Economics

Do you trust people who profit from you?

We’re often told that we shouldn’t trust people whose only interest is to make a profit from us. I ran into a brief piece by economist Russ Roberts which stands that conventional wisdom on its head in an interesting way.

The other day I had to get some important tax receipts to my accountant. He’s in St. Louis, it was getting close to April 15, and it was very important that the papers didn’t get lost. To give my accountant plenty of time, I wanted the papers to arrive the next morning.

So what did I do? My first choice was to get on a plane and deliver the letter myself. Too expensive. Too much time.

So I did the next best thing. I went down to the airport and found someone headed to St. Louis. I told her how important it was for my accountant to have my receipts by the next day. Fortunately, she seemed really nice. She said she’d be happy to help me out. I sealed up the envelope, and she promised not to open it after I left.
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Income Gap Narrowing

A year into the economic downturn, the much decried income gap has narrowed.

The deepest downturn in the U.S. economy since the Great Depression may finally shrink the gap between the very best-off Americans and everyone else.

If so, it won’t be by lifting up the bottom. It will be by pulling down the top.

Over the past 30 years, chief executives, Wall Street bankers and traders, law-firm partners and such amassed ever-greater incomes, while the incomes of factory workers, teachers, office managers and others in the middle grew much more slowly. In 2007, the top 1% of U.S. families accounted for 23.5% of all personal income in the U.S., according to economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics. That was a level not seen since the Roaring Twenties.

The top 1%’s share appears to be falling fast. Mr. Saez and other economists expect income going to the top 1% of taxpayers — currently, those with about $400,000 a year — will drop to somewhere between 15% and 19% of all income by 2010. That still would leave income distribution more top-heavy in the U.S. than in many other countries.
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Smith, Hume and the Servile State

I was recently listening to an interview with Stanley Engerman, co-author of Time on the Cross: The Economics of American Slavery. It was an interesting discussion overall, but what particularly caught my attention was basically a side-note.

Engerman referenced Adam Smith’s understanding of slavery which he described as being that slaves had no incentive towards greater productivity, with the result that using slave labor rather than free labor was inefficient. Smith thus attributed the fact that people use slavery despite it’s inefficiency to the will to domineer over others:

But if great improvements are seldom to be expected from great proprietors, they are least of all to be expected when they employ slaves for their workmen. The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own. In ancient Italy, how much the cultivation of corn degenerated, how unprofitable it became to the master when it fell under the management of slaves, is remarked by both Pliny and Columella. In the time of Aristotle it had not been much better in ancient Greece. Speaking of the ideal republic described in the laws of Plato, to maintain five thousand idle men (the number of warriors supposed necessary for its defence) together with their women and servants, would require, he says, a territory of boundless extent and fertility, like the plains of Babylon.
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The Prudential Science

I ran into this quote going through an old EconTalk the other day, and thought it interesting:

As economists, we’re specialists in prudence only.

That, as you say, is not what Adam Smith recommended. Not at all. I and a number of other people would like to get back to a Smithian economics, which although it didn’t throw away the very numerous insights that we get from thinking of people as maximizers — maximizers in this narrow sense — acknowledges that temperence and justice and love and courage and hope and faith can change the way the economy works.

UIC Economist, Deirdre McCloskey

I’m trying to decide if I agree with it or not. I would certainly agree that economics basically only looks at certain prudential concerns, it doesn’t consider humanistic or theological questions. However, I’m not sure if economics should acknowledge those concerns, or if it is more the case that economists (and others dealing with the field) should clearly acknowledge that there is much more to any question than the question of what is most economically efficient.

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How to Get There from Here

There’s been much discussion of late about what other country’s health care apparatus the US should consider emulating, and in such discussions France is often mentioned. Now, all cheerful ribbing against the French aside, their health care system is not nearly as “socialized” or nearly as afflicted by treatment denials and waiting lists as those of the UK or Canada. It is also rather more like the system that the US already has, in that it is a hybrid public/private system, though in their case there is a guaranteed base level of coverage everyone has through the government (funded via a hefty payroll tax — not unlike Medicare) which most people supplement with private coverage. Most doctors are in private practice, and 25% do not even accept the public plan, just as some practices in the US do not accept Medicare. However, everyone does have that minimum level of coverage, and the French spend a lower percentage of their GDP on health care than the US (11% versus 16%) which when you take into account that France’s GDP per capita is a good deal smaller than that of the US (which is the polite, economist way of saying it’s a poorer country) works out to the US spending about twice as many dollars per person on health care, while still not having universal coverage.

So what are we waiting for? Why don’t we go enact the French system here right now? Why doesn’t Obama put on a jaunty beret, dangle a cigarette coolly from the corner of his mouth, hoist a glass of wine, and just say, “Oui, nous pouvons.”
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"Federal Budget on an Unsustainable Path"

Federal Debt Projections

As regular readers of this blog know, I have been sounding the tocsin regarding government spending since the Bailout Swindle of 2008.  Here is one of my posts in which I list other posts I have written on the subject.

Yesterday the Director of the Congressional Budget Office had a chilling post on his blog which you may view here.  He states in part:

“Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.” 

His chart is at the top of this post.

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

He concludes on this somber note:

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

This is fiscal madness.  We have the wealth and the ability to solve this problem by spending cuts, and minor tax increases if, and only if, combined with meaningful and deep spending cuts.  What we lack is the political will.  We are destroying the future prosperity of our kids because of current political cowardice, folly and inertia.

The Class Analysis

At the request of my friend and fellow contributor to The American Catholic, Darwin Catholic, I will elaborate more on some of the general points I introduced to the discussion over his latest post about economic morality. For those who did not follow the exchange (of me versus everyone, understandable on this somewhat more conservative blog), I questioned the accuracy of any scientific theory of economics that did not take into account class conflict (or, as some insist on saying, “class struggle”). Darwin and others responded by questioning the validity of the very category of class. Hence, we have a great deal of ground to cover – I hope you will bear with me, and that we all end up learning something.

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