Jobs for Everyone

It has been more than a week since Internet-Mana had their official launch promising nationwide full employment. Their policy platform got overshadowed a bit by the strange comments of Kim Dotcom and the outburst by Pam Corkery, but it is still surprising to me that the policy itself has been met with almost complete silence. This I take to be a comment on the seriousness with which Internet-Mana is being taken, but there is one aspect of their jobs policy that deserves a further look.

First, here are the highlights as reported in the Stuff story linked to above:

• a plan to create 50,000 permanent jobs and 50,000 shorter-term jobs a year over the next five years at a cost of $1.3b; and 
• funding to come from redirecting a fifth of ACC current reserves and future employer and earner ACC levies.

There are some obvious questions to ask about the first bullet:

• What is the process by which a flow of spending each year generates an on going stock of jobs?
• How exactly is the spending going to create the jobs?
• What is the model of labour-market interactions, wage determination, etc. that currently has the economy generating jobs for a bit more than 94% of those working or actively seeking work, that will not continue to have a 94% success rate after the new policies are put in place? 

But it is the second bullet that struck me. Steven Landsburg would have loved this one. (See his posts on the man who can't be taxed, here, and Scrooge as a great philanthropist, here.) The joint leaders of Internet-Mana, Hone Harawira and Laila Harre  are quoted as saying that "it was widely accepted that ACC reserves and levies were excessive and redirecting some of these would allow them to pay for their policies without increasing taxes". This may be true, but that doesn't mean that this is a free lunch. If ACC are investing their reserves in New Zealand, then redirecting those reserves to the employment policy will pull money out of New Zealand capital markets, making less available to investors or inducing more capital inflow with the resulting pressure on the exchange rate and export earnings. If they are investing the reserves in overseas markets, then redirecting them to the employment policy will put pressure on the New Zealand exchange rate and exporters directly. 

Now one might want to take the view that our savings rate in New Zealand is too high, and consequently that the exchange rate is too low and exporters having too easy a time. If so, redirecting ACC reserves would be consistent with that view. But the fact that the reserves might be excessive in terms of future ACC payouts does not imply the policy comes with no opportunity cost. Further, the leaders need to explain why they think that aggregate savings rates are excessive in New Zealand. 

Saint Steven

If Steve Landsburg is right about the process for becoming a Saint, I think we ought to launch a campaign for Saint Steven. Here's Landsburg's summary:

So if I have this right, it is now the official position of the Catholic church that:

1. The late Pope John Paul II has the ongoing power to cure brain aneurysms.
2. As far as we know, he has chosen to employ this power exactly once. (He also once cured a case of Parkinson’s.)
3. While hundreds of thousands of others have suffered and/or died from brain aneurysms, John Paul has not been moved to intervene.
4. The one victim he troubled himself to save was selected not because she was particularly deserving or particularly valuable to society, but because she chose the right guy to pray to — sort of like having to suck up to the teacher to get a good grade.
5. All of this makes John Paul II particularly fit for veneration.

For God’s sake (you should pardon the expression), if you’re looking to make the case that John Paul II was capable of performing (or at least catalyzing) genuine miracles, isn’t the defeat of Soviet Communism good enough? That right there makes him a saint in my book — though if I ever come to believe that he cancure aneurysms and has been holding out on us, I might have to retract my endorsement.

So, here's the campaign for Saint Steven.

1. Any of you who have any kind of illness at all pray to Steven Landsburg for intervention. 
2. If you do not receive divine Landsburgean intervention, don't tell me about it. 
3. If you do receive divine Landsburgean intervention, please leave a record of such in the comments. Preferably with a link to a doctor's note saying that your recovery was unexpected and pretty remarkable. This should happen in maybe 1% of cases. 
4. We submit the documented evidence of the successes, while ignoring the failures. Ta-dah! Saint Steven.

Economics has its Gods; why couldn't it also have Saints? 

Thought experiments and taking offence

I love Brad DeLong's academic work. He's way smarter than me and, more importantly, clearly works much much harder than I do. And he tackles interesting questions. But every time I check his blog, I get an awful "Everyone in the world is evil or stupid or both except Brad and a few of his friends" vibe.

I'd not been there for a while, but switching to The Old Reader (for now) from Google Reader messed up my RSS habits. And so, there I was, looking at Brad DeLong saying that Steven Landsburg is the stupidest man alive and that "the University of Rochester has a big problem" - presumably Landsburg's continued employment there.

What was the cause? A piece at Gawker taking great offence at a thought experiment Landsburg proposed. I'll link Gawker at the end so you're not tempted to read it before reading the original Landsburg piece.

In grad school, we had a lot of fun with thought experiments of this sort. The classic one is Nozick's experience machine. Step into the machine and you'll experience a simulated life much better than the one you'd otherwise live; moreover, you'll never remember that you're actually in the machine. If you stay out of the machine, there has to be something that matters more to you than experienced utility. 

Tyler Cowen liked to ask a variant on it in our Economics & Philosophy class: World B is identical to World A, as far as you are ever able to observe, but in World B, your wife has been cheating on you for years and you never ever knew it, nor will you ever know it. The worlds are identical except for the unknown-to-you fact of your wife's infidelity. Are you worse off in World B? If so, clearly state exactly how, and make that consistent with other things you believe about utility. 

So, what was Landsburg's offensive thought experiment? Recall that the rules of thought experiment club are that you don't add in auxiliary assumptions but stick to what's stated in the thought experiment. Landsburg asked a series of three questions, then wanted to know why our answers to 1 and 2 might differ from our answer to 3. Here they are.

Farnsworth McCrankypants just hates the idea that someone, somewhere might be looking at pornography. It’s not that he thinks porn causes bad behavior; it’s just the idea of other people’s viewing habits that causes him deep psychic distress. Ought Farnsworth’s preferences be weighed in the balance when we make public policy? In other words, is the psychic harm to Farnsworth an argument for discouraging pornography through, say, taxation or regulation?

That's scenario 1. Most economists just ignore that psychic harm - the world's essentially impossible to evaluate when we add this kind of thing in. Further, Farnsworth could pay other people not to watch pornography if he really cared about it that much. But we could assume that away to stick within the proper confines of the thought experiment: say transactions costs prevent it. Is pyschic harm of this sort admissible in the utilitarian calculus? Here's scenario 2:

Granola McMustardseed just hates the idea that someone, somewhere might be altering the natural state of a wilderness area. It’s not that Granola ever plans to visit that area or to derive any other direct benefits from it; it’s just the idea of wilderness desecration that causes her deep psychic distress. Ought Granola’s preferences be weighed in the balance when we make public policy? In other words, is the psychic harm to Granola an argument for discouraging, say, oil drilling in Alaska, either through taxes or regulation?

Actually, policy does weigh Granola's concerns. It's counted as existence value over and above option value or use value. Sound analyses don't put much weight on it, but it does sometimes count. If I get existence value from thinking heroic Randian thoughts about oil derricks and man's mastery of nature, that gets ignored in the cost-benefit analysis for some reason. But, again, all these kinds of pyschic distress are treated pretty dismissively in economics. And now the third and controversial question:

Let’s suppose that you, or I, or someone we love, or someone we care about from afar, is raped while unconscious in a way that causes no direct physical harm — no injury, no pregnancy, no disease transmission. (Note: The Steubenville rape victim, according to all the accounts I’ve read, was not even aware that she’d been sexually assaulted until she learned about it from the Internet some days later.) Despite the lack of physical damage, we are shocked, appalled and horrified at the thought of being treated in this way, and suffer deep trauma as a result. Ought the law discourage such acts of rape? Should they be illegal?

If we take this as a parallel thought experiment, the only trauma here allowable is the psychic distress, which we otherwise typically ignore.

It is a hard question and so a good one. All our intuitions tell us to condemn the third scenario while dismissing the psychic harms in the first two. But if we stick within the confines of the thought experiment, it's hard to distinguish the cases. We can say the psychic harm is worse in the third case, and it would be in the real world, but it's not hard to have a thought experiment Granola McMustardseed who gets more psychic harm from oil drilling than from being in Scenario 3. Or a Scenario 3 victim who never learns that it happened - a case pretty close to Cowen's World A vs World B.

I don't have any great answer other than that when we step away from the thought experiment and into the real world, a rule allowing Scenario 3 that imposes psychic harm no greater than that imposed in Scenarios 1 & 2 would also necessarily allow much much greater harm because we cannot set rules only allowing Scenario 3. But that's a cop-out, because even if we could do it in the real world, I'd still want it banned - in the same way that I think I'm worse off in Cowen's World B and that I wouldn't want to step into Nozick's machine. My maximand isn't just experienced utility.

Meanwhile, Gawker turns it into a story about how Landsburg thinks rape is OK and DeLong signs onto their interpretation. The contrast between the quality of comments at Landsburg's post and DeLong's is interesting too... Landsburg's commenters wrestle with a difficult thought experiment; DeLong's want Landsburg fired.

Kidney Counsels of Despair

I love the contrast between Steve Landsburg and Virginia Postrel on the Roth Nobel.

They're both completely right.

Says Landsburg:

So Alvin Roth wins the Nobel Prize for, among other things, figuring out the best way to allocate kidneys subject to the constraint that you’re too damned dumb to use the price system.

Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.

Says Postrel:

Imagine a parallel universe in which federal law prohibited Americans from paying anyone to care for their children, whether in cash or in some other “valuable consideration,” and where paid child care was similarly repugnant and illegal throughout most of the world.

In this alternate reality, family bonds would simply be deemed too sacred and children too precious to permit the taint of commercial transactions.Some desperate parents would risk arrest to pay under the table. Parents with a lot of friends and family would help each other out. People with small social networks or loved ones in poor health would be out of luck. A lot of parents would stay home with the kids when they’d prefer to go out, whether to a romantic dinner or a regular job.

The intellectual consequences are equally predictable. Michael Sandel would use child care to demonstrate to his Harvard University classes that there are some things money just shouldn’t buy. The Cato Institute would issue reports showing how the prohibition hurts poor people who would like to be nannies and noting that the law makes an unfair exception for school teachers. Economists would calculate how much higher labor force participation and gross domestic product would be if parents could pay someone else to watch their children. Feminists would debate whether paid child care would liberate women or subject yet another aspect of women’s lives to the brutality of the marketplace.

Meanwhile, Alvin E. Roth, who shared this year’s Nobel Prize in Economic Sciences, would be figuring out how to make it as easy as possible for parents to trade off taking care of each other’s children.

Back in grad school at Mason, the harder core libertarians used to debate these kinds of questions. Roth makes the interventionist world suck less than it otherwise would and has definitely saved lives. In doing so, he has arguably reduced potential pressure for broader changes to the system that would do even more good, although equally convincing cases could be made that he is incrementally helping to make a full market system more palatable to those with strong visceral reactions against any kind of kidney exchanges.

When I attended the Rothbard Graduate Seminar at the Mises Institute, I made the case for free immigration in a session run by Hans Hermann Hoppe. He warned that we couldn't do it while the welfare system remained in place. I reminded him that a big influx of people demanding welfare would be the quickest way to generate real reform moving back to private alternatives, if he really wanted to be rid of welfare anyway. He countered, "But that is a counsel of despair!"

David Henderson criticises Roth for failing to explicitly support full markets in kidneys. If Roth does support them, though, he likely can't say it. If he does, then his system gets tossed out as an incrementalist path towards something some voters find repugnant.

Optimisation constrained by ridiculously harmful voter preferences is a lot harder than unconstrained optimisation. The best we can hope to do is make things suck less. And so Roth has done much good.

Update: Mike Giberson agrees. So does Paul Walker.

Popcorn, Parking, Exercise and the Theory of the Second Best

The University of Canterbury recently announced that it will be charging faculty and students alike something close to marginal cost for parking. The stated reason was that they saw no reason why scarce resources should be allocated to providing an amenity benefit that is of value to some staff and students but not to others.

The economists, of course, cheered. A parking permit at Canterbury is currently very cheap, but it is only a licence to hunt, not a guarantee of a park. We have been saying for years that parking should be charged at a market-clearing price. After all, charging parking at less than marginal cost generates a deadweight loss in which the marginal units consumed are valued at less than cost, and so reduces the total value that the university can deliver to staff and students. If there was a reason for thinking that the UoC-specific elasticities of demand of students or of labour supply of staff are higher for those who want parking than those who do not, you could make a Landsburg popcorn price-discrimination argument for subsidising parking, but that assumes that the University is a profit-maximising monopolist, rather than a not-for-profit utility maximising institution.

Then today, I heard from students that in another move, the Univeristy is increasing the student levy next year but including free gym membership as an offset. My first reaction was that this is the exact opposite of the move to increase the price of parking, and is silly for exactly the reasons that the former policy makes sense. But then it became clear. The students explained that a student levy can be added on to a student's interest-free student loan, whereas the cost of gym membership as an optional extra cannot. Given that every dollar of student loan is roughly equivalent to a straight out grant from the government of 33c if it is paid off at the slowest possible rate (from memory of a back-of-the-envelope calculation I made some time ago, so don't take this number to seriously), the new policy might make sense as a way of increasing the total government contribution to the University, as long as that benefit outweights the effect of the created deadweight loss, including, possibly, the cost to some students of having to queue for gym services.

But then I reaslied, we have to pay for parking permits out of after-tax income, but the University's expenditure on parking net of parking fees is not subject to fringe-benefit tax. So subsidised parking is also a way of increasing the government's total contribution to the University......   Isn't second-best analysis fun!

Borrow!

It's nice to see both Paul Krugman and Stephen Landsburg agreeing with me, though they surely didn't see my post.

Back in April, I'd argued against the Green Party's push for a tax hike to pay for the earthquake. The New Zealand Greens wanted, and still want, a current earthquake levy on higher incomes to cover some of the rebuilding; they argued vehemently against cuts elsewhere. I made the usual standard argument from standard theory that equating marginal returns from government spending across different areas meant we had to cut spending on some non-earthquake areas. And, we'd want to take on debt.

So even if you reckoned the ex ante mix of spending and taxation was optimal, the best response to the quake seems likely to involve cuts to non-quake programmes, increased debt, and future tax increases. If you figure, like the Greens, that the ex ante mix had way too little government spending, you'd push for smaller cuts to non-quake spending and larger future tax increases; it's beyond me why they're averse to debt to fund a massive capital reconstruction project. If you figure, like National, that the ex ante mix had too much government spending, you'll bring forward some of the cuts that you'd already had in mind while raising debt and pushing back future plans for tax reduction. If you reckoned, like me, that a reasonable proportion of government spending was of negative value, the case for cutting that spending has gotten stronger.

It's hard to avoid that the optimal arrangement involves some cuts to relatively low value government programs, even if you think those programs are of positive value.

And here's Krugman on Hurricane Irene:

Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts.

But wait: even more important, the government can borrow (or, in principle, lend, if it pays off all its debt). So it should balance its budget in present discounted value terms, not year by year. This means that the tradeoffs should include future spending and taxes as well as this year’s spending and taxes. And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters.

Steven Landsburg takes issue, pointing out that Krugman's results hinge on the ex ante efficiency of the spending and tax mix:

To get a little wonkier, there are actually two separate points here. First there’s the point that comes from public finance: Unless you believe that everything is perfect to begin with, the Ricardian argument fails, leaving you with no reason to believe that the cost of new spending should be spread widely. Instead, you should start by cutting back on your least wise activities. Cantor and Krugman probably have some legitimate disagreement about what those least wise activities are, but neither of them has any reason that I know of to believe that all activities are currently equally wise at the margin.

And so Krugman puts out the case that the Greens here should be making, and Landsburg adds in that if we were spending too much on dumb things to start with, it makes even more sense to stop doing that when we have to pay for a natural disaster.

So the consensus across me, Krugman and Landsburg seems to be that it's absolutely bonkers to try and pay for something like a massive earthquake out of a current big tax increase. Some mix of debt and reallocation of current spending ought to be used, with tax increases in future.