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.

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.)

Open Letter to the Editors of First Things

Note: First Things just released an issue in which they ranked colleges based on academic, social, and religious criteria. The rankings are not available online unless you are a subscriber, but for people at Calvin, I can send a copy of the article from our library upon request. What follows is my response. Thanks to Kurt and Irene for helpful editing.

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To the Editors of First Things:

First, I would like to thank you for doing a service to parents and educators in the United States: by publishing rankings of schools that explicitly engage the academic culture and treatment of faith on campuses, you have provided sorely needed information to those making difficult choices. I am sure that the process of producing these rankings was expensive and time-consuming, but I hope that you will consider making them a regular feature.

Second, as a faculty member at Calvin college, I would like to thank you for the great compliment you have paid my institution. Placing us 13^th overall and 2^nd among Protestant schools is a generous recognition of what we do here, given the number of fine institutions that you examined. The point of this letter is not to argue that we were ranked unfairly. This is most certainly not the case.

The process of producing rankings is always one in which false precision is inevitable, and the methods of ranking will never make everyone happy. This is particularly true when the rankings are intended to express a set of priorities different from those that are common in academia. But let me, as an empirical social scientist, offer some suggestions for improving your methods, should you choose to repeat this process.

First, rankings are only useful if a reader can understand the criteria used to rank the schools. There are a couple of ways by which you could make these criteria clearer, and thus make the rankings more useful. First, your inclusion of “descriptions from our FT experts” mixed in with the other data makes it difficult to interpret the final rankings. If your goal was to produce a ranking of “the favorite schools of FT editors and friends,” then you really don’t need all of the empirical apparatus that you include, such as explicit weights on different surveys. In fact, to those of us who respect what FT does, it would be more helpful to produce a separate “FT Favorites” set of rankings, so that we can see those data in isolation.

The second move that you could make for more clarity is to share, somewhere, some or all of the questions that were used to arrive at the scores given in various categories. One example will illustrate the point. Hillsdale College, a fine institution in most respects, inexplicably has a higher “religious” score than Calvin College. This may be a testament to Hillsdale’s ability to be hospitable to Christian students outside of a confessional framework, something for which they deserve credit. Without more knowledge of the questions in the surveys, however, a reader can only be left to speculate about why a college that does so much to integrate faith and learning (Calvin) ends up ranked lower than a school with no explicit institutional faith commitments.

One more note of caution. In surveying people in very different institutional contexts, the students' context can affect the comparability of their answers. A student at a religious school might have very different reference points for questions about faith and social life than a student at a non-religious institution.

Again, thanks for the hard work. This particular issue was especially interesting and insightful.

Sincerely,

Steven McMullen

Department of Economics

Calvin College

Happiness

A number of studies recently have purported to measure people's happiness, and then correlated that happiness with things like marriage, divorce, religion, kids, education, etc. One book that has popularized much of this research is Daniel Gilbert's Stumbling on Happiness. One type of argument that comes up in this book, and in some of this research goes like this (see this for an example):

• people report being less happy when with their kids
• on average kids make people unhappy
• people are generally wrong if their vision of "happiness" includes children

The problems with this argument might be obvious, but nevertheless I found myself returning to this argument as I read a very interesting essay in the New York Times today by David Sosa. His argument goes something like this:

• When given the choice, people will not choose happy fake experiences over unhappy real experiences.
• Therefore people must be aiming for something other than happy feelings.

I would add that people are rightly aiming for something other than a large number of happy feelings over their lifetimes. Which goes to the heart of the problem with Gilbert's book.

Here is one paragraph that summarizes what Sosa is arguing for:

One especially apt way of thinking about happiness — a way that’s found already in the thought of Aristotle — is in terms of “flourishing.” Take someone really flourishing in their new career, or really flourishing now that they’re off in college. The sense of the expression is not just that they feel good, but that they’re, for example, accomplishing some things and taking appropriate pleasure in those accomplishments. If they were simply sitting at home playing video games all day, even if this seemed to give them a great deal of pleasure, and even if they were not frustrated, we wouldn’t say they were flourishing. Such a life could not in the long term constitute a happy life. To live a happy life is to flourish.

Henninger on class war

Daniel Henninger's column in today's WSJ questions the idea he attributes to Pres. Obama that "the 'well-off and well-connected' economic factions in the U.S. have done something explicit to shaft the middle class." He thinks that the President should instead be "getting everyone, from top to bottom, believing they are on the same national team."

The problem is that there is plenty of evidence to suggest that the President is right about this. Look for example at the current campaign being waged by the Chamber of Commerce and advanced vigorously by the Grand Rapids Press to pass a "right to work" law in Michigan. Look at the attempts by the Mott company to cut wages for its workers at its applesauce plant just because of high unemployment in the region. Look at the conservative program of shifting tax burdens away from the affluent, like Reagan cutting income taxes while increasing payroll taxes, or Engler cutting property taxes and raising sales taxes, or Bush junior abolishing the estate tax. Look at the rates of wage increases over the last 30 years for executives and for hourly non-supervisory workers. Look at the enthusiasm for cutting the pay of teachers and other government workers. Look at the data on income inequality in the U.S. over the same period.

Of course, Henninger and his ilk speak out of both sides of their mouth about this. When he wants to woo middle-class folks to his political program, we're all on the same team. When he wants to reduce capital-gains taxes or cut wages for working folks, it's all about market forces and competitiveness and looking out for your own interests.

The tell-tale language in today's piece is this: "Our economy has been free-riding on corporate training programs for years...." This is part of the myth that businesses operate training programs, open stores and factories, invest in technology, and "create jobs" out of the goodness of their heart, and not because it's profitable to do so. It also betrays the sense of entitlement, bred by decades of corporate welfare programs, that insists that government should pay a big share of businesses' costs because of the social good businesses do. The social problems they create we're supposed to let slide.

If indeed we are all on the same national team, then business leaders and their apologists in the media need to start talking and acting that way. First of all, economic growth has to be for everybody. Productivity gains should show up as higher real wages. Executive pay should not increase at a faster rate than anybody else' pay. Cutting the pay of your employees or the government's employees should not count as a virtue. Corporate leaders also need to own up to their mistakes and misjudgments, and recognize that sometimes government regulation is the best way for them to be accountable for the consequences of their decisions.

If that happens, we can get past class warfare. The war that's on now was declared by the leadership on the business side. For the war to end, they need to accept the terms of the peace.

Reinhardt on Value Judgement in Economics

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:

As the economist Steven E. Landsburg explains it bluntly to students in “Price Theory and Applications” :

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.

Bernanke's options

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.