes on billionaires. Kevin points out that it would apply to people making over $400K annually. He then expresses optimism that Biden will hold off on raising marginal tax rates, due to the state of the economy.

31:00: Here is where Austan gives numbers on increases in real median family income that differ dramatically from Kevin’s data.

Aside:  As a viewer, I was able to type a question on line and I did. We learned near the end from Goda that a number of viewers had asked a similar question and it was this: “You two are disagreeing on actual facts; show us your sources.” I asked Mark Duggan, the SIEPR director, for the source and he sent me the link to the Census data that Kevin had cited. Kevin turned out to be right about the large growth in median family income of families, including black and Hispanic families. I’m still scratching my head about what data Austan had in mind.

32:00: Kevin says that growth in median real family income in the first 3 years of Trump vastly exceeded any 3-year period under Obama.

32:10: Goda lays out the deficit issue nicely and asks about the two candidates’ plans.

In Part 2, I’ll cover the rest of the discussion.

 

 

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Should Jane Decide Who Gets the Vaccine?

Who will get the cars and when? Who will get the steak? Who will get the wine? Or, as the Associated Press asked this morning, “who’s first in line for COVID-19 vaccine”? There are two answers: (1) Jane who works for the government will decide. (2) An impersonal, decentralized, efficient exchange process, where everybody is his own Jane, will give the answer.

My first claim is that, if such a process as #2 existed, it would be much superior for satisfying the most urgent demands, promoting prosperity, and preventing social strife if not “the war of all against all.” My second claim is that such a process does exist: it’s called the (free) market.

The market is a continuous, invisible auction in which every individual or association of individuals can bid, and in which any producer may choose to fill any bid—which will usually be the highest bids. (Some may choose to serve those who bid the lowest price but they are rare. A mischievous economist would say that they are trying to bid for a place in heaven.)

Who gets the cars? Lots of bidders, in fact. Once the bidding process is over at any point of time, all the auction participants willing to pay the price that clears the market get cars. The others don’t. It’s the same for steak or wine or pretty much everything. Some services, like love or friendship, are more difficult to bid for, but they can’t be efficiently allocated by the government’s Jane either.

Why can’t billionaires or governments bid everything away from ordinary people? Suppose a billionaire wants to buy all the guns. Assume there are 200,000,000 private guns in the United States, probably an underestimate. Assume an average price of $200. The minimum value of guns, as evaluated by those who own them and bid for them continuously (if only by not selling), would thus be $40 billion. “Minimum” because of the consumer surplus: one only buys something whose value is higher than its price. No single billionaire has enough money to buy that and, as we shall see presently, even the trillionaire government could not buy all the guns in voluntary exchanges.

As the government bidder-in-chief (or a billionaire) starts bidding, gun prices will start increasing. The first guns can be bought easily, but as individuals who least want their guns have sold them, the bids for the remaining guns will have to increase, and the fewer the private guns left, the higher the necessary bids. As only a few guns are left in the hands of people other than the bidder-in-chief, their prices will be extremely high not to mention the likelihood of holdouts. “$10 million for my old revolver!” Even with confiscatory taxation, the bidder-in-chief will need eminent domain or the Defense Production Act to get all the guns from all the people.

Moreover—and this additional factor is important—as the price goes up, new producers will jump in the industry to produce more. So if the bidder-in-chief does not have the power to abolish free enterprise (or kill all smugglers), he will never be able to bid away all the guns, all the steak, or all the wine in order to give them to his preferred supporters and clientèles. Similarly, neither billionaires nor the trillionaire state can buy all the steel or all the aluminum to build cars, mansions, or walls.

Now suppose Covid-19 vaccine is (hopefully) invented. Instead of Jane deciding who gets the vaccine, everyone in a free society would make his own decision on whether to buy or not, now or later. Every individual would decide to which extent he contributes to biding up the price by deciding whether or not to stop bidding before a price clears the market for all winning bids at that price. Note that our former but humbled bidder-in-chief, the government, would still be able to bid up the vaccine price in order to purchase some—to give, say, to seniors in nursing homes, to government bureaucrats, or to White House occupants, but he would have no more power than that. There is a good argument that vaccines should be subsidized and available free for children. Charities or associations could also bid up the price in order to obtain vaccines for the people they cater to.  And nothing would forbid any less-than-average Jane to sell her TV set to get a dose, if she thinks the latter is more important than the former.

In any allocation system, of course, not more than what is available at any point in time can be consumed. But remember that as the price goes up, other producers, domestic and foreign, would be incited to jump in the market by inventing and producing a new vaccine. Furthermore, as more people are vaccinated, herd immunity would develop so that, in the end, even those who did not, directly or indirectly, pay to be vaccinated would be protected.

These ideas are not very original, at least for economists. You may find them in, say, Milton Friedman’s 1962 book Capitalism and Freedom—or, for that matter, in many if not most microeconomics textbooks. They have underlaid the whole classical liberal tradition. Yet, they seem to have disappeared from anywhere else in our socialist societies.

In a perfect socialist society, where there would presumably be a continuous redistribution of income from the above-average to the below-average individual, there would be no reason, from that point on, not to let each one be his own Jane and up prices. (Continuous redistribution: You wake up in the morning, look at your screen, and see that $100 have been debited from your bank account with the mention DIET, or “Daily Income Equalization Transaction.”) However, there would be few vaccine producers as one could live as comfortably doing anything that one thinks is the easiest and most pleasant.

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Herd Immunity: Saving Lives and Saving the Economy at the Same Time

Absent a highly effective vaccine or some other cure, only two policy questions are relevant: how quickly should we reach herd immunity and whom should we protect during that period? The answers are obvious. We should achieve herd immunity as quickly as is prudent, while protecting the vulnerable, including the elderly, sick, and frail. Let the young and healthy become infected in the natural course of their lives to help create a protective layer around the old and sick. The first step is reopening schools and businesses.

No one wants to become infected with the novel coronavirus. But those who do can know that their private cost confers a public benefit, moving us one step closer to herd immunity. The good news is that we might already be close to herd immunity.

This is from David R. Henderson and Charles L. Hooper, “Herd Immunity: Saving Lives and Saving the Economy at the Same Time,” Brief Analysis No. 138, Goodman Institute for Public Policy Research, July 20.

Read the whole thing: it’s only 2 pages long.

Charley and I finished the piece about 10 days ago. Would I write it somewhat differently today? I would. I found this post by EconLog co-blogger Scott Sumner, published 2 days ago, persuasive.

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