In applications, the Kaldor-Hicks criterion and the efficiency criterion amount to the same thing. When Jack gains $10 and Jill loses $5, social gains increase by $5, so the policy is a good one. When Jack gains $10 and Jill loses $15, there is a deadweight loss of $5, so the policy is bad.
Evidently, on the Kaldor-Hicks criterion one need not know who Jack and Jill are, nor anything about their economic circumstances. Furthermore, a truly stunning implication of the criterion is that if a public policy takes $X away from one citizen and gives it to another, and nothing else changes, then such a policy is welfare neutral. Would any non-economist buy that proposition?
Readers will notice an irony in the widespread acceptance of the Kaldor-Hicks criterion by economists. On the one hand, they claim that their science is rooted strictly in the personal preferences of individuals in society, which seems democratic. In their application of the Kaldor-Hicks criterion to real-world problems, however, economists act like collectivists who seek to allocate society’s resources under a preferred moral doctrine. Economists take on the role of a benevolent dictator presumed to be empowered by someone to redistribute welfare among individual members of society for a larger social purpose — increases in what economists call efficiency and the maximization of what they call overall social welfare.
Tuesday, August 31, 2010
Uwe Reinhardt posted a nice article on the New York Times website discussing some of the not-so-subtly hidden value judgments in standard economic writing. Here is a good quote:
Friday, August 27, 2010
In his speech today at the annual Fed conference in Jackson Hole, Wyoming, Ben Bernanke laid out the options for further stimulus from the Fed. He dismissed the possibility of lowering the interest on excess reserves rate (IOER, what the Europeans call the Lombard rate), the interest rate the Fed pays to banks on money they keep in their deposit accounts at the Fed. Excess reserves (above those required to back checking deposits) are normally almost nothing, but since the crisis began have hovered close to 2 trillion dollars. The IOER is currently 25 basis points (0.25%), while the Fed funds rate hangs around 10 to 15 basis points, and the primary discount rate is at 75 basis points. The chairman argues that cutting IOER to zero would not affect the Fed funds rate, and so is useless. He's probably right about that, but the point of doing it would be to make holding excess reserves less attractive, inducing banks to make loans instead. Bernanke also says that pushing IOER to zero "could disrupt some key financial markets and institutions." I'm much more convinced by the argument of Alan Blinder in a recent WSJ op-ed (is he running for something?). Paying a non-zero IOER at this point just gives banks a way to make money without sacrificing liquidity or making loans, and so keeps credit stopped up, especially to small businesses and consumers. The Fed did not even have the authority to pay IOER until three years ago, so it's not clear why going back to a zero rate would disrupt market institutions. It's certainly not having its expected effect of setting a floor under the Fed funds rate. This seems to me to be one of the few potentially effective tools the Fed has left in its toolbox. Now is the time to get it out and use it.