Richard H. Serlin

Who does more "bossing around"?

2012-01-05T16:47:00.001-08:00

From Jonathan Chait today:

Consider Will’s column from the past weekend. It centered primarily on climate change, a favorite Will topic – he is a climate-science skeptic. Occasionally, Will ventures forth to cast doubt on the science directly, but he usually takes the total falseness of the climate-science field for granted and proceeds from that basis. In his recent column, Will argues that liberals made up the global warming scare in order to justify their desire to ration energy:
Because progressivism exists to justify a few people bossing around most people...

Now, aside from the conservative anti-science, I love this line, "Because progressivism exists to justify a few people bossing around most people..."

Even at the height of government power in the 1960s, when were people ever anywhere near as bossed around by government as by the free market, as by, say, THEIR BOSS!

The more income inequality we have, the more plutocracy we have, the more people get bossed around. It's very often government that PREVENTS large numbers of people from being bossed around. Try being an indentured servant to a private student loan holder, after being conned into a culinary institute and now working at Taco Bell. See how bossed around you are.

Yeah, before the progressive movement in the early 1900s, people were never bossed around.

Republicans: Cut all the meat if you find any waste!

2011-12-02T02:15:00.001-08:00

A typical Republican response to evidence of the value of government is, yeah, and what about this one time there was waste! I mean you could talk about the polio vaccine, and they'd say, yeah, and this one guy in Salk's laboratory stole office supplies and used to sleep in the back room. You could talk about how the passage of Social Security (which they fought tooth and nail; it was the death of freedom circa 1935) turned senior citizens from by far the biggest group in poverty to the smallest, and they'll say, yeah, what about this guy who got it fraudulently at age 58.

This should be obvious, but if you're ending anything because you can find some waste in it, you might as well kill yourself right now, because there will be nothing left and you'll starve. In every large endeavor you'll find some waste. You could take the most successful private company in the world, Apple, Sony, you name it, and you find tons of examples of waste; employees watching porn on their computers, sexual harassment, lavish corporate jets,...

The particular example that set this off is a post by Brad Plumer at Ezra Klein's Wonkblog. It shows how slashing of government employees in some areas cost far more than it saved. In the comments we see responses like, yeah, "Using the SEC and the minerals office as examples - where porn was viewed thousands of times as the economy crashed?"

As liberals, and just intelligent people, we have to make an effort to call out these ridiculous -- but pulling at the emotions -- arguments from Republicans whenever we hear them. You don't throw away all of the valuable, or essential, meat just because there exists some fat. I don't decide not to send my daughter to college because there was the Penn State scandal. I don't throw my Vanguard portfolio in the trash as worthless because my cousin knows this one guy who works there who played computer games on the job.

Massive Income Inequality and Achievement among the 99%

2011-11-13T13:27:00.000-08:00

The latest from Tyler Cowen:

Nonetheless, higher income inequality will increase the appeal of traditional mores — of discipline and hard work — because they bolster one’s chances of advancing economically.

Let's be clear here:

Severe income inequality DECREASES, not increases, the chances of the poor and middle class to get ahead, not that Libretario Cowen would care much; as an extreme libertarian he'd rather have massive suffering, loss, and decreased growth rather than give up even a tiny amount of personal freedom.

It DECREASES the chance to get ahead when you have to work 40 hours per week while going to college full time, thus having far less time to study, learn, and succeed. Studies have shown that this substantially reduces the odds of graduating, as well as learning, and GPA. But, hey, let's cut college aid even further, so we have even more income inequality!

It DECREASES the chance to get ahead when poor – and middle class – children have no health insurance, so they grow up sicker, and more poorly developed mentally and physically, and when their mothers can't afford to spend the time to breastfeed due to work, or to buy and cook the healthier foods, whole fruits and vegetables. Or when they have to live in more and more polluted areas because of Republican deregulation. But, hey, no problem, the rich can afford to move away from the pollution. It's only the children of the poor – and middle class – who as a result will be sicker, dumber, and more likely to suffer from behavioral problems.

It DECREASES the chance to get ahead when poor and middle class children can't go to pre-school because their parents can't afford it, or they can only afford day care which just sits them in front of the TV because that's a lot less time consuming and expensive than teaching.

It DECREASES the chance to get ahead when little regulated for-profit schools can prey on unknowing young people with promises of great careers from substandard education that does little to increase earnings, but costs 10 times as much as GOVERNMENT community colleges, and is financed with loan shark private student loans that can quickly grow exponentially so they're impossible to ever pay off, but thanks to the Republicans can never be escaped in bankruptcy – Welcome back indentured servitude! Always nice to ruin lives before they can even get started, and the poor kid has any idea even what's going on. But hey, Pure Free Market! And better to ruin a billion lives than give up even one micron of personal freedom, right Libretario?

But does this "increase the appeal of traditional mores — of discipline and hard work", as Libretario says? Taken to this kind of extreme, especially for the poor, it can do the opposite, because it can increase hopelessness, people just giving up and turning to crime and an underclass mentality, people just thinking why try.

Remember, it may not be nice and simple, but the reality is that lots of things graph U-shaped, or upside-down U, not simple straight line, always increasing or always decreasing. A certain amount of income inequality increases discipline and hard work, but at some point it gets so extreme that things just look too daunting or herculean for most, hopeless and rigged, and then effort, and a belief in the payoff of hard work, starts decreasing.

You increase discipline and hard work, and achievement, overall, by giving people the means to succeed and clear, reasonably realistic looking, routes to success. Make college more affordable (a lot more), give all children healthcare and truly nutritious school breakfasts and lunches, and quality pre-school and daycare, give middle aged mothers and fathers who have made mistakes, or just had no idea of how important education was when they were kids, but want to work hard now and turn it around, the realistic possibility of going back to school and getting a college degree, without making it a herculean task that few will attempt, let alone succeed at.

Do these kinds of things, and then you'll see both more effort AND more success, because effort is a lot more productive if you provide tools and resources to go with it, and you get a lot more effort from most people if you make the goal look realistically achievable, not a daunting, or herculean, task. Yes, some people will take on daunting or herculean tasks; they won't shy away, and they will work themselves to the bone, and may succeed. But do you want only this minority of people to get ahead and do well, and screw the majority, or do you want to make the high return investment to make the majority highly productive and financially comfortable too?

Of course, Libretario, you don't actually care, if it means giving up even a speck of personal freedom.

Sharply Progressive Taxation Virtuous Circle

2011-09-10T09:52:00.000-07:00

One important benefit of sharply progressive taxation that I haven't really heard is that it makes the rich a lot less capable of controlling, corrupting, and perverting government with massive legal bribes, I mean donations. Importantly, as well, the middle class has a lot more money to donate to compete with the rich.

With a sharp increase in the progressivity of taxes (all taxes, including state and local), the rich become less capable of controlling and corrupting government, making it a lot less efficient. Thus, the increase in progressivity makes government more efficient, increasing confidence in government along with its performance, creating a virtuous circle of government confidence and performance. At the same time, the rich have a lot less money to fund the right wing propaganda machine, thus it becomes a lot less able to grossly distort people's image of government's efficiency, usefulness, and importance, so again more confidence in government. And this leads to greater public investment and insurance, which greatly increases long run growth and total societal utility, with the gains widespread, instead of only at the top.

It looks like such a virtuous circle may have occurred in the early part of the 20th century. The top marginal income tax rate went from 7% in 1915 to 77% just three years later! This was shortly followed by the New Deal, unprecedented levels of professionalism and efficiency in civil service, and respect for it, a golden era of high and evenly spread growth, the birth of the great middle class, widespread and easy college access, the highest level of college graduates in the world (after a generation of Republican dominance we're down to 11th), Medicare, and Medicaid.

Sadly, with the generation of Republican dominance, the cycle has been reversed, from virtuous to vicious. The top marginal income tax rate dropped from 70% in 1980 to 28% in 1988. The rich, with their great increase in wealth, gained ever more control of government, deregulated finance, and much else, lavishly funded a vast propaganda machine to slander government, slashed college aid and education (relative to inflation, population and/or it's fast growing importance in a high-tech world), slashed public investment and social insurance (as always relative to inflation, population growth, and/or growing importance/need), and we've had a generation of tragic decline, with the rest of the world catching up to us or passing us in many key areas. And income inequality has gone through the roof, with incomes for most stagnating or declining for a generation, and a third of the population 18-64 without health insurance at least some time over the last two years. In addition, the right uses it's money-fueled influence and electoral victories to degrade government whenever possible, then they say, see, government can't do anything well, which helps them to degrade it further, and the viscous circle continues.

Cornell economist Robert Frank gives one huge benefit of sharply progressive taxation that's little if ever heard, allaying monumental positional/context/prestige externalities; another big one is preventing the rich from controlling and degrading government.

The Corrosive Attitude from a Generation of Right-Wing Dominance

2011-07-29T14:41:00.001-07:00

Jonathan Chait writes today:

So basically, we're risking mass financial havoc so that... John Boehner can remain as House Speaker, and not have to go be a lobbyist making way more money. That sounds like a bad trade-off for virtually in the world everybody except Boehner. (Boehner's family might even take that deal.)

It seems odd to me that, of all the potential pain we're contemplating here, the one sacrifice nobody seems willing to broach is John Boehner having to lose his Speakership and go be a lobbyist. Why is that?

It's really in large part a result of a generation of every-man-for-himself Republican dominance. Greed is always good; you do what's best for you. And there's been this kind of dominance in economics too over the last generation. It used to be much more economists would assume people only care about themselves as a simplifying assumption in most models. They understood it wasn't literally 100% true, and thank goodness. But now there's much more of an attitude among many economists, especially fresh-water, that people should care only about themselves, and this is natural and good.

Of course it's not. When people really do think it's every man for himself, you always do only what’s best for you, trust breaks down. People will little be able to work together, and security, crime, monitoring, and contracting costs will explode. Forget about a super complicated high-tech economy with enormous increasing returns to scale when people can't come close to working smoothly together in vast highly intricate interconnected organizations because everyone knows everyone else will hurt them if they can get away with it, because you always do what's best only for you.

Why do you think altruism evolved? because a group of people who can trust each other and work together is far more productive and powerful than a bunch of individuals who all work alone because they can't trust each other.

Asymmetric Information

2011-06-23T10:39:00.000-07:00

If the debt limit is not raised, and there's a government shutdown on steroids and amphetamines, and maybe a debt default after that, a big question is who the public will blame. The Republicans will have been the ones who voted against it, and who took America hostage to get what they wanted, but our press is so lacking, and asymmetric information is so bad, will most of the public understand that? especially with the Republican's billionaire backed propaganda machine.

The world is just so immensely advanced and complicated today, asymmetric information is just an enormous problem. It just really takes tremendous study to understand many issues in economics and government, and people have so little free time today.

One important solution is a better press, where the monumental positive externalities of serious analytic and investigative journalism are commensurately subsidized, but another huge one is try-and-see. We need to end the filibuster, for one, so we can have a lot more try-and-see to disintegrate Republican disinformation and really move us forward. Another thing is massive public campaign finance, and donation limits. With this kind of asymmetric information, we really need well informed and well intentioned representatives. Our legislators should be spending 80% of their time learning and studying to make good decisions, not 80% of their time raising money.

Automatic Registration and Permanent Mail Ballot with Tax Filing

2010-11-11T05:52:00.001-08:00

The Democrats will be able to pass little or nothing over the next two years, so especially now it's best to focus largely on the long term and structural:

1) Make it far easier to vote – This is so crucial to Democratic success; you really wonder why they never pushed for it more. My specific idea is a law to make it so everyone, when they submit their income tax form, is automatically registered to vote – and put on the list to be permanently sent a mail ballot for every single election, no matter how small. And the same would be done when getting a drivers license, or with any filing with government. This would result in virtually 100% voter registration, and virtually 100% receipt of easy, convenient, no driving anywhere or waiting in any line, mail ballots, for every single election, no matter how small.

This would be an enormous boon to the Democrats, as Republicans vote disproportionately by a large margin – the older you are the more you vote, and seniors have all the time in the world to vote; moreover, the passionate, the whipped up by outrageous propaganda, (and the insane), are very motivated people; they'll make the time. It's far easier to vote if a ballot arrives in your mail, with a prepaid return envelope. And the ballot arriving in the mail makes it hard to forget an election. This could tremendously increase relative Democratic turnout. You can put a law like this on referendums all over the states, as well as trying to push it through nationally when you control congress.

2) Plan now for how and when you will end the filibuster, and build support for it behind the scenes now – try-and-see is far kinder to good ideas, ideas that are good for the vast majority, and far harsher to bad ones, thus try and see is a great ally of the Democrats and a great enemy of the Republicans and their best friends ignorance and deception – nothing decimates lies and misleading like try-and-see. And ending the filibuster tremendously increases the odds of try-and-see. If we had try-and-see we would have had, for example, Medicare-for-All and Cap-and-Trade permanently a long time ago. For more on this see here.

3) Push for the Presidential popular vote plan, where an electoral majority of states commits its electors to chose only the winner of the national popular vote. This would result in the winner of the national popular vote always winning, no matter what, unlike in 2000. So it would, for all practical purposes, end the Electoral College. Like suggestion1 above, millions of DNC money could greatly increase the odds of its success.

You wonder why the Democrats never put much effort or money into these things when they can do such great good long term. As an economist, it just doesn't seem very efficient or utility optimizing.

I should add that one good big thing that the Democrats might get by the Republicans, perhaps the only one, is free trade agreements. So now would be a good time for Obama to really push for them, and he seems to understand this. I would love to see a free trade agreement between NAFTA and the EU, a GFTA, which could later be joined by Japan, and with momentum, the vast majority of the world. But that's pretty ambitious for the next two years.

Do We Really Prefer Winner-Take-All Races?

2010-10-07T00:04:00.001-07:00

In a recent post, Ezra Klein talks about the founding of Facebook and makes some important, relatively rarely considered, economics points. The following is a long drop quote, but please read it; the points are important, and the ones I will make after depend on it:

At the same time, of course, Friendster, MySpace, Orkut, and a variety of other social networking platforms were swirling about. After all, technological advances had made these things simple enough that even college students could pull them together in a few weeks. If it hadn't been Zuckerberg, it would've been someone else. Maybe Goldberg.

This is a rather common phenomenon: It's called "simultaneous invention," and it happens all the time: Technology advances to the point that the next step is obvious to multiple people, and so they all take the next step at approximately the same time. In the end, one of them gets the patent, or the market share, and so squeezes the other out and becomes synonymous with the invention. That's what happened with Alexander Graham Bell, who in all likelihood invented the telephone after Elisha Gray -- and both of them came after Antonio Meucci. Amusingly, the discovery of "simultaneous invention" was another case of simultaneous invention, with multiple thinkers and researchers publishing on the phenomenon all at once. "Unjust Deserts," by Gar Alperovitz and Lew Daly, has a good discussion of this.

What does this have to do with the movie? Not that much. Insofar as the film implies that only Zuckerberg could've invented Facebook, that's wrong. But since the movie is mainly a character study of Zuckerberg, it's a bit churlish to criticize it for focusing on his characteristics so intently. Alperovitz and Daly, however, would argue that it has a lot to do with how we should think about inequality. "Differences between individuals are almost negligible compared to the influence of the resources, infrastructure, and most important of all, the knowledge an individual has at his disposal," they write.

In other words, the difference between Mark Zuckerberg and Adam Goldberg was very small, while the difference between Mark Zuckerberg and the smartest college kid in 1999 was huge. It was the advancing storehouse of human knowledge, not the advancing capabilities of particular humans, that made up the difference. But humans tend to think about things in terms of other humans, and so we overestimate the impact of personalities (autistic genius) and underestimate the importance of technology (all sorts of people could suddenly build social networking platforms in under three months). That also makes it easier for us to believe people deserve* enormous, inconceivable monetary rewards for their inventions, as we tend to attribute the entire value of the product to them, as opposed to attributing the incremental difference between that product and whatever was right behind that product to them.

"There's a different argument that assuring people astronomical profits for creating useful things makes them more likely to create useful things. That argument makes more sense."

Ezra finishes up with this:

Note the word "deserve." There's a different argument that assuring people astronomical profits for creating useful things makes them more likely to create useful things. That argument makes more sense.

It does to some extent, but you can be way past the optimal point on that.

Consider this situation, which is analogous to the entrepreneurial, innovational example Ezra discusses:

You're in a race with 100 other people (or considering entering one). To have any chance of winning, you have to train for a year full time, so you can't work and make any other income besides what you may win in the race. Everyone has very close to the same odds of winning, about 1%. Even if you're most likely to win, your odds are still only 3% of winning and 97% of losing.

There are three ways the race's prizes can be structured that all cost the same to the races sponsors; let's call those sponsors society:

A) The Winner-Take-All Way – the winner of the race, first place, gets $100 million; everyone else gets zero.

B) The Very-Low-Taxation Way – the winner of the race gets $99.55 million. Second place gets $100,000. Third place gets $70,000, and the other 97 competitors get $20,000 – and this is for a year's work.

C) The Strongly-Progressive-Taxation Way – The winner of the race gets $30 million, and the other competitors divide up the other $70 million in a not extremely uneven way: Second place gets $2 million, third place $1 million, fourth place $700,000, and so on, so that even the 100th place competitor still gets $40,000, so he can at least afford to keep his family's health insurance and not lose their house.

Now really think about this:

1) Suppose you were able to enter this race, and chose either A, B, or C. Which would you prefer – even if you knew you were the most likely to win, even if you knew you had the 3% chance?

2) Do you really think you'd have that much less incentive to train hard for the race if the highest potential winnings were only $30 million, like in C, as opposed to $100 million, like in A (and keep in mind that in C you still have a strong incentive to train hard even if you think you have no chance of getting first, just because 90th pays a lot more than 100th)?

3) If the race were set up like A, would you even risk spending a year to train to enter? Would you even risk trying? And would you be (far) more likely to enter the race, to risk trying, if instead the race were structured like C?

So, the moral of the story is the vast majority of us are far better off, both ex-ante and ex-post, with highly progressive taxation in "winner-take-all" type situations, and such situations are common in the ultra high economies of scale, ideas/information based, modern high tech world. In addition, rather than decreasing the incentives to make an effort, take risks, and innovate, progressive taxation (if not taken to a ridiculous extreme; no one in power in the Democratic Party wants communism) increases incentives to make an effort, take risks, and innovate. And it funds the widespread education, public resources, and seed funding that makes widespread effort and high utilization of human productive potential possible.

As the world becomes more and more "winner-take-all" with ever greater increases in economies of scale, technology, and importance of zero marginal cost ideas/information, greater progressivity of taxation will become more and more important to maximizing growth and total societal utility.

The Optimal Level of Governemnt Investment in the High-Tech World of 2010, not 1810

2010-09-13T13:02:00.001-07:00

In response to Stephen Williamson's opus magnum last week, I left a series of comments that actually exceeded his word count. I encourage you to read them and the whole discussion. I think there are a lot of important points and insights. But I especially think the following part is important, and so I have reprinted it here, with modifications and expansions.

David Andolfatto asked:

    Richard,

    Would you mind elaborating on this:

    Due to externalities, especially positional/context/prestige and carbon, asymmetric information, the zero marginal cost of idea/information use, high transactions costs, great economies of scale and the problems of monopoly power, inability to price discriminate well leading to inefficient provision, and much more, the current level of government spending, insurance, and especially investment is far below the optimal level.

    Do you have any way of quantifying the importance of these "externalities" you highlight above? And what is the "optimal" level of government spending, investment, taxation, etc.?

Here is my reply (again, modified and expanded from the original comment):

David (and Stephen),

This is a very big question. A good complete answer can be book length (or books length). It's far from a few simple statistics and p-values. And I'm especially short of time right now, but I think I can give you some big important indicators that I hope will encourage you to really think about this – logically utilizing all of the evidence you've seen in your lifetime, not just the fraction that's considered "formal". As the great growth economist and perennial Nobel shortlister Paul Romer of Stanford said:

In evaluating different models of growth, I have found Lucas's (1988) observation, that people with human capital migrate from places where it is scarce to places where it is abundant, is as powerful a piece of evidence as all the cross-country growth regressions combined. But this kind of fact, like the fact about intra-industry trade or the fact that people make discoveries, does not come with an attached t-statistic. As a result, these kinds of facts tend to be neglected in discussions that focus too narrowly on testing and rejecting models.

Economists often complain that we do not have enough data to differentiate between the available theories, but what constitutes relevant data is itself endogenous. If we set our standards for what constitutes relevant evidence too high and pose our tests too narrowly, we will indeed end up with too little data...

My greatest regret is the shift I made while working on these external effects models...I suspect I made this shift toward capital and away from knowledge partly in an attempt to conform to the norms of what constituted convincing empirical work in macroeconomics. No international agency publishes data series on the local production of knowledge and inward flows of knowledge. If you want to run regressions, investment in physical capital is a variable that you can use, so use it I did. I wish I had stuck to my guns about the importance of evidence like that contained in facts 1 through 5.

– Journal of Economic Perspectives, Volume 8, Number 1, Winter 1994, Page 20.

That said, let's lay out some big chunks of evidence:

Stephen, regarding asymmetric information, you talk about contracts and credit markets, but asymmetric information (or just lack of information – or, as is often forgotten by economists, the lack of expertise to evaluate it well in a very advance complicated world, expertise that can take years or decades of full time study to obtain) is far more extensive than just this kind of thing.

Here is a a 2009 Eureka Alert. It notes a large scale survey which found 97% of climatologists who are active in research think that human activity is a significant contributing factor in global warming, but only 58% of the public thinks this.

And there's this AP poll from July which found that 59% of Americans would oppose any climate bill if it would cause their electricity bill to rise by even $10 a month.

Now that's what I call asymmetric information!

But this is asymmetric information that, David, will lead to massive government underinvesting in basic scientific research related to alternative energy, as well as related infrastructure, and as well as undertaxation of carbon (either direct or indirect).

But there's more than this; how many people understand the underlying economics, that the free market alone isn't the most efficient at all for providing many things (especially after the constant and massive disinformation efforts of the Republicans)? How many people understand the list of potential market problems referred to in the beginning of this comment? And how many people can you expect to have the time or willingness to learn this much economics, when the vast majority have careers that are in very different areas, and they have historically little free time?

Or foreign policy: How many people really understand the extent of the effect a declining price of oil has on positive change for some of the worst authoritarian and terrorist sponsoring regimes in the world (including the old Soviet Union in the 80s), where terrorism costs us trillions per decade, let alone the loss of life.

How many understand that that $10/month, or $100/month, on average, progressively applied, will essentially not make their monthly budgets any tighter after a period of adjustment (see here).

So this should give you an idea of the true extent of asymmetric information, and the magnitude of a large source of government underinvestment.

But now let's look at another huge one.

Cornell economist Robert Frank in 1999 wrote:

A cautious reading of the evidence suggests that we could spend roughly one-third less on consumption--roughly $2 trillion per year--and suffer no significant reduction in satisfaction. Savings of that magnitude could help pay for restoring our infrastructure, for cleaner air and water, and a variety of other things.

Now let's think about this.

I'm 47. I spied on David's vita and found he finished his undergrad degree in 1985, so he's probably around 47, and Stephen has admitted to 55. So all of us should remember 1978 very well.

Disco was sweeping the country and real per capita GDP was $25,503 (from the BEA, in 2005 dollars). In 2009 it's up to $41,890, for a difference of $16,387. Multiplied by the current population of 308 million, that's $5.05 trillion per year (and keep in mind here the yearly GDP figures are adjusted very little for increases in quality, like increased effectiveness of medical treatments).

Now, let's compare how people lived in 1978, their happiness, their utility, to how people live today. Have we added that $5.05 trillion per year efficiently from the standpoint of optimizing total societal utils? (and I care even less about the Pareto definition of optimality or efficiency than Stephen. What's Pareto optimal can have tragically comically small total societal utility).

In 1978, I lived like a pretty typical member of the middle class, in a three bedroom suburban house in Oak Park Michigan. Our floors were all carpet except for the kitchen and bathrooms which had nice linoleum. Our kitchen countertops were linoleum too. It was carpet and linoleum, not wood, stone tile, and granite. But for all that our home was much smaller and less expensive than a comparable one today, from my human experiences, our family (like those of our peers) found it just as beautiful and just as high quality as a comparable one with comparably middle class families today.

Now, there's no t-statistic here, but I can take assumptions just as mild as those on which t-statistics typically are based, or milder, and construct a logic chain showing that it's extremely unlikely that my experiences throughout 47 years in many cities and neighborhoods, with many people, were completely unrepresentative of the population as a whole – and that's what they would have to be to not conclude that a huge amount of that $5.05 trillion was positional/context/prestige utility, of zero sum game at the societal level. This is as opposed to intrinsic utility like increased incidence of air conditioning since 1978, or improved medical effectiveness – which is a quality increase little included in that GDP statistic.

As Paul Romer said, things that don't come with a t-statistic can be a lot more valuable pieces of evidence. And I'd add that their logic chains can be just as rock solid and anchored to assumptions as mild – or far milder – than those behind the t-stat, or other formal empirical evidence.

Now, today total government spending on basic scientific and medical research is approximately $34 billion per year. That includes all of the government spending on basic scientific and medical research on curing cancer, arthritis, backaches, headaches, obesity, robots building robots, solar power, everything. [Calculation: National Science Foundation data, table 2, 2007, the sum of columns E,H,N,O, and W, 2000 dollars adjusted to 2009 via GDP deflator]. And these are things well known to be usually provided more efficiently by the government, either directly, or largely indirectly, say through sponsorship, or purchase from the private sector – Paul Romer quote time:

As just one example, recall that the increasing returns to scale that is implied by nonrivalry leads to the failure of Adam Smith’s famous invisible hand result. The institutions of complete property rights and perfect competition that work so well in a world consisting solely of rival goods no longer deliver the optimal allocation of resources in a world containing ideas.

– Forthcoming American Economic Journal paper, page 8.

and

Think about the basic science that led to the discovery of the structure of DNA. There are some kinds of ideas where, once those ideas are uncovered, you'd like to make them as broadly available as possible, so everybody in the world can put them to good use. There we find it efficient to give those ideas away for free and encourage everybody to use them. If you're going to be giving things away for free, you're going to have to find some system to finance them, and that's where government support typically comes in...Because everybody can use the idea at the same time, there's no tragedy of the commons in the intellectual sphere. There's no problem of overuse or overgrazing or overfishing an idea. If you give an idea away for free, you don't get any of the problems when you try and give objects away for free. So the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world

– 2001 interview with Reason magazine.

Now, can you imagine how much faster, over the long run, science and medicine would advance if we increased this ten fold? One could easily see it advancing multiples as fast over the long run. At the end of this commentary, I'll leave references to some formal studies that do some quantifying, but for now I'll just leave this from the abstract of a 1998 Quarterly Journal of Economics paper by economists Charles I. Jones of Stanford and John C. Williams of the San Francisco Fed:

Is there too much or too little research and development (R&D) [This is all R&D combined together, not just basic scientific and medical research. It includes basic scientific and medical research, plus applied research, plus product development (even if it's for products of little or no intrinsic utility, but high positional/context/prestige externality, like "silky smooth transmission" or geo gravitational adjustment for a $100,000 mechanical watch for 0.1 seconds per month better accuracy, but still less accuracy than a $30 atomic clock radio-controlled watch) The estimated total for all of this is $308 billion per year from all sources combined, government, business, and non-profit, NSF data, table 1, column C, adjusted by the GDP deflator]? In this paper we bridge the gap between the recent growth literature and the empirical productivity literature. We derive in a growth model the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature and show that these estimates represent a lower bound. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Conservative estimates suggest that optimal R&D investment is at least two to four times actual investment [emphasis added].

– Vol. 113, No. 4 (Nov., 1998), pp. 1119-1135

A ten fold increase in government research spending is about an extra $304 billion per year, about 1/17th of our $5.05 trillion increase from 1978. Now you don't think if we channeled 1/17th of the increase since 1978 into this we'd produce much higher total societal utility over the long run? We went 1/17th of the way back, less giant wheels on cars, but they seem just as high quality and prestigious because everyone's wheels are smaller, do you really think an average person with a new 1978 Cadillac, with the crushed velvet and pile carpeting, got much less pleasure (or any less) out of it than their counterpart with a 2010 Mercedes of equal societal rarity and affordability? And technological advancement is very little in the GDP, so you can also compare such a Mercedes to the pleasure you'd get from one 2.1% less expensive ($304 billion divided by the current GDP of about $14.6 trillion), but it was just as rare and prestigious and high quality seeming because everyone else's car cost 2.1% less too? And remember, in return you get a ten fold increase in government basic scientific and medical research, and since 54% of basic scientific and medical research is government [same NSF data as before], that means an over five fold increase in total basic scientific and medical research from any source.

Think about it.

Or look at it this way: According to Berkeley economist Emmanuel Saez's data, the top 1/10th of 1% of earners in the United States in 2008 got 5.37% of all income including capital gains. U.S. GDP in 2008 was $14.6 trillion (2008 dollars), so depending on Saez's definitions and calculations, that 5.37% is in the neighborhood of $800 billion. And given that very few people are in the top 1/10th of 1%, his data estimates that that group makes a minimum – minimum – of $9.1 million per year. Now, suppose we take our $304 billion to increase government basic scientific and medical research ten fold and total basic scientific and medical research from all sources, government, business, and non-profit, five fold, from their $800 billion, so they all have about 3/8ths less, so they earn a minimum – minimum – of about $5.6 million per year.

But they all maintain their same relative position, same relative prestige, same relative feel of quality for what they have. Instead of making $9.1 million per year, it's $5.6 million per year. Instead of $91 million per year, it's $56 million per year. Instead of $910 million per year, $560 million per year. Do you really think there will be much of a loss of utils for these individuals, especially given that they will have the exact same level of prestige because all of their counterparts lose an equal proportion of income, the exact same feeling of quality for what they have?

And don't tell me the pie will shrink because they'll work less. They’ll only make $5,000 per hour after taxes instead of $8,000, so that's not enough incentive? Anyway, we all know the income and substitution effects. Stephen in his post just assumed a tax increase would get people to work more hours due to the income effect. In fact, tax rates in anything but a very extreme range have little effect over the long run on work hours, especially if they are constructed smartly to allay psychological effects (like a VAT with progressivity from using the proceeds progressively like for free universal pre-school and bachelors degree). From an expert well versed in this literature, MIT economist Jonathan Gruber:

Changes in tax rates appear to have relatively modest effects on total gross income; the total amount of income actually generated through work or savings does not respond in a sizable way to taxation.

– "Public Finance and Public Policy", 2nd edition, 2007, page 734

I even got Scott Sumner to admit this! (see the comments of this post)

So again, I ask you, do you really think there will be much loss of utils for these super wealthy individuals with this 3/8ths diversion to basic scientific and medical research?

And you have to decide one way or another here. However happy you are with your data and evidence, not making a choice, or the status quo, is a choice. And one that must be justified with the data and evidence you have – not fancy non-existent data and evidence that you'd like to have – because the theory is not determinate due to all of the market imperfections of the invisible hand that are well acknowledged in economics, that are referred to at the start of this comment.

Do you really think that this little intrinsic utility loss per person – over this tiny an amount of people – would outweigh, over the long run, the utility gained from a ten fold increase in government basic science and medicine, which is a five fold increase in basic science and medicine from all sources, government, business, and non-profit combined?

Again, you have to choose a level of government investment too, based on the same data and evidence that I do. The data and evidence is no more formal and fancy for you (although I'll give some additional strong formal data and evidence at the end). You have to rely on the same data and evidence that I do to justify your decision if you say we should keep the level of government investment the same, if you say we should cut it, or if you say we should cut it by 99%. The theory is not specific. It's clear due to externalities etc. that government investment shouldn't be zero and it's clear that it shouldn't be 100%. To find out what it should be in between you have to use the data and evidence you have, and it's well established in statistics that it's inefficient to throw away data and evidence. Now, I hope to illustrate this with a little parable:

A snobby empirical economist is hiking with a friend who eats a berry off a bush and immediately keels over and dies. The snobby economist thinks to himself, well it's just a sample of one berry; you can't draw any conclusions from a sample of one. It's just anecdotal evidence. And being hungry himself, he eats a handful, keels over, and dies.

Moral of the story: It's very inefficient, and perhaps very dangerous, to ignore abundant a priori information at your disposal, even if that information is not formal, but still logical – the logic chains are completely solid – and based on relatively realistic assumptions. You just currently don't have a formal version of it.

It wasn't hard at all to put together a completely solid logic chain showing those berries were poisonous using common, but informal, a priori knowledge about biology, human physiology, evolution, similarity across humans, and extremely realistic assumptions.

Now, I think I could put together a similar case here with regard to the magnitude of positional/context/prestige externalities, the magnitude of the effect of the zero marginal cost of idea/information usage, etc., etc.

In any case, this is plenty for now. As I said at the start of this, a good complete answer can be book length (or books length), and I can't write that here, but I hope what I have written gets you to really think about this.

Before leaving you with a sample of strong formal evidence, I'll tie this post to it's title with this comment I recently left on the blog of Richard Green:

I think a big point is that as a country advances more technologically, high return government investment of the kind the free market will grossly or inefficiently underprovide (due to long established in economics market problems like externalities, etc.) becomes more and more important.

In 1810, there was little need for education. The vast majority just did low tech farming and there was not much to learn in school. Medical costs were tiny because there wasn't much for a doctor to learn and there wasn't much he could do.

As a country advances the need for these social investments increases and we've fallen far behind this increase over the last generation in California and in the country as a whole.

Now, I'll leave you with that sample of strong formal evidence:

Robert Barro and Jong-Wha Lee, "Educational attainment in the world, 1950–2010", Vox, http://www.voxeu.org/index.php?q=node/5058

Charles I. Jones, "Sources of U.S. Economic Growth in a World of Ideas", The American Economic Review, Vol. 92, No. 1 (Mar., 2002), pp. 220-239

Charles I. Jones and John C. Williams, "Measuring the Social Return to R & D", The Quarterly Journal of Economics, Vol. 113, No. 4 (Nov., 1998), pp. 1119-1135

Zvi Griliches, "Productivity, R and D, and Basic Research at the Firm Level in the 1970's", The American Economic Review, Vol. 76, No. 1 (Mar., 1986), pp. 141-154.

Was it cautious or "cautious"?

2010-08-31T22:46:00.000-07:00

You often read that Obama was too cautious in the size of his stimulus, making it too small (for example here). But really in this context the word cautious should be in quotation marks.

Having a smaller stimulus may have been what seemed cautious to many, or what was considered cautious by Washington conventional wisdom, but it was actually much riskier politically for Obama and the Democrats – and for the country.

The truly cautious thing was actually doing the opposite -- erring on the side of making the stimulus too big (assuming you could pass a bigger one).

Making the stimulus substantially bigger than the estimated expected amount needed was the cautious thing. Making it much smaller was the "cautious" thing.