Category Archives: Specialization and Trade Economics Intro

The case against policy analysts

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Robin Hanson writes,

On the other side, however, are most experts in concrete policy analysis. They spend their time studying ways that schools could help people to learn more material, hospitals could help people get healthier, charities could better assist people in need, and so on. They thus implicitly accept the usual claims people make about what they are trying to achieve via schools, hospitals, charities, etc. And so the practice of policy experts disagrees a lot with our claims that people actually care more about other ends, and that this is why most people show so little interest in reforms proposed by policy experts. (The world shows great interest in new kinds of physical devices and software, but far less interest in most proposed social reforms.)

Tyler Cowen adds,

Policy analysis, while it often incorporates behavioral considerations, when studying say health care, education, and political economy, very much neglects the fact that often both the producers and consumers in these areas have hypocritical motives. For that reason, what appears to be a social benefit is often merely a private benefit in disguise, and sometimes it is not even a private benefit.

Some comments of my own.

1. This is where George Mason has a very distinctive point of view. Bryan Caplan’s The Case Against Education will be out soon. There is Hansonian medicine. And of course The Elephant in the Brain.

2. My minor contribution is to say that whatever the policy analyst inputs to the policy process, the output is usually policies that subsidize demand and restrict supply. See my book Specialization and Trade.

3. And of course there is the whole Hayekian theme that about what policy analysts do not know about complex problems.

It is too bad that there is so much resistance to these ideas, all of which seem persuasive to me.

Renewable != Sustainable

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Benjamin Zycher writes,

there is nothing “clean” about renewables. There is the heavy-metal pollution created by the production process for wind turbines, along with their noise and flicker effects. There is the large problem of solar panel waste. There is the wildlife destruction caused by the production of renewable power. There is the land use both massive and unsightly, made necessary by the unconcentrated nature of renewable energy.

And above all: There is the increase — yes, increase — in the emissions of conventional effluents caused by the up-and-down cycling of the conventional backup generation units needed to avoid blackouts caused by the unreliability of wind and solar power.

(links omitted)

In Specialization and Trade, I make the point that sustainability is best measured by profitability at market prices. The attempt by environmentalists to second-guess prices is misguided. Recycling, if measured at market prices, is not sustainable. The use of renewable resources for energy, if assessed at market prices, is not sustainable. It is likely that from a strictly environmental point of view, practices like buying local and subsidizing renewable energy have adverse effects.

Applying Nondiscrimination to Markets

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Mark J. Perry writes,

Although workers outside the US are not protected by US civil rights laws, doesn’t “Buy America” legislation still make it legal to discriminate against workers in Mexico, China and Russia who make iron and steel by denying them equal access to employment opportunities for infrastructure projects spending taxpayer dollars? Should that worker discrimination based on national origin from “Buy America” legislation be acceptable if discrimination against those same workers would be illegal if they were on this side of an imaginary line called the US border?

It will be a great day when the ethics of “buy American” and “buy local” are viewed skeptically.

Still Looking for a Present?

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Yuval Levin recommends my book, among others.

It helps you unlearn what is untrue and then try to learn what is true. And it treats economics as a discipline—that is, not just a set of tools and facts but an ongoing project engaged in by real human beings with a purpose and a history and all manner of virtues and vices. It seems to me that we are living through something of a crisis in economic theory at the moment (not for the first time), and Kling can help us through it.

Supply, Demand, and Immigration

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Don Boudreaux writes,

An increase in the supply of labor lowers wages only if nothing else changes. But when immigrants enter the workforce two very important other things change. First, immigrant workers spend or invest their earnings, both of which activities increase the demand for labor – thus putting upward pressure on wages. By focusing only on immigrants’ effect on the supply of labor, Mr. Burwell overlooks immigrants’ effect on the demand for labor.

A second change is one that was emphasized by Adam Smith: larger supplies of workers, as well as more consumers of the economy’s output, lead to greater specialization. Jobs change. As Smith explained, this greater specialization makes workers more productive. This increased productivity, in turn, causes wages to rise.

Peter Turchin would disagree. In Ages of Discord, he finds a strong historical correlation between periods of high rates of immigration and stagnant wages for ordinary workers. I have read through Turchin’s book once, and I mean to write a review. But I keep procrastinating. I am tempted to say that the book, while it appeared to be very interesting on a first pass, is un-rereadable. The data that lands in Turchin’s charts takes a very circuitous route to get there, and it hard for me to stay on top of the relationship between the underlying data and what Turchin says that they represent.

Will Trump Revive Liberal Economists?

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Justin Wolfers writes,

you should think of the economy as being in a state of constant churn. The economist Joseph Schumpeter used the now-famous phrase “creative destruction” to describe this process by which new firms push out the old. The result can be cruel, but an extraordinarily fluid labor market, many economists argue, is the secret of American dynamism.

Wolfers tells a PSST story using a metaphor of a parking garage. The metaphor works a bit awkwardly in my view, but it will suffice.

Mr. Trump is focusing his resources on existing firms — the cars already parked there — rather than on the millions of potential entrepreneurs who might open the next generation of businesses.

Pointer from Mark Thoma.

If Mr. Trump can get more center-left economists talking about the seen and the unseen and describing the economy in the way that I do in Specialization and Trade, then he will have done a great service to the profession.

WaPo Watch

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The idea would be to have regular analysis of the bias in the Washington Post. One reader emailed encouragement but suggested that the New York Times is more influential.

My guess is that I do not want to take this on as a regular job. Instead, I might try it for a few weeks to try to develop a model for how it ought to be done. Then we can think about creating some sort of franchise to do it.

The goal is to create something that editors the Post might look at and recognize that there are reasonable indications of bias. Ideally, editors would start to think about how their priorities, headlines, and lead paragraphs could be altered to be less biased.

Below is a first pass at a weekly analysis. For the main news section, the emphasis will be on stories and op-eds related to Donald Trump. For stories, I will tally positive, negative, and neutral, based on bias or spin. As long as there is no spin involved, then I consider the story neutral, even if it reflects on Mr. Trump very favorably or very unfavorably.

For op-eds, I don’t begrudge the paper running negative op-eds on Mr. Trump. I think that the job of the op-ed writer is often to complain and “speak truth to power.” The Post showed bias, in my view, by regularly running op-eds favorable to the Administration with Mr. Obama in office. I will make note of any op-eds that are favorable to Mr. Trump. I expect that in many weeks that tally will be zero, and I am not saying that it should be otherwise.

I will look at other biases in the front section, as well as in the Style section that covers arts and culture and in the Metro section that covers local news. For the Sunday Outlook section of op-ed essays and book reviews, I will tally the slant of non-Trump pieces. I will count the number that appeal to closed-minded progressives, the number that appeal to closed-minded conservatives or libertarians, and the number that offer something to people with open minds.

Read below the fold for the first week’s analysis.
Continue reading →

Regulation and Sustainability

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Concerning a new EPA regulation, Jennifer Ko writes,

many industry and environmental groups have failed to address one important aspect of biofuel regulations—the effect that increased ethanol use will have on dwindling water supplies in the United States. Jay Famiglietti, a senior water scientist at the U.S. National Aeronautics and Space Administration, questions the prudence of policy decisions that drain stressed water supplies to irrigate water-intensive crops. Many of the nation’s top ethanol producing states sit in the “breadbasket” of America where farmers irrigate crops, such as corn, using water from underground aquifers. In Kansas, the main source of water—the largest basin of freshwater in the United States—is dwindling rapidly, in part due to the water used up by massive acres of crops earmarked for ethanol production.

If policymakers fail to consider the relationship between energy and water, Famiglietti warns that “consequences will be huge.”

Pointer from Mark Thoma.

In Specialization and Trade, I argue that market prices tend to do a better job than environmentalist intuition at indicating sustainability. Water tends to be under-priced, in part because agricultural interests lobby for low prices. They also lobby for higher ethanol mandates. And the EPA, which is supposedly here to protect the environment, helps the agricultural interests.

Trust and Banks

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Erika Vause writes,

No institution more clearly relies on trust than the bank. That is precisely what makes banks a lightning rod for suspicion. From the time modern banking emerged, it has been the subject of intense misgivings. Many of these suspicions are with us still.

This issue gets much more attention in Specialization and Trade than it does in standard economic textbooks, but reading Vause’s essay makes me think that there is even more involved. The role of materialism is one example. That is people, including most economists, want to see value reduced to tangible properties of things, such as capital and labor input. A prerequisite for understanding finance is a willingness to acknowledge the large intangible components of value, including the components that consist of trust and financial intermediation.