Tuesday, August 14, 2012

Facebook Politics: Paul Ryan's Budget pt 1

Facebook and Politics don't mix.
Facebook and Politics clearly do not
mix well, according to this image
*Obligatory comment on how long it's been since my last post.*

No one wants to read about that.  Let's jump right into it: Politics! Economics! New GOP VP nominee Paul Ryan! Social Media!

I have long been a believer that social media is a very sub-optimal medium to discuss serious and important issues such as politics or religion.  Twitter (where I am much more active than here on my blog, follow me @bobbyg27, yes that was a shameless self-promotion plug), especially, with the 140 character limit, is particularly notorious for "sound byte"-style discussion, where shock value is both easier and more resonating than true content.  Facebook is not much better, particularly when political discourse can lead to "defriending," a likely permanent separation between two barely-acquaintanced parties.

And yet, despite my knowing better, I still partake.  It is too tempting.  Sometimes there are things I want to say that I want people to hear/read, and sadly Facebook pushes what I say to several hundred people.  Twitter is too shortform for any meaningful exchange of ideas, and this blog would be perfect but I neglect it too much.  So Facebook is where I plant my soapbox, to the anticipated furrowed brows of my liberal friends.

I have had a few exchanges of late that I am proud of, and in the interest of spreading the word, soliciting feedback from my many blog readers (lol), and mostly archiving for my own later review, I will post some snippets of my Facebook exchanges here.


Thursday, September 3, 2009

Still Alive, Still Pessimistic (Traffic)

In normal circumstances I would apologize for my 9+ months absence from the realm of the blog, but having been rather thoroughly convinced that I am my only reader, I hereby forgive myself for the delay in advance of any apology and will post what I want to post here without further ado.

There have been many things that should have warranted a blog post so far this year, and yet I haven't had either the time, energy, or desire to sit down and construct a legitimate post that is up to the high standards of my reader(s), namely, myself. In some idle minutes the other day, however, I checked the link to the blog and began reading some of my older posts which are, while outdated, still fun to read and utilize valid logic and argumentation. So it's inspired me to revist the blog realm and hopefully stay a little bit more up to date. I certainly do want to finish my auction post at some point, and get back to talking about economics issues. Today however will be more of a continuation of my traffic complaints having a year's worth of commuting under my belt to add to my traffic "expertise." And so we begin.

As many trains of thought do, this one begins out of frustration (or to use a business cliché, "sensing an opportunity"). I see many many failures of my "Golden Rule" every day, which is disheartening, and to add insult to injury I got a speeding ticket a while back trying to get out of a situation where I was "boxed in" before I missed my exit. Even so, the worst part of my week is sitting in stop-and-go traffic for 20 minutes, only to have it magically clear up a couple miles down the road. Although some may say, don't question your blessings, perhaps it is the commuting pessimist in me that suspects the slowdown itself never should have happened. Time to flip on “analyst mode” and think about the problem.

Before even identifying the problem, I can tell you what is not the solution: metering lights. Allow me to vent just a moment here before coming to my ultimate point. Metering lights do nothing productive. I'm not sure who invented them and, worse yet, who voted them into the state legislation, but it was probably someone who has a very shortsighted view of either traffic congestion and/or simple economics (California politicians? Economic neophytes? What a silly suggestion!). There is no scenario that I have witnessed where metering lights have done anything other than cause congestion on the onramp. The congestion never helps the situation. Either the highway is already congested, wherein the metering lights merely transfer onramp congestion back a few feet from the merge lane to the line on the onramp with the stoplights, or there is no congestion on the highway and the metering lights create ridiculous congestion on the onramp for no reason. Some may claim that this second scenario is the point of metering lights ("hey, if we didn't have em, there WOULD be congestion on the highway!") but that is pretty ridiculous. Assuming people aren't idiots when merging onto the highway (granted, a surprisingly large caveat), the additional traffic would not cause much if any delay for the highway traffic. In any event, the societal lost time would be less than having to sit through 3 minutes of metering lights for the person entering the traffic system. Not to mention it's bad for mileage to have to come to a complete stop unnecessarily so as to "obey the law."

Ok, I feel a little bit better. The point of bringing up the metering lights is that they are evidently the government's solution to making traffic better. Naturally I've brought up my concerns before about inefficient government intervention, and here is a nice, bottled-up, everyday scenario for us to use as evidence of that fact. Metering lights, which taxpayers were forced to pay for, do not solve the problem and in fact only have the potential to make matters worse. The government failed us, and now we're stuck not only footing the bill but putting up with this incremental waste of resources until who knows when. Yay.

With a year's worth of commuting and traffic experience as well as all my past endeavors into the forays of theoretical economics combined with time spent amidst frustrating traffic systems, I took it upon myself to think about, aside from not following the "Golden Rule," why these mystery slow downs occur. It should not surprise my readers to discover my conclusion: more idiot drivers.

We all know about the phenomenon I call "the brake chain" (I'm developing my own traffic language here, aren't I?), where one driver on the highway brakes for whatever reason, sometimes for a safety concern, sometimes because they just aren't paying attention, sometimes for no logical reason whatsoever. The red lights cause the driver behind him to brake, which cause the driver behind HIM to break, etc etc. Depending on several factors including but not limited to how dense with cars the traffic system is, the brake chain can continue on for a good several minutes. Other things that can affect the duration of the brake chain: beginning speed (going faster means the speed-reduction effect of a brake chain is more severe, due in part to safety concerns), and following-driver ignorance/miscalculation, as drivers tend to over-brake also out of an inflated concern for safety.

During peak traffic times, aka "rush hour," these brake chains can be very disruptive, as traffic density is at the daily peak. The only way to break the brake chain (forgive the homonym) is for the numbers of cars entering the brake chain to be less than the number exiting the brake chain. At peak commuting times, if we assume traffic starts at speed limit speeds, you have cars entering the brake chain system going 70mph, and cars exiting the system at 50mph, then accelerating back up to 70mph. However, this creates a problem, as there will be more cars entering the system than exiting the system until overall traffic density (in other words, cars per minute, for example) drops below the traffic density of cars exiting the system. Only then can the system improve, and during rush hour, it can take a long time for that density to drop, and a longer time depending on how slow the brake chain drops the speed of traffic.

This explanation can be confusing, I understand, so here's a simpler way of explaining it: if someone brakes on the highway, and there are a lot of cars on the road, most likely the person behind him will brake as well. The subsequent cars will brake behind the cars in front of them, creating a chain of cars who are braking, lowering the speed of traffic. The cars that brake will then need to re-accelerate back up to their original speed, but in the meantime, looking at the highway from a helicopter's point of view, for example, there will be this patch of road where the speed has dropped due to the "brake chain" More cars will be entering this patch of road (going the original, fast speed of traffic) than will be exiting the patch (going the new, slower speed, and re-accelerating), and so the patch of road that is slower will grow longer as long as the total cars entering at the faster entry speed exceed the total cars exiting at the slower exit speed. Hopefully that's a little bit more clear.

To make matters more difficult, it is extremely difficult to manage one's way out of this system without just having to deal with it (i.e. without waiting for "market conditions" to improve). Further driver error can have the same effect as the initial brake chain, as now if anyone brakes too much and drops the brake chain's speed to 45 mph, that is now the new speed of the system for everyone behind that person. A chain is only as strong as its weakest link, as the saying goes, and weak drivers impose the traffic cost on all of us. This is why a slight brake chain can, several minutes down the line, create a traffic jam that slows the speed of traffic to a grinding halt possibly even below 10mph.

The most disgusting part of this realization is that the true culprits, the drivers that slowed down first, are not the ones that bear the cost of their error. The first driver, who tapped his brake for no reason while traffic was at the original, fast speed, creates the system but is instantly the first person to exit the system. That system that is left in his wake will exist, and will likely even get worse until overall congestion conditions improve (which may take hours), and his commute time will be hardly affected. The same goes for every driver who slows down the speed of the brake chain: he will be the first to exit the system which now contains the slower speed, but he will have created that system for everyone behind him. Doesn't it seem immensely unfair that 99% of the time (made up number) when you're sitting in a traffic jam, it's probably the fault of some half wit who, by the way, did not even have to sit through his own traffic jam? Boom. Market failure. See, didn't you have a feeling there was one lying around? I hope that every single traffic expert out there has reached the same conclusion (obviously not though; we have metering lights...)

Unfortunately, there do not seem to be easy solutions to this market failure that come to mind. How do we shift punishment away from innocent drivers and place it on the culprits? It is also unfortunate that the error can only take a few seconds to have hours of repercussions... it is easy to see that there was an error made, but impossible to trace it back given our current technology. Perhaps in the future if, for example, we have every mile of highway videotaped, or on-board computer systems that can track every single car on the highway, we would be able to trace back traffic jams to the bad drivers who caused them, but until then, I think we're just stuck with the plea that, if you are on the highway, please do not brake unnecessarily. Any significant speed reductions or even perceived speed reductions (tapping on your brakes puts the driver behind you on edge) can cause long traffic waits for EVERYONE behind you. Of course if you're reading this and this is news to you I'd also beg you to read my "Golden Rule of Commuting" post, as that will also provide some good insights on efficient highway driving.

Thanks for reading, if you did read. Hopefully I'll keep on updating. Following my blog (on the right hand side of the page, probably back near the top) will provide a good incentive for me to entertain an audience, so if you like what you read, follow or comment so that I know I'm not my only reader :).


Friday, December 19, 2008

Auctions and Incentives: Part I

Recently, one of my favorite writers on Freakonomics, Ian Ayers, wrote a post discussing the economics and game theory principles behind certain types of auctions.

The first one he talked about is what is called a dollar auction. In this auction, the item up for auction would be cash, or something of fixed and common value. Whoever has the highest bid wins the prize, like normal. What is different, however, is that the second place bidder, aka the “first loser,” also has to pay his bid. So consider this scenario: I put a $20 bill up for auction, starting price $1, bid increments in $1. Would you bid? Even understanding the principles of the game, how once you bid, you might have to pay without winning, I bet most people would bid. So let’s say bidding continues on up, along the bid increments, to a high bid of $10. This is a crucial point in the auction, as the next bid determines whether the person auctioning off the $20 makes money (the next bid, at $11, will guarantee the person auctioning off the cash $11 winning bid + $10 losing bid). Keep in mind, in a standard auction, the profit point would be at $20. Here it’s at $10.

If this doesn’t immediately ding a warning bell in your head, then you should think about this a little more. Would you bid on a $20 bill for $11? Would you put up a $20 to get at least $21 back? How can the answer be yes to both? Perhaps the more important question is, if I win on both sides, who is the loser? Now things become clearer: the person who would pay $10 to get nothing is the loser. Someone buys a $20 for $11, and then the person holding the auction gets a free $10, netting $1. But wait, who says the auction has to end? The $10 bidder can bid $12, usurping the $11 bidder and going from the person who nets the least (-$10) to the person who gains the most ($8). It seems like bidding again at $12 is the smart thing to do for the $10 bidder. Unfortunately, yet again, the same incentive now exists for the other player (or even a new player, moving from $0 to $7 net with a $13 bid). Sounds like a breakdown is coming, doesn’t it?

The last possible pivot point would be at $19. At $19 and $18 payout bids, the person with the cash is sitting pretty, having become the top gainer at the $15 bid point (now he stands to gain at least $17). Initially you would think that no one would bid over $20 for a $20 bill, right? But check out how the incentives are right now: the bidder at $18 stands to lose $18. If he bids $20, at least he breaks even. Breaking even vs. losing $18… the choice seems easy. So he’s up to $20. However, that same equation now presents itself to the formerly-top-bidder at $19.. lose $19 or lose $1 by bidding $21? Seems like losing $1 is better than losing $19… so he bids $21! This common scenario, as you’ve probably derived already, of losing the entire bid amount or bidding again for a chance to net $18 more (at this point it’s “less loss”) will never cease to exist in this auction. It becomes a game of chicken, where the winner loses less. Only when one of the bidders determines he will bite the bullet and take his losses, which could possibly be substantial, will the auction end. If it ends with a high bid of $11 or above, the person running the auction makes money. Seems like a pretty easy way to make money if you can convince people to play.

Before we move on to the real life example, let’s consider ways to get out of this as a player. The first solution would be, quite simply, to not play. In suggesting this I am reminded of my sex-ed teachers in high school who loved to say, “The best way to avoid contracting an STD is to practice abstinence.” Well, it’s true here, if you assume the disease to be those crazy incentives. Of course that’s a pretty boring solution… a better solution would be one where a bidder can game the auctioneer right back.

After some thought, the only solution I could come up with would be an early flat bid of $19. Ideally, you would bid first at $19… no one else has played yet, no one stands to lose anything else, and barring the desire to screw you over (and risk entering into that dreaded bidding war, i.e. losing money), no one would probably bid $20 for a $20 bill, being indifferent between the two immediate $0 options. If someone has already bid $1, things become trickier. A $19 bid retains the incentive for the initial person to bid $20 (not losing their $1), at which point the $19 bidder has escalated the game. If the $1 bidder is smart, however, he will realize that the $1 loss is likely the smallest loss he will receive in this game once the following $19 bid has been cast, and won’t bid that $20. However, odds may be that he might only see the immediate impact and bid $20 to save his $1. If I were the $19 bidder, I’d bid up a few times more just to punish him at this point… even if he won with a $26 bid, I’d then chastise him by saying, “See, if you stayed at $1, you would have lost only $1, not $6.” Of course I would have lost $25, but once he bids $20, I’m prepared to lose at least $19 anyway… that extra $6 loss would be there so that I could at least have some dignity by calling the winner stupid. Of course if the bid increment is locked in at $1 per bid (not that suspicious of a regulation, in fact it even sounds like it’s helping the bidders), there would be no possible solution… only to not be in the game.

Those crazy auctions… my next post will discuss swoopo.com, mentioned in the above Freakonomics article. Check it out now if you want. My recommendation, however, is DON'T REGISTER AND DON'T PLAY, but of course do what you want… I’ll explain my sentiments soon. Don’t forget to add yourself to the “follow this blog” list on the top right, to get emails when I make new posts, and see ya next time.


Thursday, December 11, 2008

In Response To: Automakers Bailout (v2!)

Let me just preface the fact that this is a very similar post to another recent post of mine, which was in response to a different blog. Unfortunately I didn't reference the other one too much so there might be some repetition, but there are definitely some new, good points in this one. Enjoy:

I’ve been doing some more thinking about (and some hearing about) the automaker bailout, and once again I am dismayed at the lack of information that most of the media is spewing out to the public. Worse yet, the self-described “experts” often seem to be nothing more than political hacks with agendas (or equally uninformed, or under-educated, take your pick). At least some people I read have put in an effort to think a little critically about the topic, but it is stark minority of the media as a whole. Out of said dismay comes, yet again, inspiration to lay down the law to my spell checker, who may well be my only reader.

When dealing with problems of the economy, it is good to know a little economics. This particular subject is one I enjoyed learning, so we’ll start today with a lesson in public finance. Here’s an example of an externality where a government can potentially help a society (I believe I’ve briefly outlined this before): flood damage deals $200 per year to each of the 10 homes in a neighborhood. Building a levee costs (let's say) $1000 to build and $1000 to maintain every year after. No one homeowner is willing to front that entire cost, despite the dam's utility to society being $2000 year at a cost of $1000 year. Boom. Market failure.

In this case, a government can step in and tax all 10 homeowners $100 a year and build and maintain the government (although the tax would probably be more like $150 or higher). Now a homeowner is paying $100 a year to prevent $200 in per-year damages. A governing body intervenes, solves a market failure, and society is better off. That's how externalities work.

A key point here is that, without some sort of governing body, say with the use of a contract, no one can enforce participation. One homeowner might see that there’s a petition going around and refuse to sign it, knowing that if the other 9 pay for the dam, he gets all the benefit while paying none of the cost. Considering this incentive exists equally for all 10 homeowners, and one can begin to see why a government with some enforcement power might be required.

I hinted before at one of the flaws in the system, however: governments can never operate more efficiently than a private firm could (perfectly at $100/year tax, let's say), due to increased costs and a separation from the issue that affects incentives (why would they care as much when they are not personally affected?) and analytical measures (how will they know what the damages/costs are to set efficient taxes?).

These inherent problems mean that, when there is no market failure, the government CANNOT improve markets... when the private sector is operating without externalities, it will reach an efficient solution... the government cannot be *more* efficient than the free market. One cannot be more optimal than the optimum.

With that in mind, most likely the tax in the dam scenario would be higher than $100 which, while still improving society, would leave some deadweight loss. It's quite possible, too, that the government's additional costs could potentially surpass the damages, i.e. over $200 year per house. Add in the factor of politics and this can become a problem; a construction company who wants to build the dam could lobby the government to raise taxes to get the dam built. The dam company’s cost would be that $1000/year, naturally, which no homeowner is willing to pay for himself, but the government’s potential inefficiencies might require a tax higher than $200/year per homeowner; if not at the inception, then an increase along the way. I’ve said before, and anyone who understands economics would agree, without an externality, government intervention can ONLY make the market worse; what this example proves is that even in a case where the market is failing, there is still a chance that government intervention could make things worse.

Some might call this attitude pessimistic (or worse), but I would call it economically and logically sound. Perhaps one might begin to see how this line of thinking would lead to prudence when considering government intervention. There is another, more hate-inspiring name for being prudent: conservative. That shouldn’t surprise you, though, dear reader, since I’m a self-proclaimed fiscal conservative. As my favorite professor at UCLA taught me, when considering government intervention (or “fiscal stimulus”), one must first show that there is an externality. If there is no externality, there should be no intervention. If there is an externality, efforts should be made to internalize that externality and only to internalize that externality… other forms of intervention would only destroy properly-functioning free market mechanics. When your computer’s hard drive is broken, taking apart the monitor will be a waste of time and resources. That’s an easy one to see. Hiring your mayor to do it for you might not necessarily be the best solution either.. in fact he could potentially mess up other parts of your computer. In short, you need to be careful.

So what are my thoughts on the auto industry bailout? To answer that I’ll link yet another blog response, this time to a Freakonomics article written by blog frequenter Daniel Hammermesh, a writer that I think is a pretty smart guy, although he is retired and writes more for recreation than for true analysis. This time, at least, he’s on my side. Here’s my response, it’s probably much easier to read following my outline of public finance above:

This bailout is, as I've said before, like giving morphine to someone who's lost a limb. It's a temporary fix that may well exacerbate the problem.

US automakers have been hemorrhaging money. Why? They have been getting out-competed by international car companies. Part of this has been a change in demand (not a market failure); consumers are moving toward smaller, more fuel-efficient cars, and foreign companies have excelled at small-car production for decades. It is, one could say, their comparative advantage in the industry. US companies, on the other hand, are set up to produce large, powerful, admittedly gas-guzzling trucks and SUVs, and we are good at what we do. That's our automakers’ comparative advantage, and as consumer preferences have been shifting away from that line of products, our carmakers have been suffering accordingly. This is not a market failure... it is a change in demand.

That's not the end of the issue. Another reason our companies are not faring well has to do with the unions, as several other commenters have brought up. Needless to say, we pay our auto-workers much more than what foreign companies pay, due to the striking power of US unions. One can make an argument that this is because foreign countries pay health care and other benefits, and not the company, but the initial incentive to outsource remains for companies; why would you build factories in America when labor costs are so high that building cars abroad and shipping them over are cheaper than building in the US? This doesn't even touch on the fact that unions have "negotiated" for gold-plated benefits and pensions for retirees; a substantial chunk of the bailout money would be to pay for these non-working people's high-coverage health care and their pensions. I understand that the retirees are relying on these forms of income to live, but quite frankly, they made an arrangement with the company, not with the US taxpayer (at least I never voted to pay him that), and if that company goes out of business then hey, sorry pal, you're out of luck. That's a risk of the contract. If a bailout goes through, I would at the VERY least want those retiree contracts voided. We can't stimulate an industry that has to waste money on costs that in no way spur production or innovation. Yes I said waste.

The last issue that hasn't been brought up once again concerns our comparative advantage: namely, the fact that we have regulated our industry to produce cars not in our advantage. Liberal politicians have jumped on the opportunity to slap regulations on our auto industry by mandating MPG requirements based on the class of vehicle produced in the US. This is a regulation that sounds alright, but completely violates the principles of economics. These regulations force our carmakers to produce vehicles that our factories are not made to build, and thus that they cannot build as efficiently. If the goal behind this regulation is to decrease gas consumption, there are many much better ways to fix that problem. Example 1: make the *consumer* (this is a consumption issue, right?) pay more for gas, i.e. tax. But no, American politics would never make the voter directly pay for stuff, only indirectly. At least then consumers could still decide if they wanted bigger cars (for cheaper, since we can produce them and sell them at a lower price), which may be a bit worse on MPG, or not. Instead, the government is saying we can't have them.

So our automakers are not just operating in unfavorable market conditions due to shifting demand, they are also overpaying our labor (and 100% overpaying their retired labor), and they are operating in handcuffs put on by their own government. Unless they invent fusion-powered cars, increased cash flow will do nothing to solve these problems. The US taxpayer will be paying money to companies that are losing money (at no fault of their own, I would even venture), who will not be able to repay, who will likely receive even MORE government regulation as a condition of the bailout, and who will eventually go out of business or become nationalized. If we want to help these companies, reduce union power, terminate all existing union contracts and remove production-restricting regulation. In other words, Congress, get your hand out of the mixing bowl and let the cook work. Sprinkling shreds of cash on top will not make the cake taste any less like your hand.

The bailout as it stands today is a terrible idea.

That's all for now. If you've made it this far and you either enjoyed reading or hate my conservative guts, follow the blog to stay up to date on new posts, and as always I welcome comments. Like most badguys in movies, I consider myself someone looking out for the best interests of the country... here's hoping we don't sweep ourselves under the rug.


Thursday, December 4, 2008

MvNL: Death and Taxes without the Death part

Here’s an earlier response post to a Krugman post that I wrote up last week and forgot to post. Sorry for the delay, just found it in my e-mails to myself.

I suppose there’s something to be said about Paul Krugman: he inspires me to write on this blog. It’d be nice if the inspiration was traditional inspiration, rather than responsive, reactive inspiration, but it is inspiration nonetheless and the objective part of my mind says he deserves some credit. Without his blog, would I have written my last post? Would I have thought about so many issues so critically? Although I am in stark disaccord with the Nobel laureate on most policies, he has earned my thanks, at the very least, for his thought-provoking opining.

That said, I hate how he doesn’t post my comments on his page.

Last week, Mr. Krugman wrote up a blog post expressing his disgust with one of his colleagues, John Taylor, for suggesting that creating a permanent tax cut would be good for the economy. Honestly, this is no surprise for the Keynesian-minded Krugman, who believes that high taxes along with high government spending is the best thing a country could do for itself. Naturally, as a fiscally conservative utilitarian, I am fundamentally against this manner of thinking.

Not only that (and perhaps it is this aspect of Krugman’s writing that inspires me the most), but I can’t stand the authoritative tone with which he writes his articles. The series of inane questions early on in the blog post implies that the respective answers are simple and obvious. Notice how he says, “Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook.” Not only does Mr. Krugman state matter-of-factly that his answer is the “obvious” one, but he name-calls the argument against it. What grade are we in?

An observant reader would also note that nowhere in this article does Mr. Krugman support his line of reasoning except through his blatant disagreement. The man is no fool; I understand he has likely written about such things before and felt he has already proven his point, and it is on us, as readers, to follow his line of thinking or to shut up and learn. I typically write the same way. Still, if someone is going to bash both a Republican administration as well as a recognized economist simply for saying something different than the person’s belief (and I feel like I’m being generous for omitting an adjective there such as “mistaken”), at least throw out some data, or a link to a past article. If one is content using his “logic” to solve the problem, be prepared for rebuttal with more logic, and cut the authoritative tone.
With all this in mind, I wrote up a response to his blog post expressing my discord and answering that barrage of questions with some logic of my own. I didn’t call him or anyone else names. I didn’t really put him down for anything except his apparent suspension of objectivity in favor of partisanship. Arguments are fine, and I would have welcomed his response to my contention. I did make a mistake though. Following my previous response’s clearance to be published, I figured he would have published last week‘s comment. The other day, I couldn’t find it, and with the lack of a message from nytimes.com saying “Your comment is awaiting moderation,” it appears I was just flat-out denied. It’s too bad; on MY blog, I’ll always post dissenters’ comments. I might not reply to them directly, but they’ll get to have their say. That’s my commitment.

Another one might be to always put a copy of my replies to Mr. Krugman’s blog here, for my own reference at least, on the “off chance” he doesn’t approve it. Lesson learned.

I realize I have mostly ranted and complained thus far in this post, and I’d apologize but, well, it’s my blog and I write what I want. For the readers who expect some sort of economic reasoning, however: fear not; if you’ve read this far you shall be rewarded with just that. So let’s start…

The first issue is that of the permanent tax cut. I have spoken of this before. The Laffer Curve is an economic concept I seldom dealt with at school, but one that makes a lot of sense, especially. Consider the economic incentive structures of the following scenarios: a 100% income tax economy and an income tax-free economy. Which one earns more money for the government? The initial answer might seem to be, the 100%, since 100%*x > 0%*x, with x being any income. But how many people would work if they don’t get paid (since all of their money gets converted into taxes)? Would you? I wouldn’t, I’d spend my time as leisure time. In reality a 100% tax rate and a 0% tax rate are the same in terms of tax revenue. However, the key difference lies in the incentive to be productive (a.k.a. to make money). At 100% tax, there’s no incentive. Going to work doesn’t earn any money, and at least not going to work allows for some free time, which has some value. When there is no tax, however, going to work earns money. Working more means more money. Working better means more money, as does working smarter. While both 100% tax and 0% tax might be the same for the government, in terms of national productivity they are drastically different.

Now, as I have also said before, I am not in favor of a country without a government. A government has its uses, particularly when there are market failures, and the government needs tax revenue to be effective. The shape of the Laffer curve starts to become clear with a change in taxes by 1% for both scenarios. A 99% tax economy is still probably short on productivity, but now at least there is a little bit of incentive to work, so some people will work and pay their taxes. On the other hand, a 1% tax economy still has a lot of incentive to be productive, and at least all those productive people will pay 1% of their income in taxes, thus generating some revenue (likely more than the 99% scenario). The equilibrium isn’t necessarily at 50%, but there will be a point where tax revenue could not be maximized by either raising or lowering the tax rate. That’s what the Laffer curve indicates.

That’s also what I feel like Mr. Krugman is ignoring. Certainly I am not always in favor of tax decreases nor am I always against tax increases (although I would give a strong “usually” to both of those arguments). I do, however, believe that the Laffer curve has merit and if Mr. Krugman agrees with that principle (which I would imagine would be a difficult admission if he did), I would like to see some evidence, at least, that perhaps we are on the 0% side of the optimal government revenue point. I currently do not believe we are, and in fact even if we were my personal political tastes would want to say, “So? The government still cannot spend my money more efficiently than me, even if they maximized their revenue from me,” but I would at least like economic data and analysis behind the claim that increased taxes is what the doctor ordered for our economy.

At the end of the post, Mr. Krugman alludes to an argument against the Employee Free Choice Act (that's the union's pro-EFCA site) where he paraphrases with “now would be a really bad time to make union organizing easier, because it would hurt business confidence in a recession.” Initially when I read this I thought he agreed with the criticism, and I had been truly surprised… it seemed very out of character for the liberal economist. But after reading it again today, I think he had laced his comment with some sarcasm. It’s unfortunate: I think unions are bad for US business by creating over-valuation for itself (i.e. labor) which causes US companies a disadvantage when competing with foreign companies (*cough* automakers *cough*).

And so my frustration builds. Thanks for reading, don't forget to follow the blog (box near the top of the column on the right) to see when I write updates, and as always feel free to comment.


Wednesday, December 3, 2008

MvNL: New-Hire Subsidies

In another episode of a series that I think I’ll start calling "Me vs. a Nobel Laureate" (MvNL for short), today’s blog post once again challenges a blog post written by recent Nobel winner in the field of economics, liberal Princeton professor Paul Krugman. In this particular post, entitled "The greatness of Keynes…", Krugman concludes that anyone who disagrees with President-elect Obama’s "rescue plan for the middle class" is flat out wrong.

I wrote a response to his post on his website, as usual, but it will likely get lost in the already 170 other comments (some of which suggest Krugman should apply for a job as an economic advisor to Obama… /shudder), and so I wanted to include it on my own blog. Before I post my response, I feel like a little background on the policy is in order. Essentially what Obama wants to do is create more jobs in the country ("stimulating the economy" as liberals like to say) by subsidizing the first $3,000 of a worker’s wage for a scaled maximum $50,000 annual salaried employee (i.e. $25,000/year employees will have their wages subsidized by $1,500, a hypothetical $10,000/year salary would yield a $600 subsidy, etc). He calls this policy the "New American Jobs Tax Credit." Sounds pretty good… until we start thinking about the economic impact (this is an economic policy, right?).

My main issue, which is the common criticism of the policy that I allude to in my response, is that I do not see a failure in the labor market. Anyone who has taken public finance understands that the government should only intervene on a market when there is a market failure; the government can never achieve a better equilibrium than that of an externality-void free market. By that logic, if there is no failure in a market (such as the labor market), any government intervention will only waste national resources.

There are thus two questions that seemed to have been posed and answered by the Obama administration (assuming they understand economics) in reaching this conclusion: first, is there a market failure in the labor market? They apparently say yes, while I say no. People are getting laid off because it is a standard business tactic: when times are tough and sales are down, cost-cutting takes place. It happens everywhere and it is a natural consequence for a struggling business. Unemployment increases, obviously. The idea here, however, is that if society is efficient (and unregulated), a re-allocation of unused or under-used resources, in this case labor, will take place eventually as society reorganizes and recovers. A failure in the labor market, if you read that wikipedia link I put defining it, would be something where the optimal amount of labor is not being used by businesses and there is unnaturally high unemployment. In his post, Mr. Krugman tries to assert that businesses are being too conservative in their hiring decisions, I suppose he thinks beyond prudence. My response addresses that issue:

So the argument here is that laborers don't know how to properly value additional workers? And we are trying, in this post, to say that the whole country is guilty and susceptible to this fault? I'm having a hard time believing that... doesn't that imply that it would only take one company within an industry to be more lenient with hiring policy, either through chance or through brilliance, to gain an advantage over competitors? Wait a minute, if it is a mistake in judgment leading to pre-existing under-utilization of resources, isn't there already a free-market incentive to more efficiently assess labor? Why would we need Obama to step in and fix that for us?

So many questions, and I already have some theories. First, we don't need Obama to tell us how many people to hire. No one can dispute the fact, not even Mr. Krugman, that under Obama's labor policies there will be SOME people hired that, quite frankly, are not efficient enough to get hired. Not all industries are equally affected by this labor market "failure" and thus a flat subsidy across the board will generate some inefficiencies in and of itself. Granted, Mr. Krugman's argument is that the inefficiencies in the new system will be less than the current inefficiencies, but quite frankly, I don't see any current inefficiencies... with the exception of, perhaps, the minimum wage.

Mr. Krugman states in his own article that "the real choice is between having workers doing something and being uselessly, destructively unemployed." Whoa whoa whoa... I thought he was adamantly pro-minimum wage. This statement is a primary argument AGAINST having a minimum wage... if a task is valued to an employer at $2/hour, why can he not hire someone to do it for $2/hour? If no one will accept that wage, so be it. If someone will, society benefits: the job gets done and the worker gets paid what he considered a fair enough wage for the job (or else why accept it?). I agree with Mr. Krugman on his strangely utilitarian above statement: I disagree with his solution. Rather than increasing the minimum wage and force currently-working taxpayers to pay for subsidies on the currently unemployed, why don't we just eliminate or lower the minimum wage and have the free market reach its optimal solution?

Simulating a free market solution at the cost of (and the substantial risk with) government intervention financed by our already job-holding taxpayers is not as good as having a flat-out free market solution. Without a failing market, I see no reason for government intervention.

The second question for the Obama administration that I alluded to earlier is partially addressed at the end of my response: if there were a market failure, what would be the solution? They say subsidize new workers (at the expense of current workers). I say remove the minimum wage. There’s a brief summary of why I think the minimum wage is bad but seeing as how I’ve written a lot already, we’ll have to hold off that issue for a later post.

Until then… don’t believe everything you hear. Do your own research… even on the stuff I write. I welcome comments and criticisms. Oh and (shameless self plug) click “Follow this blog” on the right hand side of the page here to see updates every time I write a new post.

Thanks for reading.