Tuesday, July 26, 2005

The BLM, Mr. Grazer, and Mr. Enviro

I posted the following comment to a post over at Environmental Economics. You might be interested in checking out the post as well as the news article that prompted it.
I want to see if I have the facts straight with respect to the situation described in the news story. First, as an aside, I want to overlook the reference to party politics, but it makes me wonder what parts of the story I can take at face value.

Setting that aside, this is what I think is going on. Government owns some land. As the owner of the property right to this land, government can choose to do what it wants with it, as long as (just like with you and I as property owners) it does not harm the person or property of others. So, government decides to lease the land it owns to Mr. Grazer, of course with agreed upon terms which no doubt includes rules about the number of animals etc. Then Mr. Grazer meets Mr. Enviro who offers to buy the lease from Mr. Grazer. A deal is struck between these two, money changes hands and Mr Grazer takes his animals elsewhere. Does that sound about right?

If it does, the it looks alot like the idea of a sub-lease to me. If so, does it make sense that the original property owner can take back its land?

I have an example that might be on point here. Years ago my father owned about a section of land that was fairly well forested. At some point he was approached and asked if he would lease the land to a timber company to cut down trees. He agreed because of 2 things: (1) there was money, and (2) he wanted his trees "thinned" as he called it. Now suppose Mr. Timber had taken that lease and then made a deal with Mr. Hugger who did not cut down any trees. My Dad would have had money, but he would still have had more trees than he wanted. It seems to me that Mr. Timber failed to uphold the lease contract he agreed to, and my father should then have an opportunity to have the tree removal aspects of his contract enforced.

Perhaps the news article isn't describing a situation that is fairly characterized as use of the market. Perhaps so. Now, I'm not sure if I think a bureaucrat should decide the "chiefly valuable use" of BLM land. On the other hand, the government is the property owner, just as my father was the property owner, and I don't think any one (or at least very many of us) are going to say my father can't decide what is the "chiefly valuable use" of his land.

As a citizen, and in a way a shareholder in government's ownership of this parcel of land, I would encourage government to lease this parcel to be used by the highest bidder. I think that perhaps the best use of the market with this set of circumstances would be to have the BLM auction the leases to the highest bidder.

Monday, July 25, 2005

Bankruptcy Power -- Maybe Not What You Thought

Todd Zywicki on the bankruptcy power of Congress:
". . . the Bankruptcy power in Article I, sec. 8 of the Constitution was not actually put into the Constitution to help debtors. This is usually quite surprising to most people. It was actually put there in large part to help creditors--like the Contracts clause, Fair Faith and Credit, and prohibition on state issuance of paper money, Congress's power to 'enact uniform laws on the subject of bankruptcies' was designed to enable creditors to collect interstate debts more easily and to eliminate the power of state legislatures to try to discharge the debts of their residents (as often was the case during the Articles of Confederation era). In particular, states used their laws to pass pro-farmer laws that interfered with the ability of banks to collect on farm loans and vesting the Bankruptcy power in the federal government was an effort to restrict the excesses of state legislatures under the Articles."

Eminent Domain Amendment

"We the people therefore ask that the Constitution of the United States be amended to include the following language:

The right to ownership of property being the cornerstone of liberty, no government, or agency thereof, within these United States shall have the authority to take property from any person, corporation, or organization through exercise of eminent domain for other than a public use without just compensation.

Public use shall be understood to be property the government owns or retains the paramount interest in, and the public has a legal right to use. Public use shall be understood to include property the government owns and maintains as a secure facility. Public use shall not be construed to include economic development or increased tax revenue. Public use of such property shall be maintained for a period of not less than 25 years.

Just compensation shall be the higher of twice the average of the price paid for similar property in the preceding six months, or twice the average of the previous 10 recorded similar property transactions. Compensation paid shall be exempt from taxation in any form by any government within these United States."

Sounds about right to me.

Commerce Clause

If you're interested in the Commerce Clause you probably want to check out Glenn Reynolds .

Market Power & Government

"With the new year under way, there was little time for brooding, seldom time enough for anything. A steel strike loomed, threatening the whole economy. Hurried meetings were held. Official cars came and went in the White House drive. '1946 is our year of decision,' [President] Truman had told the country in a radio broadcast. 'This year we lay the foundation for our economic structure which will have to serve for generations.'

The steel workers' union, headed by Phil Murray, called for a wage increase of 19 1/2 cents an hour. The steel companies, represented by Benjamin Fairless of U.S. Steel, offered 15 cents. At the conclusion of a long, arduous session at the White House on January 12, Truman was able to announce that Murray had agreed to postpone the strike for one week. After another session on the 17th, and still no agreement, Truman proposed that the steel companies grant an increase of 18 1/2 cents. Both sides wanted time to consider and were told that they had until noon the following day.

Murray accepted the President's proposal, but Fairless refused. On January 19, 1946, at more than 1,000 mills across the country, 800,000 steel workers walked off the job in the biggest strike in history.

[ . . . ]

Pressed for a statement about the steel strike at his next press conference, Truman replied, 'I personally think there is too much power on each side, and I think it is necessary that the government assert the fact that it is the power of the people.'"

David McCullough, Truman, p. 480-481
Interesting, eh? Both sides have too much power. What is interesting to me is that the President is involved in labor negotiations between two entities that seem to me to have considerable monopoly power. The President is negotiating what seems to me to amount to the way the extra profits of monopoly power will be distributed between a producer monopoly and a union or labor monopoly. Further, the losers in this dispute will really not be either big labor or big steel, but rather "we the consumers." If the government is going to be involved in such a situation, shouldn't its policy be to work to end the monopoly profits, and not to determine the distribution of monopoly profits?

Walter Williams on Kelo

Walter Willaims writes:
The framers of our Constitution gave us the Fifth Amendment in order to protect us from government property confiscation. The Amendment reads in part: '[N]or shall private property be taken for public use, without just compensation.' Which one of those 12 words is difficult to understand? The framers recognized there might be a need for government to acquire private property to build a road, bridge, dam or fort. That is a clear public use that requires just compensation, but is taking one person's private property to make it available for another's private use a public purpose? Justice John Paul Stevens says yes, arguing, 'Promoting economic development is a traditional and long-accepted function of government.'

[ . . . ]

The Court's decision helps explain the vicious attacks on any judicial nominees who might use framer-intent to interpret the U.S. Constitution. America's socialists want more control over our lives, property and our pocketbooks. They cannot always get their way in the legislature, and the courts represent their only chance. There is nothing complex about those 12 words the framers wrote to protect us from governmental property confiscation. You need a magician to reach the conclusion reached by the Court's majority. I think the socialist attack on judicial nominees who'd use framer-intent in their interpretation of the Constitution might also explain their attack on our Second Amendment "right of the people to keep and bear Arms." Why? Because when they come to take our property, they don't want to risk buckshot in their butts.

Saturday, July 23, 2005

More Externality Abuse, eh?

Will Wilkinson discusses Richard Layard's idea that a person's envy of the income and success of others is a negative externality. Isn't this such a lot of nonsense? Why would we want to think that a person's resentment or jealousy of others is a matter of economic efficiency? I thought a negative externality was about a market failure to achieve an efficient allocation of resources, and not a matter of personal good or bad character.

This reminds me of what I thought was a relatively brief flirtation with "pareto optimal distribution" some 20 or 30 years ago. That earlier literature provided the genesis for my often used "Mutt and Jeff" discussions in my courses. I think my favorite article from that earlier literature was titled
Mutt and Jeff Ride Again: The Case of Malice and Envy.
Surely malice and envy are attitudes to consider and be concerned about when we run up against them in our relationships with others, and certainly malice and envy of others is something I hope we would consider character flaws in ourselves and others. But, we do not have questions here that are matters of an economically efficient allocation of resources.

Oh, one other thought. I can once again refer to one of my economists hereos (because of his clear thinking about matters in the realm of welfare or normative economics). E.J. Mishan wrote a devastating critique of pareto optimal distribution years ago, and if I could remember the citation I would offer it now.

Friday, July 22, 2005

Sowell On The Politics Of Activist Judges

Thomas Sowell :
Those who want to see judges who will apply the law instead of imposing their own policies face not only political obstruction to the appointment of such judges but also calculated confusion about the very words used in discussing what is at issue.

Judges who impose their own preferences, instead of following the law as it is written, have long been known as "judicial activists" while those who carry out the law, instead of rewriting it to suit themselves, have been said to be following the "original intent" of the law.

But now a massive effort to muddy the waters has been launched by those who want judges who will continue to impose the liberal agenda from the bench. Words like "activists" and "intent" are being twisted beyond recognition.

. . . . . . . .

One of the major functions of the Supreme Court for more than two centuries has been to strike down acts of Congress, the President, or the lower courts when any of these exceed the authority granted to them by the Constitution. Calling this "judicial activism" is playing games with words and befogging the real issues.

. . . . . . . .

It is one thing to allow the government to take land needed to build a military base or a dam and something very different to allow the government to bulldoze people's homes to turn the land over to a private developer to build casinos or shopping malls.
I agree with Sowell. And, I think the debate around "judicial activism" has greater import than discussion of "legislating from the bench" suggests. I think the term "judicial activism" certainly includes "legislating from the bench," but the term covers more. When the Supreme Court allows government to "bulldoze people's homes to turn the land over to a private developer" it has done more than "legislate from the bench." The Court has amended the words of the Constitution from "for public use" to "for public purpose." The Legislature cannot, on its own, amend the Constitution. So, sometimes the term "activist judges" describes more than legislating from the bench. Perhaps we should say in such cases that "activist judges" are "amending from the bench" or even "ratifying from the bench."

Thursday, July 21, 2005

Scalia & Few Americans

E.J. Dionne Jr.:
"Many of us would welcome the chance to have Scalia as a professor. But outside the ranks of the right wing, few Americans want their country defined consistently by Scalia's choices. In shifting the balance on the court, Roberts could give Scalia the power to impose his worldview."

Dionne asserts that outside the right wing few Americans want their country defined by Antonin Scalia. This may well be true, IF we are thinking about Scalia's personal views of life and politics. But, the issue involves the Constitution, not majority views on legislation. According to the words of the Constitution, a super-majority is required to ratify and to amend the Constitution.

So, imagine if you will, the numerous views on the role and purpose of government in our system of political economy. Which views about the role and purpose of government are likely to garner the support of a super-majority, say of 75% of the populace? I believe they are likely to be views that sound like government as the protective state, i.e., views of government that sound like a practical application of individual liberty. Would you agree? If not, then which of the views regarding the role and purpose of government do you think would garner the support of 75% of the populace?

If I'm correct, then I would think that it is much more than the far right side of the political spectrum that would be comfortable with Scalia. Scalia's views of relevance relate to defining the meaning of our written Constitution, not to defining our country or to picking specific public policies. Scalia's constitutional interpretation generally tends to be consistent with viewing our Constitution from the perspective of individual liberty and with the role of government as being that of the protective state.

Applied Economics

Tim Habb has a useful illustration of the value of knowing how to apply economic analysis:
But, by decreasing the number of people wanting gas and improving fuel efficiency, we decrease the demand for gas and LOWER THE PRICE. Lower prices create a disincentive for innovation and lengthens the time to conversion to alternative energies.

Wednesday, July 20, 2005

A New Approach on Social Security Reform

"I believe the president should focus on putting Social Security on a sound footing. The best way to do that is to adjust benefits by increasing the retirement age, cutting back payments further for those who choose to retire early and indexing the growth in benefits to the consumer price index (that is, inflation) rather than to wages. Raising payroll taxes -- or increasing the ceiling below which those taxes are collected -- should be off the table. Such a hike would have a disastrous effect on the economy.

Should we give up on personal accounts?

Not at all. Those accounts will grow organically as Social Security withers.

The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme. The system would become more of a safety net. Retirees would, very naturally, fill in the gap by saving more.

The vehicle for those savings would be personal stock and bond accounts -- which already exist!

There are 401(k) plans, IRAs, Roth IRAs, Keoghs, 403(b) plans and other tax-advantaged accounts. These should be consolidated under simplified rules. My preference is a universal, unlimited IRA -- income that you put into savings is not taxed at all. When you withdraw the money, at, say, age 60 or later, then you pay capital-gains taxes on it."
Seems worth a look.

Value to Society

"Also implicit in the I.Q. controversy is the notion that mental tests are not only intellectually invalid, but morally 'unfair' if they do not measure 'real' or innate ability. But there is no more individual merit in having received a windfall gain in the form of brain cells rather than in the form of encyclopedias or private schooling. Each individual is born into a world he never made, with a brain he never made. His moral claims are no greater or less, whether heredity or other circumstances beyond his control gave him his advantages or disadvantages. Similarly, his value to society is the same, whether that value originated inside his head, or inside his home or school, or among his companions."

-- Thomas Sowell, The Economics and Politics of Race, p. 145
I'm curious about the meaning of "his value to society." My curiousity is not specifically with respect to Sowell's point in this paragraph. I think this phrase has a more general use than just in the discussion of I.Q. What do you think this phrase means?

Sowell Insights

"The question is not about the 'right' or 'best' definition of the word 'racism.' Words are servants, not masters. The real problem is to avoid shifting definitions that play havoc with reasoning."

-- Thomas Sowell, The Economics and Politics of Race, p. 144

I believe there are many examples of shifting definitions over time in public policy discussions that play havoc with reasoning. One might be what happens with the idea of a negative externality. This concept has been precisely defined to be a source of market failure. After some time it seems that using this concept in discussions of public policy choices has led to definitions of negative externality that plays havoc with reasoning. Reasoning has been so distorted or misguided in some cases that negative externality has been used by some to characterize government failure rather than market failure.

Tuesday, July 19, 2005

More BCA Debate

E.J. Mishan in Introduction to Normative Economics explains what I always took to be the position of economists with respect to policy analysis. That is, economists, as economists, do not argue for or against specific value judgments that define the appropriate role or purpose of government. Rather, the role of the economist is to study the economic implications of alternative value judgments. While I don't think I hear economists speaking in such terms very often any more, I still think this is the best conceptual view of the role of economists in public policy discussion. I would add that I think it is the best conceptual view of the role of any social scientist in terms of public policy discussions.

For this perspective to work and make sense, I think it is important for the economist (or other social scientist) to be very explicit about the value judgments being studied. In my view, economists are pretty good at doing this in general. After all, nearly every undergraduate textbook on a microeconomic policy topic discusses efficiency and market failure. Economists precisely define efficiency as pareto optimality, and they are very up-front about the fact that their study of efficiency and public policy does not question individual preferences. The benefit-cost analysis that is developed by most economists is an effort to provide empirical information about which public policies are likely to be efficient and which are likely to be inefficient. If those in government want to choose efficient policies, if they like to define the role of government as efficiency and correcting market failure, then they should be very interested in the information provided by BCA.

On the other hand, if our policy makers think another normative framework is important to defining the appropriate role of government and in defining the appropriate use of government's coercive power, then the information provided by BCA should be of little interest.

I mention this because I think the discussion of BCA over at Environmental Economics Blog seems to be missing this. Specifically, my guess is that those who have written critically about BCA in that discussion simply do not think government's role should be to correct market failure or to pursue an economically efficient allocation of resources. Unfortunately, it seems the best I can do is guess because the critics have not made their value judgments clear, and certainly they have not made their value judgments as clear and explicit as economists do.

Consequently, I suggest the discussion has made little progress, and I'm not sure there is much common ground. For one thing, I hear in the critics an unwillingness to accept the preferences of individuals, and instead I hear a willingness to judge some preferences as better than others. But, again, I'm not quite sure because the discussion seems to me to stay well away from the real issue and fundamental difference between those who find BCA useful and those who do not.

Those who find BCA useful are exploring the implications of government policy alternatives under the normative assumption that the role of government is to correct market failure. Those who are critical of BCA do not want the economic efficiency normative framework to define the appropriate role and purpose of government. I suggest that when we discuss policy alternatives and the tools to evaluate policy alternatives, it is of utmost importance that we be explicit about our normative framework for defining the appropriate role/purpose of government. When we don't, I think we talk with each other in very unproductive ways.

I will offer what I think is one illustration of unproductive discussion. Ackerman & Heinzerling have an article titled "Pricing the Priceless: Cost Benefit Analysis of Environmental Protection" (150 U. Pa. L. Rev. 1553, 2001-2002) in which they write:
". . . Cost-benefit analysis differs, however, from other analytical approaches in the following respect: it demands that the advantages and disadvantages of a regulatory policy be reduced, as far as possible, to numbers, and then further reduced to dollars and cents. In this feature of cost-benefit analysis lies its doom. Indeed, looking closely at the products of this pricing scheme makes it seem not only a little cold, but a little crazy as well.

Consider the following examples, which we are not making up. They are not the work of a lunatic fringe, but, on the contrary, they reflect the work products of some of the most influential and reputable of today's cost-benefit practitioners. We are not sure whether to laugh or cry; we find it impossible to treat these studies as serious contributions to a rational discussion."

The paper begins this way. This beginning makes it clear, unfortunately, that the critique to follow has little relevance to the work of economists in developing BCA. The reason it has little relevance is that the discussion does not understand the normative framework upon which BCA is built. Economists are NOT estimating prices when they develop a BCA. What economists are doing is attempting to estimate changes in individual well-being that will result from the allocative changes in the economy due to government choosing the action or policy that is being studied. We want to estimate changes in the well-being of all the individuals who will be affected by the allocative changes in the economy because this is fundamental to the normative framework we generally use to evaluate public policy. We need estimates of changes in individual well-being to be able to identify which government actions we expect to be consistent with economic efficiency and which we expect will not be. Prices DO NOT tell us such information. We are not estimating prices, we are estimating a term we call "compensating variation." It seems to me of little value to offer a critique of BCA if the critique is not founded upon the very normative framework upon which BCA relies. It is difficult to treat the BCA critiques "as serious contributions to a rational discussion" if they do not accurately describe what economists are up to with their BCA.

The discussion over at Environmental Economics Blog about BCA seems to me to talk right past the fundamental differences. Economists are comfortable with the normative idea that government should correct market failure. I'm pretty sure those who are critical of BCA are not comfortable with that normative foundation for the purpose of government. I think a better and more useful conversation would take place if both sides of the debate made their value judgments regarding the role of government very explicit. Then the debate about evaluating alternative environmental public policies could, perhaps, be over the bottom line issues, i.e., what is the appropriate role of government and its coercive force in our lives?

Friday, July 15, 2005

Web Debate on Benefit-Cost Analysis

"Smith says that we have limited resources and that we may have to trade one environmental or educational program against another. But why is it only good things that have to be traded against each other? What if we want both education and environmental protection, what if we want both protection of coastal wetlands and spending on climate change mitigation? Personally, we’d like to have it all, and finance it by giving up some useless missiles or tax cuts for millionaires. Scarcity is artificially contrived, in the midst of American affluence, by declaring such choices off-limits. Why should we throw up our hands and say that the richest country in the world can’t afford to protect the environment and educate our kids? Cost-benefit analysis doesn’t reflect preferences like ours because it does not -- and cannot -- take a large look at what our society spends money on and help us get the things we want most. For that, we have democracy, not made-up markets."
I would be very interested to have people make comments on this on-line debate. Which side do you think gets the best of the discussion?

I know that most economists view the role and purpose of government as correcting market failure. Based upon the discussion by Ackerman & Heinzerling, I have no idea what they think the role of government should be. James Madison describes the role of government:
"Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own."

Madison's "end of government" is pretty much the normative framework of individual liberty. I agree with Madison. While the normative framework of efficiency, which defines the economic role of government as correcting market failure, is not identical to the role of government defined with respect to individual liberty, it seems to me most economists are not hostile to liberty. I suspect that Ackerman and Heinzerling can be pretty hostile to individual liberty because of their assertion that we have democracy to help us get the things we want most. Would you agree?

Nomination Watch on Judicial Philosophy

Luckily, some Senators recognize that the Senate has an obligation to find out about a nominee’s philosophy. As the blog ThinkProgress noted, Senator Arlen Specter (R-PA), Chairman of the Senate Judiciary Committee, wrote in his autobiography that Senators should ask nominees about their judicial philosophies, and that nominees must answer or risk rejection by the Senate.
Well, I'm not sure about this idea. I think I agree, but I'm afraid my definition of judicial philosophy may be different from this author, and unfortunately the term is not explicitly defined. I suspect that for this author questioning about judicial philosophy means asking questions about what a nominee's opinion of a specific case is. It is my opinion that a nominee cannot answer such questions truthfully until the questions are actually presented and debated between the justices. Further, I don't think such questions are questions of judicial philosophy. In contrast, I think questions about judicial philosophy should attempt to discover whether the nominee believes the Constitution lives and breathes by the preferences of Supreme Court justices, or whether the nominee believes the Constitution is "living" because it includes a formal process by which it can be amended. I think such a question is about judicial philosophy, while questions of the first sort seem to me questions about judicial politics.

Thursday, July 14, 2005

Party Politics

Speaking of parties, is one political party more honest than the other when it comes to disclosing the mess we are handing our kids? No. Each party has its constituents, all of whom share the convenient property of being alive and being able to vote. Future kids don't have that luxury, and current kids are kept far away from the polling booths. So the goal becomes to make the grown-ups happy. The Democratic grown-ups are happy when the government spends more money (on them). The Republican grown-ups are happy when the government raises less taxes (from them). The ideal solution, then, is to spend more and tax less.

Kotlikoff & Burns, The Coming Generational Storm .
What more do we need to know about politics?

By the way, I think this book by Kotlikoff and Burns is a must read.

Wednesday, July 13, 2005

Environmental Economics & Cost-benefit Analysis

Dan Phaneuf on BCA:
Environmental economists tend to favor cost-benefit analysis in the policy arena because of the discipline and transparency it provides in evaluating policy options. It is easy to evaluate absolutes. Most would agree that reducing nitrogen contamination of groundwater wells, limiting the occurrence of code red ozone alerts, and preserving habitat for grizzly bears are worthy goals. Determining the relative merits of any one of these compared to the others, or compared to non-environmental goals such as improving public education, is much more daunting. Because policy making is ultimately about evaluating the relative merits of different actions some mechanism is needed to rank the alternatives. Without the discipline of cost-benefit analysis it is not clear how the interests, claims, and opinions of parties affected by a proposed regulation can be examined and compared. Criterion such as ‘moral’ or ‘fair’ do not lend themselves well to comparison and are subject to wide ranging interpretation. Who gets to decide what is moral or fair? Cost-benefit analysis is far from perfect, but it demands a level of objectivity and specificity that are necessary components of good decision making.
Certainly economists may favor the use of benefit-cost analysis because doing so involves transparency and discipline, and perhaps because both these things encourage objectivity by the analyst. But, there must be more than this that is involved.

As is noted in this quote, choosing among policy alternatives involves, either implicitly or explicitly, the ranking of alternatives, and in order to rank alternatives, it is necessary to make value judgments. In a sense, "benefit-cost analysis" (BCA) can have a generic meaning which relates to any choice. That is, to make a choice a person considers the benefits against the costs of each available choice, and then presumably, the person chooses the alternative with the greatest excess of benefits over costs. Different people can, and do, make different choices even though they face the same alternatives. Different people make different value judgments about what the relevant "goal" is, and therefore, for different people each of the available choices is valued or evaluated in different ways. In thinking of BCA this generic way, benefits are associated with advancing toward the goal and costs are associated with detracting from the goal. As such, different value judgments would imply that the benefits and costs have to be computed in different ways. For the same set of policy alternatives, different value judgments must lead to computed benefit-cost analyses that are different.

When environmental economists do benefit-cost analysis what value judgments do they use? Note, first, that the value judgments I am writing about provide economists with an answer to this question: What is the appropriate role or purpose of government in our system of political economy? Or to borrow, and paraphrase, from Weimer and Vining : What do we consider legitimate uses of government's coercive power? For most environmental economists the value judgment that answers these questions is that the economy should achieve an efficient allocation of resources, and therefore, the role and purpose of government is to aid the economy in achieving efficiency. Much economic analysis of efficiency is theoretical. For environmental economists, benefit-cost analysis represents the applied version of theoretical efficiency analysis.

Saying that economic benefit-cost analysis is the economist's applied tool for assessing the efficiency of alternative public choices and policies doesn't really tell us very much which is specific. We still need to know what the economist means by "efficiency." A very general idea is that an efficient choice for government is one that means people in the community in general will be better off as a result. This means, then when an environmental economist makes a benefit calculation, the idea is to make an estimate in dollar terms of how much better off people in the community will be. Similarly, the cost calculation is supposed to be an estimate of how much worse off people in the community will be. In general, the people who are better off, given a choice by government, will not be the same people who are worse off because of government's choice. Economists want to recommend only government actions which are expected to have benefits greater than costs (both terms as specifically defined by us) because when this condition obtains they know it is possible to use resources differently in our system of political economy, and in such a way that people in the community in general can be better off.

Economists certainly like benefit-cost analysis for the reasons cited in the above quote. But, there is more to it. We also like benefit-cost analysis because we conceptually construct, and then estimate, our notions of benefits and costs so that we can make empirical statements about which government choices will aid in achieving the normative purpose of government, which, in the case of most environmental economists, is an economically efficient allocation of resources.

So, if you agree with the role of government utilized by economists, then you probably should like to know the results of their benefit-cost analyses. On the other hand, if the value judgments you favor to define the role and purpose of government (and its use of coercion) differ from that of economists, then the benefit and cost numbers estimated by economists are not likely to tell you much about whether a given choice by government advances toward the role of government you favor. In that case, I assume you would want to develop your own definitions of benefits and costs based upon the value judgments you use to define the role of government.

More Job Creation

Russell Roberts has a follow-up on jobs in our economy:
In my earlier post on job creation, I lazily opened with this line:

The US economy grows jobs steadily.
It's a standard way of thinking about the economy as an engine or machine that creates jobs the way a factory makes cars. The sentence conjures up an image of the economy as something over there, separate from the rest of us. When the economy is healthy, it creates jobs. When it's unhealthy, it struggles to create jobs or worse, destroys jobs.

It's a very misleading metaphor. Job creation is the result of millions of decisions made by millions of people pursuing dreams and profits. When the environment for pursuing those dreams encourages risk-taking, jobs get created as long as people want to work. When the environment discourages risk-taking, people who want to work may not find it as easily.
. . .

The lesson here is to avoid metaphors taken from physics and engineering that are inevitably cause and effect metaphors and think instead of metaphors from biology where results emerge from the actions of multiple interactions in a complex system. Think rain forest not engine.

At least I said in that earlier post that the economy "grows" jobs. Sounds something like a rain forest. But the problem isn't the verb. It's the noun "economy" doing the growing like a farmer growing wheat. The economy can't do things. It is the result of individuals "doing."
This is excellent economics.

Tuesday, July 12, 2005

Global Warming and the US Economy

Alex Tabarrok:
Actually Laurie, and PGL of Angry Bear who links to David, the best study of the issue indicates that global warming is most likely a net benefit to the US economy. Carbon dioxide and greater temperature makes plants grow faster. The author, Yale economist Robert Mendelsohn writes:

Climate change is likely to result in small net benefits for the United States over the next century. The primary sector that will benefit is agriculture. The large gains in this sector will more than compensate for damages expected in the coastal, energy, and water sectors, unless warming is unexpectedly severe. Forestry is also expected to enjoy small gains. Added together, the United States will likely enjoy small benefits of between $14 and $23 billion a year and will only suffer damages in the neighborhood of $13 billion if warming reaches 5C over the next century. Recent predictions of warming by 2100 suggest temperature increases of between 1.5 and 4C, suggesting that impacts are likely to be beneficial in the US.

Speaking personally, I have undergone a greater shift in mean temperature by moving from Canada to the US than will occur in 100 years of global warming and I like it! My fellow Canadians, still stuck in the frozen north, will be glad to know that in the future they too can have warmer temperatures without giving up their prized health care system.


Russell Roberts:
Not surprisingly, about half of the jobs are in above-average paying sectors. About half are in below-average paying sectors. Of course this tells you nothing of what has happened to the actual average. Some sectors with below average pay have created jobs that pay above the average and some high-wage sectors have created jobs with below average pay. But the point is that a growing economy creates all kinds of jobs. In truth, the wages attached to those jobs depend on our skills and the market for those skills. Those wages are enhanced by trade and by most of the things the doom and gloomers complain about.

Saturday, July 09, 2005

Krugman's Policy Analysis Exposed

Professor Boudreaux is right on target.
In yesterday’s column, Krugman wrote:

How can medical experts who see obesity as a critical problem deal with an ideological landscape tilted in the direction of doing nothing?

One answer is to focus on the financial costs of obesity, and the fact that many of these costs fall on taxpayers and on the general insurance-buying public, rather than on the obese individuals themselves.

Krugman here reminds me of the 17-year-old kid who murders his parents and then pleads for the court’s mercy on grounds that he’s an orphan.

Krugman advocates government-provided, universal health care for all Americans. That is, Krugman advocates further turning issues that would otherwise be private in to ones that are, by policy design, public. (In econospeak, Krugman advocates creating an externality where one doesn’t naturally exist.) Championing existing levels of nationalized health-care in the U.S. (mainly Medicare and Medicaid), and calling for even more, Krugman then tosses his hands in the air rather cavalierly and cites these government policies as a justification for greater intrusion into people’s private lives (or, what should be people’s private lives – and would be people’s private lives exclusively – were it not for the very health-care policies that Krugman champions).

This sort of policy analysis happens often. A problem is asserted, which is then characterized as imposing costs on others. Reference (sometimes implicit, sometimes explicit) is then made to the economist's idea of a negative externality, and, of course, it is then asserted that the negative externality justifies government action to correct the asserted problem. But the problem is actually caused by other government action. An exteranlity is a market failure. When the problem results from government action (or inaction) we should not say we have an externality because we actually have a government failure with respect to achieving an efficient allocation of resources. The policy answer to government failure is not more government action that will add to inefficiency. The policy answer would seem to be to end the government action causing the asserted problem to begin with.

Krugman ends his commentary with
Above all, we need to put aside our anti-government prejudices and realize that the history of government interventions on behalf of public health, from the construction of sewer systems to the campaign against smoking, is one of consistent, life-enhancing success. Obesity is America's fastest-growing health problem; let's do something about it.
I think we see here another sort of common problem in policy analysis. I believe the history of successful public health actions involves policies with respect to infectious disease. Infectious disease has attributes that probably fit well the economist's models of market failure. The policy issues asserted with respect to smoking and obesity do not (perhaps environmental tobacco smoke fits the market failure idea, but it seems to me that once we consider private property rights what is left of this issue as a market failure is small in magnitude), because they involve impacts on the individual that result from the individual's own choices. It is a mistake in analysis to put obesity in the same set of policy concerns as infectious disease. The public health bureaucracies have often successfully dealt with the market failures inherent in infectious disease. These days these bureaucracies seem to have branched out far beyond infectious disease, and far beyond the set of issues involving market failures. I don't think we want to suggest that any thing a public health agency attempts to do today will be beneficial simply because in the past public health agencies did often deal with market failures. The incentives and logic of bureaus lead in the direction of expansion, and even though a government agency may have once, historically, pursued policy goals consistent with the economist's idea of market failure, it is likely the agency will want to tackle any issue that might allow the agency to expand regardless of whether the logic of government action to correct market failure fits or not.

Friday, July 08, 2005

Kelo: Fight Socienics

Read Arnold Kling :
In its recent Kelo decision (see Professor Bainbridge's essay), the U.S. Supreme Court gave its approval to what might be called "Socienics," in that it put the social benefit before individual rights. When the government of the city of New London claimed that it had a higher social purpose for Mrs. Kelo's property, the majority believed that the opinion of the government officials was beyond question. In effect, the Court ruled that "there is no definition of right beyond that."
Now consider James Madison:
Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own.
I agree with Madison. It seems to me that any government that acts as Kling describes, is a government that is just.

ACORN's Living Wages

Economists in college classrooms all across the country tell students about the economic implications of government laws that impose a minimum wage. Students learn that minimum wage laws lead to a decrease in employment, among other things. Bryan Caplan points out a political organization that seeks to get government to impose a minimum wage as well as to increase minimum wage levels already imposed. The organization calls itself ACORN and apparently it too has learned that minimum wage laws decrease employment. Check out this post :
For years, ACORN has tried like hell to avoid paying its own members the minimum wage required by law! This, as those same employees were working to raise minimum wages for everyone else.

In fact, ACORN actually went to court to fight for its right to pay wages below the legal minimum. What's more, ACORN made the exact same arguments its opponents make when arguing aginst higher minimum wages -- namely, that paying higher wages would mean the company would have to make do with fewer employees.

In a suit ACORN filed to exempt itself from California's minimum wage laws, the organization wrote in its brief:

"As acknowledged both by the trial court and California, the more that ACORN must pay each individual outreach worker--either because of minimum wage or overtime requirements--the fewer outreach workers it will be able to hire."

How About Liber8

This is right on. More money aid to Africa won't lead to economic prosperity.

The Volokh Conspiracy - The Only Supreme Court Editorial You Need to Read:

Excellent summary by Orin Kerr. Check it out.

Thursday, July 07, 2005

Looming pension system crisis

Probably few Americans are familiar with the acronym "PBGC." This is the federal Pension Benefit Guaranty Corp., set up by Congress 30 years ago to provide insurance for defined benefit pension plans.

Today, the PBGC's insurance program is overwhelmed, underpriced and proves a false sense of security to tens of millions of American workers and retirees. Companies are too often offloading their pension commitments to the agency, leaving PBGC with a $23 billion deficit at the end of 2004 after posting an accounting surplus of more than $7 billion in 2001. According to the Congressional Budget Office (CBO), that deficit is likely to grow dramatically over the next 10 years -- by as much as $48 billion -- and the PBGC's single-employer program is slated to run out of cash sometime between 2020 and 2025. That is more than 20 years earlier than the expected Social Security shortfall.

As chairman of the Senate Budget Committee, I believe this serious long-term fiscal problem must be addressed now. While the root of the problem concerns widespread underfunding among defined benefit pension programs and an outdated law permitting it -- an issue the administration and Congress are tackling -- we also must take steps to maintain the PBGC's solvency and protect participants, beneficiaries and investors.
Sounds like an example of "moral hazard." Government promises to "back up" pension plans, employers then underfund, and the risk of pension fund failures increases.

Perhaps the problems here are even worse than those associated with moral hazard:
The PBGC receives no appropriated funds. Claims are paid primarily from the revenue of the premiums from sponsors of covered pension plans. Current annual fixed-rate premiums are set at $19 per participant, well below the value of the PBGC insurance. Rules surrounding fixed and variable premium levels must be updated, taking into account the amount of existing underfunded liabilities.
Government is supplying the insurance. Are you surprised, therefore, to discover the premiums are too low?

Judicial Activism

Ever wonder what the term judicial activism means? This is a post worth reading. Do I stretch the term too far to suggest that commitment to the idea of a "living constitution" is a commitment to judicial activism

Wednesday, July 06, 2005

Three Lessons for the Great Debate Over The New Justice

I like Randy Barnett :
LESSON ONE: Watch the switch from a list of ignored textual provision to good and bad results.
LESSON TWO: Watch the switch from meaningful scrutiny to extremely deferential "rational basis" scrutiny, as a means of continuing to ignore portions of the text.
LESSON THREE: Watch for an appeal to "precedent" to attack a nominee who may favor reviving the original meaning of portions of the text--e.g. the "public use" portion of the Takings Clause--that have been ignored for far too long.
I think Barnett offers very good advice to any one interested in the Supreme Court and a written Constitution, in contrast to a "living constitition" that lives according to the preferences of 5 justices of the Supreme Court.

Eliminate the Supreme Court?

Hanno Kaiser suggests eliminating the Supreme Court. I don't really like his specific proposal, but I am curious about whether there might be a reason to say the Supreme Court cannot interpret the Constitution. Earlier I noted that I thought the Constitutional role of the Supreme Court in our system of political economy was to protect individual liberty. In contrast, both the Legislative and Executive branches of government respond to incentives that reflect the "will of the majority" (and sometimes the will of many minorities due to logrolling). It seems that if we are to minimize tyranny of the majority, we need a branch of government that can, and will, protect individual liberty as the priority of that branch of government. In our system of political economy, the only branch of government that could possibly want to protect individual liberty would seem to be the Judiciary.

If the Supreme Court decides it will defer to "the will of the majority," and if it will not protect individual liberty from tyranny of the majority, then why not just say it cannot interpret the Constitution? Let the Constitution be interpreted by the other two branches of government.

What do you think?

Tuesday, July 05, 2005

The Hot Major For Undergrads Is Economics

The reason for posting this one should be obvious, eh?

Economic Liberty

Mancur Olson suggested there are 2 necessary conditions for economic prosperity in his book Power and Prosperity:
. . .it was natural to ask how a society can obtain the types of markets that generate the rapid and sustained growth that brings a cornucopia of wealth. If we bring all of the theory and evidence together at once, we see that. . . .only two general conditions are required for a market economy that generates economic success.

. . . .the first of these conditions is the paradoxical condition of secure and well-defined individual rights. Rather than being a luxury that only rich countries can afford, individual rights are essential to obtaining the vast gains . . .and to obtaining the bounteous harvests that property-intensive and contract-intensive production can yield. In particular, a market economy can reach its full potential only if all of the participants in that economy, whether individuals or corporations, native or foreign, have the right to the impartial enforcement of the contracts they choose to make. It may also reach its full potential only if all participants have secure and precisely delineated rights to private property. . . .

There is no private property without government -- individuals may have possessions, the way a dog possesses a bone, but there is private property only if the society protects and defends a private right to that possession against other private parties and against the government as well. . . . [pages 195-196]

The second condition required for a thriving market economy is simply the absence of predation of any kind. . . .one other kind of predation can and often does occur even in societies with the best individual rights. This is predation through lobbying that obtains special-interest legislation or regulation and through cartelization or collusion to fix prices or wages. . . .The distortions of prices and the obstacles to innovation arising from distributional coalitions make an economy sclerotic. . . . [pages 196-197]

I believe that since the "economic due process" era, the Supreme Court has given greater protection to political liberties than to economic liberties. In the realm of liberties such as free speech the Court seldom defers to legislatures, but it has often been very deferential with respect to economic liberties. I suggest this contrast is evident in its Kelo opinion because it allowed government to take private property for transfer to another private use (even though a "public purpose" or "public benefit" was asserted). If the Court had not deferred to a legislative determination, it could have seen the transfer from one private use to another.

In deferring to legislative determination in cases where economic liberties are at risk or are actually infringed, the Court moves our system of political economy farther away from the conditions necessary for continued economic prosperity. Is there any action of government that is more predatory than taking property from one private use to transfer it to a different private use, and from one private owner to another private owner? I think not.

It seems to me the Kelo opinion does precisely what Olson explains should not be done if we want continued economic prosperity because "there is private property only if the society protects and defends a private right to that possession against other private parties and against the government as well." In Kelo the Supreme Court chose not to defend the private right of property against either other private parties or against government.

Monday, July 04, 2005

Epstein, Kelo, & The Role of the Judiciary

Richard Epstein on the Court's recent takings opinion:
The court could arrive at its shameful Kelo ruling only by refusing to look closely at past precedent and constitutional logic. Courts that refuse to see no evil and hear no evil are blind to the endemic risk of factional politics at all levels of government. And being blind, this bare Supreme Court majority has sustained a scandalous and cruel act for no public purpose at all.
I think the Kelo opinion illustrates in an important way that the Supreme Court in particular, and the Judiciary more generally, has often failed to carry out it's proper Constitutional role in our system of political economy. Both the Legislative and Executive Branches of government respond to the "will of the majority." This is their natural tendency. Neither the Legislature, nor the Executive, branch of government really sees incentives to protect the liberty of the individual. The Judicial branch of government is the one branch of government that has any reason to protect the liberty of the individual, and this is largely because our Constitution was written with the protection of individual liberty in mind. But, when the Supreme Court turns from it's role as protector of individual liberty in order to defer to the "will of the majority," the Supreme Court allows our system of political economy to be characterized by tyranny of the majority.

I suggest that it should matter not one little bit what government says the "public purpose" of its action is. The legislative branch, as well the exective branch, will always say that it acts in the public interest, and for legitimate public purpose, and to great public benefit. It will say so, both when this is true, and when the point of government's action is quite clearly to take from Mutt to give to Jeff. The government should never be allowed to take property from Mutt to transfer it to Jeff, no matter the excuse offered by government, simply because that property belongs to Mutt, not to Jeff and not to government. It should matter not, whether it is the will of the majority. It is Mutt's property. It is not the majority's. It is the role of the Judicial branch of government to protect individual liberty from the will of the majority. In Kelo the Supreme Court failed in its Constitutional role in our system of political economy.

Friday, July 01, 2005

Energy Doesn't Come From Pork

Arnold Kling offers analysis of a portion of the Energy Bill:
Here is everything you need to know about energy policy:

Energy doesn't come from pork.
The Energy Bill seems to provide a classic example of rent seeking and Congress.