Thursday, November 3, 2011

Marginal returns to schooling

There has been some debate for a while about whether expanding college education helps people, on average, or whether it just pushes more people into college that will not really benefit from it.  In the American Economic Review I got today there is an article by Carneiro, Heckman and Vytlacil that argues that the marginal return to education for the average college attendee is six times higher than the marginal return for the marginal person, which is low enough to conclude that these college expansion policies were a bad deal for those who where induced to attend school that would not have otherwise.

The article is not a light read, as you might expect from these authors, but the methods and conclusions are interesting.

Wednesday, November 2, 2011

Eating Locally

Mark Bittman usually has interesting things to say about our food system, but today he picked up the topic of eating "local" food, and unwittingly illustrated the paucity of good justifications for altering our food system to favor local production.

His arguments for eating local seem to be the following:

  • Local food production is more secure, since we are not depending on another country for our produce.
  • Local food gives us a reason to celebrate seasons, since we will only get asparagus for 2 months out of the year.
  • We should prefer food produced close to us, because we can meet the farmers.

Go read the post to see if I have been unfair to him.  The first argument works if you expect foreign food suppliers to "cut us off" during a crisis or war, but you could just as easily argue that the more secure food system is the one that has the widest possible network of suppliers.  The second argument seems somewhat arbitrary - we don't need our food system to give us seasons.  If the weather is not enough, the Church calendar does nicely.  The last argument seems to be primarily about preferences, and I am not sure what to do with it.  I have never yet met a farmer I did not like, but the same goes for shoe makers.

What would a better case for eating local look like?  Here are the best arguments I have heard:

  • Eating non-local produce from conventional retailers wastes energy by shipping food excessive distances, which in turn uses too many fossil fuels which pollute the air.
If we assume for a second that the price of gasoline accurately reflects the true social cost of production and use, then this argument has the weight of economic logic stacked against it. It seems unlikely that shipping food long distances would be done if a more efficient local option were available.  Some studies have been done on this topic and generally find that the economies of scale in food production are significant, such that it is often the case that local food, even when it travels fewer miles, uses more fossil fuels.

If you accept that modern supply chains are actually efficient, then we have to deal with the issue of the price of gasoline.  It may be that the market under-values gasoline because we ignore pollution and subsidize energy production.  Even if this is the case, there might be an economies of scale argument for long supply chains. It is probably the case, though, that a person extremely conscious about fossil fuel use could, with effort, find a producer and vendor combination that used less fuel than the standard supermarket fare.

  • Eating local produce encourages better farming and consumption practices because it allows relationships to develop between producers and consumers.  
This argument rests pretty heavily on either having a middle-man vendor that buys local and monitors the food production methods (through a local co-op or similar organization), or putting a lot of time into choices about what to purchase. It also ends up making a moral argument against some of the efficiency gains that a market system thrives on. One of the best parts of our economic system is that we don't have to monitor every part of the supply chain - price competition ensures that resources are used efficiently and government regulation ensures that outright fraud and poison are usually unprofitable. This allows the economies of scale to work, which, in turn, allows us to do a lot more with less.  

Still, you could make the case that government regulation is incomplete, and that the regulators don't care about all the right things.  You could argue that, in some cases, low-cost production techniques might be immoral for some reason.  Or you could argue that commerce should always be embedded in relationships, not for pragmatic reasons but in order to promote a particular type of community and certain economic virtues.

In the end, though, none of these arguments have yet convinced me, so I enjoy fresh bananas year round and buy local produce only when the price & quality seem to warrant it.

Tuesday, November 1, 2011

Two types of inequality

David Brooks has written a thought-provoking piece on income inequality, in which he points out that the gap between the top 1% and the rest is widening for different reasons than the gap between the 75th and 25th percentiles.

Here is his conclusion:

But the fact is that Red Inequality is much more important. The zooming wealth of the top 1 percent is a problem, but it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It’s not nearly as big a problem as the 40 percent of children who are born out of wedlock. It’s not nearly as big a problem as the nation’s stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent.
If your ultimate goal is to reduce inequality, then you should be furious at the doctors, bankers and C.E.O.’s. If your goal is to expand opportunity, then you have a much bigger and different agenda.

Monday, October 31, 2011

Wilkinson on Inequality

Richard Wilkinson gives a nice short talk for TED on his work with Kate Pickett: The Spirit Level: Why Greater Equality Makes Societies Stronger.  His thesis is intriguing if not always convincing.  He shows a number of strikingly strong correlations between measures of social well-being and inequality, arguing that inequality causes conflict and stress.  For a number of his measures, the simple causal story seems pretty uncompelling: there is a chicken & egg problem with any argument that explains high-school dropout rates using income inequality.  Nevertheless, I was struck by the number of social phenomenon that seem to be consistently related, even if the causal story is confusing.

Friday, October 7, 2011

Pine Nut Conundrum

This article in the New York Times tells the story of the "pine nut truce," in which afghan fighters unilaterally declared a cease-fire for a few weeks to allow local people to safely harvest pine cones from the forests.  As a pine-nut consumer, should I purchase more pine-nuts, to encourage more cease-fires?  Or should I purchase fewer, knowing that this crop is likely funding those fighters who are shooting at our troops?  Given that I really like pine-nuts, I think I should eat more.

Wednesday, October 5, 2011

How progressive is the U.S. federal tax code?

Greg Mankiw posted this link a few weeks ago, in the middle of the discussion started again by Warren Buffett, which shows how progressive the U.S. federal tax code is, and the breakdown into different tax categories.  The numbers the Urban Institute/Brookings Tax Policy Center.  They don't make explicit all of the necessary tax incidence assumptions behind these numbers, but there is enough consensus on those that it is probably not a source of controversy.

There are a number of tax misconceptions that we could correct with these numbers.  One is that the super rich pay less in taxes than the middle class or moderately wealthy.  On average, this is not true, even if we look only at the income tax.  The regressive nature of the payroll tax is also made explicit here, which is interesting, and the incidence and small magnitude of the estate tax is also worth noting.

Wednesday, September 21, 2011

Review of The Economics of Honor by Roelf Haan

I just finished writing a review of Roelf Haan's book The Economics of Honor: Biblical Reflections on Money and Property, for Faith & Economics.  The book consists of a series of essays, or sermons, on biblical passages that speak about economics and poverty.  For the full review, you will, of course, have to check out the journal, but here is a brief excerpt that hits one of the high points and one of the low points of the book:

The best part of Haan’s work is his wiliness to delve into specific scripture passages in depth.  This focus allows him to illustrate well the connection between economic problems and individual sin. He convincingly describes the path from idolatry to injustice, with the focus on individual responsibility before God (i.e. chapter 4).  Haan does not stop there, however.  He also is able to show where the Bible addresses systematic injustice and dysfunction. This ability to hold together the importance of both personal responsibility and systemic order is his true gift to the field of biblical economic ethics.  Haan’s essay on Isaiah 58 (chapter 19) especially stands out in this regard. 
Unfortunately, in some important areas, Haan’s ethical vision seems too narrow.  In his strong reaction to the abuse of political and economic power, he too quickly attributes the sins of Latin American dictators to an underlying economic system.  It is true that combinations of economic and political power have, historically, been extremely dangerous, but this observation does not automatically implicate the discipline of economics the way Haan argues it does. Haan’s reading of Milton Friedman, for example, (pg. 73) strangely misses the motivation behind Friedman’s suspicion of government control of the economy. Indeed, libertarians like Friedman share many of Haan’s concerns about the abuse of political and economic power.  They disagree only on whether a reliance on markets will lead to a concentration of power, as Haan argues, or decentralized power, as Friedman (1982) famously argued. This narrow and negative view of economic ethics also shows up in Haan’s treatment of poverty and wealth.  Readers will search in vain for a moral distinction between wealth gained through abuse of government power and wealth gained through entrepreneurial activity. Instead Haan seems to agree with the dependency theorists that all wealth is necessarily implicated in oppression (see chapters 7 and 21).

Sunday, August 28, 2011

Mouw on Kuyper: a short review

I just finished reading Richard Mouw's latest book, Abraham Kuyper: A Short and Personal Introduction, which does exactly what the title indicates. Mouw's writing is easy to read, and in this book we all benefit from his years of experience thinking about and applying Kuyper's thought. The book is separated into two sections. In the first part Mouw summarizes Kuyperian thought in a series of short digestible (dare I say, classroom ready) chunks. In the second half he addresses some of Kuyper's shortcomings, blind spots, and applies his thinking to some contemporary issues.

As might be expected given Mouw's background and interests, Kuyper sounds like a theologian of culture and politics in this volume, which of course he was. His views on many other topics are alluded to, but with less attention. Given my interests, I thought that this was a good thing, not a weakness. The real strength of a book like this is that it is long enough for a serious engagement with Kuyper's thought and context, but short enough to give a reader a birds-eye view of Kuyper's theology. The sections on creation, sphere sovereignty, and antithesis are all close enough together in the volume that it is easy to remember that Kuyper held these together.

Mouw also does us a service by being forthright about Kuyper's weakness, indicating that we need to embrace a "neo-kuyperian" framework. (Does this make him a neo-neo-Calvinist?) And as one who was immediately turned off by some of Kuyper's blind spots (i.e. race), I appreciated Mouw's reminder that, in any tradition, we must build on the best that the past offers, and make amends for the worst. Most importantly, Mouw has a way of pointing to the ways in which Kuyper can be mis-used, but without a hint of polemics, inviting us to the most helpful and charitable interpretations. His last chapter, titled "A Kuyperianism 'under the cross,'" does just this, beautifully.

This book is an excellent first read for those new to Kuyper, or for those like me who have read some Kuyper, knew the main points, but needed guidance putting it in context.

Friday, August 19, 2011

Why Americans Hate Economics

Stephen Moore's column with this title in today's WSJ is hopelessly wrong. He ridicules the "witchcraft" of Keynesian macroeconomics, and insists that fiscal stimulus has to result in dollar-for-dollar crowding out. I have to say that our old friend Todd Steen, quoted in an earlier post by Steve, makes pretty much the same mistake.

When there are unemployed resources in an economy, a fiscal stimulus does not crowd out anything. To the extent that it increases aggregate demand (and is not offset by tax increases, say), it employs resources that would otherwise be idle. It therefore crowds IN economic activity, and has no burden on the economy. The first thing we teach students is opportunity cost. What is the opportunity cost of fiscal stimulus? To the extent that it employs otherwise idle resources, its cost is NOTHING.

The canonical model is not relevant in this situation. The model has no explanation for an economic depression, and hence can not be expected to predict results accurately in a situation of persistently depressed economic conditions. It is only relevant when the economy is in a full-employment equilibrium situation. That is not the case now. It is for times like this that Keynesian economics was developed.

Why do our students hate economics? Because they come to us expecting to learn about the real economy, not some fantasy economy that exists only in economists' heads.

Thursday, August 18, 2011

Thomas Aquinas on Property

In my reading I came across a passage by Thomas Aquinas on property which struck me as quite notable. Here is part of it:

Two things are competent to man in respect to exterior things. One is the power to procure and dispense them and in this regard it is lawful for man to possess property. Moreover this is necessary to human life for three reasons. First, because every man is more careful to procure what is for himself alone than that which is common to many or to all: since each one would shirk the labor and leave to another that which concerns the community, as happens when there are a great number of servants. Secondly, because human affairs are conducted in more orderly fashion if each man is charged with taking care of some particular thing himself, whereas there would be confusion if everyone had to look after any one thing indeterminately. Thirdly, because a more peaceful state is ensured to man if each one is contented with his own. Hence is to be observed that quarrels arise more frequently where there is no division of things possessed. (Sum. Theo., II-III, q. 66, art. 2.)

It would probably be a mistake to read too much modern economic thought into this paragraph, but he does, in a short passage, summarize the tragedy of the commons (sentence 2), allude to specialization and division of labor (sentence 3), and hint at the Coase theorem (sentence 4).

Not bad for one paragraph.

Wednesday, August 3, 2011

Over-Thinking Food

I am a conflicted member of the Christian "ethical food" movement. At its best, it is comprised of people who are trying to be responsible stewards by eating in a way that minimizes environmental harm and/or treats animals with appropriate respect. At its worst, it is comprised of people who add a Christian veneer to a progressive political agenda or new-age pseudo-theology. The real problem, of course, is that in practice those of us in the movement can fall into both camps, depending on the day.

This is one of the reasons I have so much respect for the work of Stephen Webb, a theologian at Wabash college who has written extensively on Christian eating practices. His book Good Eating contains a humble, winsome, and distictively Christian defense of vegetarian eating, while calling to task the many theological, philosophical, and political problems with the animal rights movement. This book went a long way in convincing me that I could, in good conscience, participate in this movement.

Now Webb has done it again, in an online piece that hits closer to home. His essay, published in The Other Journal, is a call for "gourmands" to take food less seriously. This is serious stuff from a guy who has already written two books on theology and eating. He correctly identifies the tendency for progressive Christians to assign too much theological significance to the slow preparation of food and to politically-minded purchasing habits. He takes William Cavanaugh's book Being Consumed to task for tying into the mix a poor critique of capitalism, and echos John Tiemstra's dissertation when he writes:
The attempt to return to more natural eating, whether in the form of buying local produce or immersing oneself in the arcane knowledge of how best to grill root vegetables, does not constitute a protest against the modern world and its capitalist masters any more than being able to discuss the much contested aromatic effects of arugula is a sign of advanced spiritual awareness and heightened cultural sensitivity.
Here's the problem. I like Cavanaugh's book, even though he and I disagree on some of the main points. Somewhere in his line of argument, Webb goes from correctly identifying much of the foodie movement as justified gluttony to critiquing my sacred cow - politically motivated consumption:
There is something to be said, then, for the argument that locally grown produce and humanely raised animal products capture and extend the moral message of communion. In Christianity, however, these dietary decisions flow naturally from acts of worshipping God, not efforts to change the world. Moreover, Christianity reminds us that only when we bring the fruits of our labor to God can we hope to resist the temptation of making those fruits look better than they really are. When we try to make meals a means of moralistic debate, we demean the gifted character of nature’s provisions. When we try to inject morality into our meals, we inevitably take too much pleasure from our actions and mistake physical satisfaction for a sense of social accomplishment.
How dare he.

He goes a little too far, however, both in the quote above, and in his critique of Cavanaugh. He quotes this passage from Cavanaugh's book:
“The key question in every transaction is whether or not the transaction contributes to the flourishing of each person involved, and this question can only be judged, from a theological point of view, according to the end of life, which is participation in the life of God” (viii).
And then responds:
Cavanaugh seems to think that unless an ultimate theological end is the direct aim of every economic act, then those acts have no morally serious meaning. Every purchase we make must be theologically correct.
His first sentence is incorrect, his second is correct. The problem is that he assumes that, for Cavanaugh, the "ultimate theological end" is quite narrow, when in fact, it is not. There is no problem with the statement that "every purchase we make must be theologically correct," if in fact God's will for humanity encompasses all parts of life. The key is to discern what part of our "ultimate theological end" is appropriately reflected in our consumption habits. Cavanaugh is right to point to the social nature of exchange as something that must be preserved in it's best form. Exploitation, fraud, and other results of greed must always be rejected in favor of service, justice, and other fruits of properly ordered self-interest and desire. If we can preserve shalom by watching what we buy, even if our sphere of influence is small, then there is no problem with trying to "change the world," one veggie burger at a time.

But there I go over-thinking food again.

Monday, August 1, 2011

Corporate Social (Ir)responsibility

Here is a new study on corporate social responsibility that will feed cynicism about CSR in general:

by Matthew J. Kotchen and Jon Jungbien Moon

This paper provides an empirical investigation of the hypothesis that
companies engage in corporate social responsibility (CSR) in order to
offset corporate social irresponsibility (CSI). We find general
support for the causal relationship: when companies do more "harm,"
they also do more "good." The empirical analysis is based on an
extensive 15-year panel dataset that covers nearly 3,000 publicly
traded companies. In addition to the overall finding that more CSI
results in more CSR, we find evidence of heterogeneity among
industries, where the effect is stronger in industries where CSI
tends to be the subject of greater public scrutiny. We also
investigate the degree of substitutability between different
categories of CSR and CSI. Within the categories of community
relations, environment, and human rights--arguably among those
dimensions of social responsibility that are most salient--there is a
strong within-category relationship. In contrast, the
within-category relationship for corporate governance is weak, but
CSI related to corporate governance appears to increase CSR in most
other categories. Thus, when CSI concerns arise about corporate
governance, companies seemingly choose to offset with CSR in other
dimensions, rather than reform governance itself.

Saturday, July 30, 2011

George Monsma and others on the debt ceiling

Our own George Monsma, and our neighbor economist Todd Steen have weight in on the controversy surrounding the debt ceiling. Both appear in Capital Commentary, published by the Center for Public Justice. Both provide well-reasoned arguments and good economic sense in the midst of an increasingly ugly national debate.

Here are some gems. First Todd explains the long term importance of the debate, without resorting to the end-of-world rhetoric that is too common:
As we examine the implications of public justice regarding the negotiations over the debt ceiling, we must be careful not to define justice solely with regards to the situation of our current generation. This mistake has led us to overemphasize current conditions at the expense of the future. We have come to believe that we can justify limitless borrowing to provide additional health care, defense spending, retirement provision, and lower tax rates. Running a budget deficit every year, however, whether the economy is growing or in recession, steals possibilities from those in the future, especially from the poor. Interest payments become an ever increasing part of future budgets, crowding out choices for future generations.
And here is George giving some basic principles to frame the debate:
Governments are called, where possible, to establish conditions in which other institutions in society can fulfill their God-given callings, and in which this can continue in the future. Families should be enabled to support themselves through their work and have access by other means to what is necessary to fulfill their callings in society when they cannot support themselves by work. Government should provide this now, as well as enable this to continue in the future, e.g., by giving families access to education needed for earning in the future, by preserving the environment and natural resources so that society can flourish in the future, and by not burdening those living in the future with debts in excess of what is passed down to them in assets from such a productive infrastructure.

Tuesday, July 26, 2011

Parallels between the right and the left

At the recommendation of multiple colleagues, I have been reading Craig Gay's (1991) With Liberty and Justice for Whom? The recent evangelical debate over capitalism. This book has been an excellent read. I will highlight a paragraph here that I found particularly entertaining, in which he is drawing parallels between conservative defenders of capitalism and those on the left who view capitalism as oppression (pp. 114-115):

Both left and right address essentially the same American evangelical audience. Both insist that a correct understanding of the present situation requires a certain amount of abstraction. They differ only concerning which elements of our experience it is safe to ignore - about whether what we are really seeing is the invisible hand of market coordination of that of capitalist oppression. Both left and right tend to understand the present situation as one of crisis, but they disagree as to whether capitalism or stateism precipitatetd the crisis. Both fear the concentration of power in modern society, but they differ as to whether this concentration is most acute among the business elite or the bureaucratic political elite. Both left and right insist that the true social relevance of the Christian faith is only now being rediscovered after having been lost, but the differ on whether its relevance is anticapitalist or not. Both feel that american evangelicalism is moving in the wrong direction at present, but they disagree on the matter of which is actually the wrong direction. Both argue that their opponents are either ideologically blind or evil or both. At their extremes, both left and right insist that salvation is essentially economic, but they differ on whether the kingdom will be populated by social workers or entrepreneurs. Both fear that the faithful exercise of Christianity's social relevance will elicit persecution from a powerful anti-Christian cultural elite, but they disagree about who constitutes this elite. Finally, both left and right fail to appreciate fully the character of modern capitalism. The left fails to appreciate the remarkable ability of capitalism to create wealth and hence to alleviate material poverty, and the right fails to appreciate the ability of capitalism to dissolve the traditional culture and hence to exacerbate spiritual poverty.

Monday, July 18, 2011

"Punishing the wealthy"

In a column published in yesterday's Grand Rapids Press, Cal Thomas repeated some misconceptions about taxes and tax policy that seem to be fairly commonly held. I think they deserve specific refutation.

1) Taxes are not punishment. Taxation is a constitutional means we use to decide how we are going to pay for the expenses of government, expenses that are our common obligation as a community.

2) The time-honored principles of ability to pay and reimbursement for benefits received govern most of our taxation decisions. Those with high incomes have the ability to pay, since their discretionary incomes are disproportionally higher. They also benefit greatly from the programs of the government: transportation infrastructure, international relations, criminal justice, higher education, basic scientific research, food safety, financial regulation, and so on. Furthermore, the incomes of the top 40 percent or so of the population have grown greatly over the last 30 years, while incomes of the rest of the population have stagnated.

3) There are growing doubts about whether in our society wealth is indeed "a sign of achievement." Pay for top executives and talented entertainers seems increasingly out of proportion to the amount and quality of their work, or the beneficial impact they have on society. Pay for people in the business community seems less and less related to their actual achievements, as leaders of failing businesses are rewarded handsomely. Business leaders seem to have a lot of control over their own pay, while they increasingly fight to have unilateral control over the pay of their employees. Many also have advocated repeal of the estate tax, a move which would further weaken the link between achievement and wealth.

4) While in some cases wealth is "a reward for risks taken," this sort of income has traditionally been viewed with suspicion by the Western religious and philosophical tradition, while income from work has been honored. For instance, the Bible forbids interest on loans (e.g. Lev. 25: 36-7), but requires the prompt payment of wages (e.g. Deut. 19:13). This suggests at the very least that income from investments should not be given the preferential treatment it is given under our current tax laws.

5) Nobody's motives are completely unmixed, so envy may play some role here. It is only fair to point out that on the other side, greed may be a factor as well. But impugning the motives of others is not a way to move the discussion forward.

I think it would be a great step forward in the ongoing deficit-reduction talks to agree that the Bush tax cuts should be allowed to expire, as they are scheduled to do under the current law. Remember, the law was written this way because at the time everyone recognized that the cuts would eventually contribute to the deficit problem. The tax structure of the 1990's coincided with vigorous economic growth and four years of budget surpluses. We could do a lot worse.

Thursday, June 16, 2011

More on unemployment

Both All Things Considered (NPR) and Nightly Business Report (PBS) on Tuesday were selling this idea of structural unemployment, with the Business Report suggesting that we should get used to a "new normal" of seven percent unemployment. So the campaign continues.

I think there are two sources of this push to normalize excessive unemployment rates:

1) The business community likes the idea of government taking over more of the funding of worker training programs. It saves them money, straightforwardly. It also means they don't have to worry as much about turnover. They don't have to put in place expensive programs to promote worker retention and loyalty. (By the way, David Leonhardt's column in today's Times suggests that business opposed a payroll tax holiday because they want to get the money without having to hire more people.)

2) Politicians of both parties have reached the conclusion that there is no popular support for additional fiscal stimulus, so they are making the best of a bad situation. Convincing people that nothing can be done about unemployment removes any responsibility they might bear for not doing everything they can, particularly the thing that might be effective.

This is the opposite of leadership, of course. Rather, it is rank opportunism. A few lonely voices in the media are making the case, notably Paul Krugman, but it's a long wait for the politicians or business leaders to take it up. The language itself has been poisoned by all the talk of "failed stimulus," as if that had anything to do with the truth.

Tuesday, June 14, 2011

Current unemployment

The President (in his NBC interview today), his Jobs and Competitiveness Council (in yesterday's Wall Street Journal), and the media generally seem fixated on the idea that the current unemployment is structural rather than cyclical. The President cites automation, and gives ATMs as his example. The Council talks about a lack of workers with "advanced manufacturing skills", whatever they are. Others have cited offshoring as part of the problem.

Surely this is not the case. ATMs have been around for at least 20 years. (The President's use of this example recalls Pres. Bush Senior's amazement at supermarket scanners, a good 10 years after the rest of us were used to them.) Advanced manufacturing skills have always been needed by industry, and industry has provided the training when it was profitable to do so. People have been complaining about offshoring and competitiveness since the 1980s at least. None of this accounts for the huge increase in unemployment since 2007, or its stubborn refusal to improve.

This unemployment is cyclical. We have (by the Council's count) two million unemployed construction workers who are victims of the housing collapse. This won't change until all the foreclosed, underwater, and short-sale properties are cleared from the market. The financial industry doesn't want to put in the work necessary to restructure mortgages, stage foreclosed properties, and approve short sales. They need to change their attitude. State and local governments are laying off large numbers of teachers, police officers, firefighters, park rangers, and others, and that won't change without more federal stimulus money or a general recovery. Retail stores and restaurants are closing every day, and those workers are stuck too. Measured productivity increases in manufacturing, retailing, health care and elsewhere are often the result of overworking a limited number of employees. This is not a sustainable strategy, and needs to change. Training workers in job-specific skills is a business responsibility, not government.

The Council's recommendations have some merit, but they will not make a big difference in the basic numbers. Speeding up construction permits and tourist visas doesn't buy you much demand. Overall decline in unemployment requires additional fiscal stimulus, in the form of federal aid to local governments and spending on infrastructure and public works. Too bad our politicians don't get it.

Thursday, May 19, 2011

Positive versus normative

The Economix blog at the NY Times carried a post on May 10 by Edward Glaeser, an economics professor at Harvard. Glaeser discusses the positive/normative distinction in economics, which he views as valuable. He never comes out and says that positive economics is value-free, which is a thoroughly discredited position, after all. But he does say that positive economics "attempts to understand the world as it is; normative economics describes how the world should be."

But then he gives away the game by pointing to the normative assumptions at the basis of his so-called positive analysis: a high value placed on individual freedom as opposed to human community, a dim view of the democratic political process, a bias in favor of formal mathematical models, and heavy reliance on statistical evidence. Change these assumptions and you get an alternative approach to positive economic analysis that often produces much more interesting insights, and very different policy conclusions.

Glaeser seems to think his assumptions are obviously true, and should be accepted by everyone. In fact, they are the product of a particular worldview that is not universally accepted, nor should it be. I for one believe in the importance of community, democracy, informal or heuristic reasoning, and the validity of all kinds of evidence in social science, including both statistics and historical narrative. And yes, I therefore hold different normative positions from Prof. Glaeser on a lot of issues.

Wednesday, April 27, 2011

The business community needs to change

Let me clarify the nature of my criticism of the current leadership in the business community:

1) Most fundamentally and problematically, they make money an end in itself: "how we keep score."

2) They believe they have no duties or responsibilities to others, or to the society as a whole. They accept no restraint on their own behavior for the sake of other people. They profess admiration for the poisonous, sociopathic "philosophy" of Ayn Rand.

3) They create a divide between themselves and ordinary working people, justifying big raises and bonuses for themselves, while making a virtue of keeping wages low by minimizing the contribution employees make to the success of the business, threatening to move abroad, to move to "right-to-work" states, to punish employees for supporting unions, and so on. This has resulting in wages failing to keep up with productivity increases, and a growing class division in the American economy and society.

4) They feel no compunction about taking advantage of others in business dealings, rather than trying to make sure that deals benefit both parties. Goldman Sachs recently paid an enormous settlement to the SEC for doing this in one particular case, but read books like Too Big to Fail or All the Devils Are Here and you realize how prevalent this has become, and how it contributed to the financial crisis.

5) Speaking of the crisis, the leaders of the finance industry have not stood up and said, "Yes, we messed up, and we have to change. Here's what we're going to do." Instead, they have resisted regulation tooth and nail, and basically said, "This was just a big accident, and there's nothing wrong with our industry. Just leave us alone." That won't do.

6) They press for tax breaks for themselves and their companies on the grounds that they will lead to job creation. There is no evidence that they will lead to anything of the sort. (In fact, the most effective ways to subsidize employment would be through the Earned Income Tax Credit and a single-payer health plan. Cutting the capital gains rate does not reduce the cost of hiring a worker.) This special pleading is entirely self-serving and lacks any sense of fairness. The special tax status of hedge-fund managers is a glaring case of this.

I am not "anti-business," and I do not believe that business leaders inevitably will behave this way. My entire career research program has been built on the idea that socially responsible, ethically informed business behavior is necessary to the proper functioning of a capitalist economy, and that business leaders play an important role in balancing and checking the power of government and the civil sector of society, in line with Michael Novak's understanding.

Furthermore, business leaders have not always behaved this way in our country. During the 1950s and 1960s our economy prospered in an atmosphere where we had a much greater sense of national unity and belonging, and where looking out for the interests of others was part of our national culture, including our business culture. There was then more of a sense that we were all contributing to the national project. There were many things about that era that were problematical, and I am not nostalgic for those "good old days." The point is that business leaders played a much more constructive role in our national conversation then.

My hope was that something good would come out of the current crisis, in that business leaders would recover a sense of themselves as servant-leaders, and lose some of the arrogance and hubris that they have acquired over the last 30 years. I have been profoundly disappointed. (This is a big reason that I plan to leave economic research and writing behind in my retirement.)