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.

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.

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.

Corporate Social (Ir)responsibility

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

Corporate Social Responsibility for Irresponsibility

by Matthew J. Kotchen and Jon Jungbien Moon

Abstract:

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.

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.

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.

"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.