Schucks

David Henderson’s take

Schuck explicitly defends public choice from its critics, writing, “[P]ublic choice theory’s rational actor model explains and predicts far more observed official behavior than its main rival, public interest theory.” He then lays out how well public choice predicts the destructiveness of many government programs–programs that are destructive precisely because of the many perverse incentives that motivate politicians, bureaucrats, special interests, and voters. Schuck gives many historical and contemporary examples of government programs that cause large inefficiencies, including unemployment insurance (creates the incentive to stay unemployed); disability insurance (creates the incentive to claim disability and quit work); and the Dodd-Frank Act (creates moral hazard by broadening the government’s safety net for risk takers).

My take:

Schuck has an impressive grasp of neoclassical economics, but I think he gives it too much weight. Neoclassical economics is obsessed with the concept of equilibrium, and in turn it pays little attention to innovation. I believe that one of the biggest lessons of economics is the value of trial-and-error learning through entrepreneurial activity.

Incidentally, that is one of the important ideas that is, for all practical purposes, outside mainstream economics. The process of innovation has three steps: introducing experiments, learning from experiments, and evolving as a result of those experiments. The government is particularly inferior to the market when it comes to both experimentation and evolution. The government does not have the ability — or the will — to attempt as many experiments as private actors do. In the marketplace, when one organization won’t explore alternatives, another one often will.

Yuval Levin calls this the three-E’s model–experimentation, evaluation, and evolution.

What I’m Reading

Where Does it Hurt?, by Jonathan Bush and Stephen Baker. Bush is W’s cousin, and I imagine there are many people who will not be able to read it because of their attitude about the family. Here is one quote that I liked:

I reached the conclusion not long ago that anger, either white hot or smoldering, is a fundamental fuel for entrepreneurs. They don’t have to be angry all of the time, of course; that would be no fun for anyone. But it helps if deep down they nurse some wound, grievance, or perhaps a sense of injustice.

I was very bitter in April of 1994 when I left Freddie Mac to start my Internet business. I had been shoved aside in a project that I had struggled to start at Freddie, and I was treated in a humiliating way. I called a staff meeting, and no one showed up. One of the staff members then explained that she had been named as my replacement.

I was motivated to do some things I would not have done ordinarily, including going out of my way to meet new people and to do sales, in part because I thought of succeeding in the business as a way of “getting back” at the people who I thought wronged me at Freddie.

Anyway, I have not read enough of the book to form an overall opinion.

The Case for Skepticism

About a book by sociologist Duncan Watts, I write,

Watts’ book can be regarded as an extended argument in favor of what I might term Epistemological Skepticism about Social Phenomena, or ESSP. Those of us with ESSP believe that we should be skeptical about how much we can know with certainty in the fields known as the social sciences. We may learn things that are true for a majority of cases under specific circumstances. But we are less likely to find perfectly reliable, broadly applicable laws comparable to those found by physicists.

In Our Hands

Charles Murray’s book of that title is almost ten years old. It is relevant to the idea of a universal benefit.

For a universal benefit, I propose something like $6000 for each adult in a household and $4000 for each child. Murray proposed $10,000 per adult and zero per child.

Murray described the program as a cash grant. I describe it as flex-dollars that can only be used for “merit” goods, meaning health care, food, housing, and education.

Each of us presumes that people will purchase health insurance. I am explicit that catastrophic health insurance would be mandatory.

I propose something like a 20 percent marginal tax rate, or phase-out rate, for the universal benefit. Murray proposed a 20 percent marginal tax rate for incomes between $25,000 and $50,000, with a zero marginal tax rate otherwise. (This is a tax rate that specifically reduces the benefit, and it is over and above existing income and payroll taxes.)

So a single adult with zero income would get $10,000 under Murray’s plan, $6000 under mine. At $25,000 income, you still get $10,000 under Murray’s plan, only $1000 under mine. At $50,000 and up you get $5000 under Murray’s plan, but at $30,000 and up you get zero under mine.

A household with two adults, two children, and zero income gets $20,000 under either plan. If each adult earns $25,000, then the household gets $20,000 under Murray’s plan (because it looks at individual income, not household income) and $10,000 under mine. If each adult earns $50,000 (and up), the household still gets $10,000 under Murray’s plan. If each adult earns $50,000, the household gets $0 under my plan.

With a universal benefit, I have suggested replacing the EITC, food stamps, housing subsidies, unemployment insurance, and Medicaid with a single benefit. Actually, think of Medicaid as two programs–one for nursing homes, the other for health care. I would leave the nursing-home piece alone.

What Murray proposed in addition was to replace all of Medicaid, as well as all of Medicare and Social Security. That means that some of the benefit would have to go toward self-financing health care when you get old and self-financing some of your retirement (instead of Social Security, an adult over 65 would continue to receive Murray’s $10,000, but not my flexible benefit). Since the average person will incur about $100,000 in medical expenses after age 65, self-financing would require about $2000 a year to be saved, because it is hard to earn a return above the rate of health care cost growth. I would say that, conservatively, someone would want to save an additional $1000 per year to fund additional consumption after retirement.

After applying phase-out rates (what I am calling the marginal tax rate) and deducting the cost of self-financing medical care and additional consumption in retirement under Murray’s plan, this is how the two ideas compare:

Type of Household Income per adult Murray benefit My benefit
Single Adult $0 $7000 $6000
Single Adult $25,000 $7000 $1000
Single Adult $50,000 $5000 $0
Two Adults, Two Kids $0 $14,000 $20,000
Two Adults, Two Kids $25,000 $14,000 $10,000
Two Adults, Two Kids $50,000 $4,000 $0

Some remarks:

1. Suppose that catastrophic health insurance costs $1500 per adult and $500 per child. In that case, Murray would leave a household of four with zero income with just $10,000 per year to spend on food, housing, non-catastrophic health expenses, and everything else.

2. Murray’s plan is more generous to all but the very poor who have children. He wants people to bear the full financial burden of having children, and if that burden feels particularly heavy for the poor, this has the virtue of giving them an incentive to avoid having children.

3. Murray’s plan has a lower marginal tax rate (zero) for those earning $25,000 a year or less. The upside of this is that it really strengthens the incentive to work. The downside is that it raises the budgetary cost considerably.

4. Murray’s plan reverts to a zero marginal tax rate for those earning $50,000 or more. As far as I can tell, the main reason he wants to do this is that he thinks the additional $5000 will encourage high-income mothers to stay home with their children. I do not find this particularly persuasive, and I think you want a much stronger argument given how much this raises the cost of the plan.

5. The 18-21-year-old gets nothing in Murray’s plan. He clearly says he wants to get rid of college subsidies, so it seems to me that he wants to drop these folks into the labor pool in the expectation that they will learn to swim.

6. Keep in mind that under current policy, many low-income households face effective marginal tax rates of 100 percent or higher. That is, they are better off with something less than full-time, year-round work. That disturbs Murray and it disturbs me. It is possibly a source of a large share of social pathology.

Rognlie > Piketty

Matt Rognlie writes,

[If house values continue to rise], Piketty (2014) will be right about the rise of capital in the twenty-first century. But the mechanism is quite distinct from the one proposed by Piketty (2014) (a better title would be Housing in the Twenty-First Century), and it has radically different policy implications. For instance, the literature studying markets with high housing costs finds that these costs are driven in large part by artificial
scarcity through land use regulation—see Glaeser, Gyourko and Saks (2005) and Quigley and Raphael (2005). A natural first step to combat the increasing role of housing wealth would be to reexamine these regulations and expand the housing supply.

Pointer from Tyler Cowen, who writes

Piketty’s mechanism of accumulation, as laid out in his book, is simply the wrong mechanism for understanding growing inequality, both theoretically and empirically.

That would appear to be the correct post-mortem on Piketty.

Larry Summers on Mian and Sufi

He writes,

They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. Resurrecting arguments that go back at least to Irving Fisher and that were emphasised by Richard Koo in considering Japan’s stagnation, Mian and Sufi highlight how harsh leverage and debt can be – for example, when the price of a house purchased with a 10 per cent downpayment goes down by 10 per cent, all of the owner’s equity is lost. They demonstrate powerfully that spending fell much more in parts of the country where house prices fell fastest and where the most mortgage debt was attached to homes. So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.

Pointer from Tyler Cowen.

Summers points out that Mian and Sufi’s suggestion that we should have bailed out homeowners is probably not correct. I feel even more strongly than Summers does about this.

Suppose that we accept the balance-sheet recession story. Some comments and questions.

1. Vernon Smith is also a proponent.

2. What was the difference between the damage to consumer wealth caused by the dotcom crash of 2000 and by the housing crash of 2007-2008? Was it solely the fact that the latter had been financed more by borrowing?

3. Suppose that there had been no debt-fueled consumer boom in 2005-2006. What would there have been instead? A sluggish economy? A more sustainable boom?

4. Suppose that we take a PSST perspective. Then the period from the late 1990s to the present is one long, painful, still-unfinished adjustment to the Internet and factor-price equalization. We happened to have a sharp boom-bust cycle in home construction in the middle of it, but even during the boom we did not have four consecutive months of gains in employment over 200,000. Then, in 2008 we had a panic about large financial institutions, leading to a big increase in government intervention, which mostly consisted of transfers of resources to less-productive businesses, such as GM, Citigroup, and Solyndra.

Inequality Measured Using Longitudinal Data

I review a book by three sociologists.

Most of the conventional wisdom about relative economic well-being, including the famous studies by Thomas Piketty and Emmanuel Saez, commits the time-series cross-section fallacy. Rank, Hirschl, and Foster did not set out to debunk this fallacy or to attack the many economists guilty of it. Instead, they took what seemed to them a natural approach for studying the evolution of wealth and poverty: longitudinal data. The result, in my reading, is that, like the boy in the fable, they have in an innocent, unintended fashion exposed statistical nakedness among many economists who are regarded as experts on the topic of inequality.

Work for a Profit

Let me re-post a recent quotation of the day from Don Boudreaux of Cafe Hayek.

from page 184 of Thomas Sowell’s 1995 book, The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy (original emphasis):

The call for more “public service” is then a call for more people to work in jobs not representing the preferences of the public, as revealed through the marketplace, but the preferences of third parties enforced through government and paid for by the power of taxation. Sometimes work for foundations and other nonprofit organizations is also included in “public service.” What is crucial is that public service not be service defined by the public itself through its choices of how to spend its own money in market transactions, but defined for them by third-party elites.

For my recent birthday, my daughters wrote me a song in which they included my line about wishing that one of them would work for a profit. If there is one notion that K-12 teachers and college professors drill into students’ heads, it is that non-profit is good and profit is bad. When I teach about the difference between profits and non-profits, I say that the main difference is that for-profit organizations are responsive to customers while non-profit organizations are responsive to donors.

Herbert Gintis on the Economics of Public Policy

It his Amazon review of Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up.

First, neoclassically inspired public economics provides a very powerful and largely correct framework for analyzing when markets work well and when they fail. Second, markets are often fragile and easily destabilized unless properly regulated. Third, markets and regulating institutes are not alternatives but rather complements. Fourth, neoclassical economics cannot model state failure, and therefore overstates the latitude for government intervention in stabilizing the economy and correcting market failures. On reason for this failure is that government is subject to political forces that lead it to favor special interests rather than the general good. What Colander and Kupers tell us is that there is a second reason: the market economy is a complex, dynamic, and adaptive system more like a natural ecology than a man-made machine.

The complex economy cannot be controlled, as the planners would like, but it can be influenced by very carefully formulated and judiciously applied “rules of the game” that move market dynamics in preferred directions. In this respect, traditional planners are like the Queen of Hearts in Through the Looking Glass who cannot stand the fact that she cannot order the flowers in her garden to heed her bidding, and employs a bevy of “gardeners” to paint the flowers to her specifications. The situation is worse for an economy because there is no regulatory counterpart to painting the flowers. “The [effective] government does not impose norms, or even force individuals to self-regulate. Instead it attempts to encourage the development of an econstructure that encourages self-reliance and concern about others.” (p. 9).

Gintis’ Amazon review essays, such as this one, are often outstanding. For the pointer to the book, I thank Tyler Cowen.

Another Proto-Libertarian

Philip K. Howard writes,

Generations of lawmakers and regulators have written so much law, in such detail, that officials are barred from acting sensibly. Like sediment in the harbor, law has piled up until it is almost impossible — indeed, illegal — for officials to make choices needed for government to get where it needs to go.

I might term this sort of thinking proto-libertarianism. A proto-libertarian is someone who, like Peter Schuck, recognizes that government performance falls far short of its promises, yet still believes that government could function effectively at its current size and scope.

In Howard’s case, I would make the following suggestions for climbing further up the mountain of libertarianism.

1. Recognize that it is not only well-meaning government officials who can be prevented from doing the right thing by legal paralysis. Private individuals and corporations also are often prevented from doing the right thing, not only by law but by regulations issued by well-meaning government officials.

2. Consider that legislation may be an inferior form of law not just recently, or occasionally, but usually. Instead, consider the ideas of Bruno Leoni, which suggest that common law that emerges from individual cases represents a spontaneous order, while legislation represents an attempt at top-down control that works less well.