Friday, June 19, 2009

Interview with Paul Samuelson

Conor Clarke recently posted an interview with Paul Samuelson on The Atlantic (part 1 here; part 2 here). Although I'm not a thorough Keynesian like Samuelson, I have a lot of respect for Samuelson's work. One of my favorite Samuelson quotes comes from an Economics U$A video. He was talking about the resistance to and gradual acceptance of Keynesian economics at Harvard:

Funeral by funeral, science makes progress.

Anyway, I found the interview to be fascinating.

A great quote on Milton Friedman:

Milton Friedman. Friedman had a solid MV = PQ doctrine from which he deviated very little all his life. By the way, he's about as smart a guy as you'll meet. He's as persuasive as you hope not to meet. And to be candid, I should tell you that I stayed on good terms with Milton for more than 60 years. But I didn't do it by telling him exactly everything I thought about him. He was a libertarian to the point of nuttiness.

Interesting quote on behavioral economics:

In my view behavioral science describes an extremely large and important part of the modern picture. However, whenever the economy turns in a very irrational
say, that can create opportunities for very rational speculators to make a profit. So you can still get some approximation on the micro level of an efficient market.

A response to those who blame greed for the crisis:

[P]eople say, 'greed has suddenly increased.' But it isn't that greed's increased. What's increased is the realization that you've got a free field to reach out for what you'd like to do.

Wednesday, June 17, 2009

Stiglitz on Banking Regulation

Given the banking regulatory overhaul recommended by the Obama administration, The Economists' Voice today published a timely piece today entitled "America's Socialism for the Rich" by Nobel-laureate Joseph Stiglitz. Here are some excerpts.

Rewriting the rules of the market economy—in a way that has benefited those that have caused so much pain to the entire global economy—is worse than financially costly. . . .

But this new form of ersatz capitalism [writing about Obama’s regulatory approach], in which losses are socialized and profits privatized, is doomed to failure. . . .

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don’t break them up, then we have to severely limit what they do. They can’t be allowed to do what they did in the past—gamble at others’ expenses. . . . (p. 2)

I don’t agree with everything Stiglitz writes, but his arguments are convincing. I too think that banks are too big, and I agree with his statement, "Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors)." Still, I wish Stiglitz would have discussed the moral hazards created by FDIC insurance and the Fed. Sure the government should regulate the banking industry, but it should also pay attention to the incentives it creates.

Tuesday, June 16, 2009

Clean Air Act - People Live 5 Months Longer!

There was an interesting and important pollution study published in the New England Journal of Medicine a few months ago. According to researchers C. Arden Pope III, Majid Ezzati, and Douglas W. Dockery:
On the basis of the average reduction in the PM2.5 concentration . . . in the metropolitan areas included in this analysis . . . the average increase in life expectancy attributable to the reduced levels of air pollution was approximately 0.4 year. . . . [T]hese results suggest that the individual effect of reductions in air pollution on life expectancy was as much as 15% of the overall increase. (p. 384)

Thanks to the regulations authorized under the Clean Air Act, the average person lives roughly five months longer. This doesn’t mean, of course, that the benefits outweigh the $27 billion costs. But the results are interesting nonetheless.

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"Spread the Wealth" - and the Proper Role of Government

Wealth redistributions are anathema to libertarians. This isn't surprising. Without Jane's consent, it seems unfair to give some of Jane’s hard-earned money to John, who has never a worked a day in his life. Many conservatives and a few liberals were thus upset when President Obama, prior to his election, suggested to Joe the Plumber that wealthy Americans should be willing to the “spread the wealth.”

In response to the ensuing debate I wrote the following letter to the local newspaper. In my view some wealth redistributions are inevitable:

Many are upset about the idea of "spreading the wealth." Our current tax system, the progressive income tax, is a de facto redistribution of wealth. If all citizens are entitled to the same government benefits, and Jane makes $300,000 per year and pays 35 percent of her income in taxes while John makes $30,000 per year and pays 15 percent, there is a shift in income from Jane to John. Jane pays more for the same government benefits.

The solution for some is to implement a flat tax: All workers pay taxes at the same rate, say 25 percent. Still, even a flat-tax rate causes wealth redistribution. If Jane pays $75,000 in taxes (25 percent of $300,000) and John pays $7,500, Jane spends far more for equal benefits.

If Americans want to rid themselves of wealth redistributions, all households must pay taxes exactly equal to the value of the government benefits they receive. This would be both impossible and infeasible. It would be impossible to know the exact value of the roads, clean air, police protection, and court systems that people receive; such public goods are non-excludable. It would be infeasible because few Americans feel that government should stop spending money to protect the homeless, elderly, disabled, etc.

The question, then, is not whether we should redistribute wealth; the question is to what degree.

Some libertarians might say that Social Security and food stamps are different from public goods, since the government forcibly takes money from one group of people and gives it directly to another via transfer payments. This is true. Nonetheless, it is impossible to deny that with both public goods and transfer payments, some people pay more money than they receive in benefits and some pay less. This is precisely how I would define wealth redistributions.

Given that wealth redistributions are permitted and inevitable under the Constitution, there are a few ways our government can proceed. First, it can seek to minimize redistributions of wealth. For this to happen Americans would need to pay taxes equal to the benefits they receive. Trying to determine the exact value of the benefits everyone received would be exceptionally expensive. Each household would need to be assigned a nonmarket valuation economist who would assist in determining the household’s willingness to pay for national defense, clean air, and public parks. I doubt few would advocate the first approach.

Second, government could seek to achieve equal distributions of wealth. There are a number of problems with this approach. By ensuring that each slice of pie is equal, the government would shrink overall size of the pie as work incentives dissipate. Also, it would be difficult to define equal. Do parents with more children get more wealth? Would this encourage people to have more children? Would people who worked longer hours receive more wealth? Would an eighteen-year-old be entitled to the same slice as an eighty-year old? Like zero redistribution, equal redistributions would be impossible to implement perfectly.

Finally, government officials can redistribute income in such a way as to maximize social welfare. In doing so, government officials should be ever cognizant of the possibility that their mandated redistributions might lower social welfare. When in doubt, officials should respect status quo distributions over other possible redistributions. This in my view is the proper role of government.