What the Democrats Must Do https://www.project-syndicate.org/commentary/democrats-must-embrace-full-employment-by-j-bradford-delong-2020-06: Although the United States has entered a period of deepening social strife and economic depression, the Republicans who are in charge have neither the ideas nor the competence to do anything about it. The Democrats must start planning to lead, starting with a commitment to full employment…. A federal commitment to full employment is not a new idea. The US Employment Act of 1946 embraced the principle…. The best response to… objections has always been John Maynard Keynes…. “Anything we can do, we can afford.”…
Far from acting as an independent binding constraint on economic activities, the financial system exists precisely to support such activities. Finding useful jobs for willing jobseekers is surely something we are capable of doing.
Adjusting the prevailing payments and financial structure to support full employment would of course have consequences…. Supporting full employment… may… require higher and more progressive taxes… sky-high debt… that we divert demand from elite consumption to labor-intensive sectors like public health. It also may require a large-scale labor-intensive public-works program. So be it. It’s time to make full employment our highest priority. Once we have done that, everything else will fall into place…
Full Column: Although the United States has entered a period of deepening social strife and economic depression, the Republicans who are in charge have neither the ideas nor the competence to do anything about it. The Democrats must start planning to lead, starting with a commitment to full employment.
BERKELEY – Like almost all other countries, the United States has become poorer since the COVID-19 pandemic began, because Americans can no longer engage in valuable activities that require close human contact. Millions of workers now need to find other productive things to do, and many of these new tasks will not be as valuable as the ones they replaced.
But there is no economic reason why the depression triggered by the COVID-19 crisis should be particularly deep or prolonged. The US leads the world in technological and organizational competence and is home to a highly skilled workforce. The problem is that recovery won’t happen by itself.
The fact that it took a decade for the US to recover fully from the 2008 financial crisis should inform today’s thinking. Back then, the US housing-construction sector had already shrunk back to its normal size before the subprime-mortgage crisis erupted, which meant that no sectoral structural adjustment was required. The challenge, rather, was to identify and reallocate resources to previously unproduced goods that would become more valuable in the future.
Moreover, the 2008 financial crisis and ensuing recession did not make American workers less skilled or reduce the effectiveness of existing technologies. In the short term, it destroyed many professional networks and reduced the social trust that underpins the economy’s division of labor. The only long-term effect was a loss of investor confidence in private-sector financial institutions’ ability to create safe, properly-rated financial assets.
But that is why it took a decade for US employment to recover from the subprime crisis. The world was short of safe assets, and governments failed to address that problem in the right way. The US, for its part, should have done more to mobilize extra private-sector risk-bearing capacity, create safe public assets, and support workers, including by printing money and buying stuff to drive effective demand and employment growth.
Although there is no reason why it should take a decade for employment to return to its pre-pandemic level, that is probably what will happen. The same forces that led policymakers to declare victory over the crisis and shift to “austerity” in 2010 are already at work again today. It is clear that the US federal government over the next month will offer no new policy initiatives to mitigate the depression or to improve upon America’s failed public-health response.
It is also clear that the Republican Party has no valid ideas for how to achieve a “V-shaped” recovery. Additional tax cuts for the rich would do as much to boost demand and employment as they did when the GOP rammed through the Tax Cuts and Jobs Act in late 2017: absolutely nothing. Similarly, slashing social programs might make workers even more desperate to find jobs; but despair won’t translate into additional employment if the spending isn’t there. Nobody with any authority in President Donald Trump’s White House knows what to do, and no one would be competent enough to implement the right policy if they stumbled on it accidentally.
With the GOP controlling three of the US government’s four veto points (the presidency, the Senate, and the Supreme Court), America will remain without a coherent response to its multiplying crises at least until January 2021. Republicans are already doing everything they can to suppress voter turnout ahead of the election this November. But assuming that those efforts fail and Democrats reclaim the White House and potentially even the Senate, what should they do to rescue America from another lost decade?
First and foremost, the Democratic Party must commit unconditionally to the principle that every American who wants a job should be able to find one. And while that job need not be great, it must pay enough to keep the worker’s family above the poverty line. Every policy under consideration should be judged by whether it accords with this principle.
A federal commitment to full employment is not a new idea. The US Employment Act of 1946 embraced the principle, but has since been watered down, owing to complaints that government support of full employment is unaffordable. The best response to such objections has always been John Maynard Keynes’s quip during a 1942 BBC radio address that, “Anything we can do, we can afford.” What he meant is that, far from acting as an independent binding constraint on economic activities, the financial system exists precisely to support such activities.
Finding useful jobs for willing jobseekers is surely something we are capable of doing. But adjusting the prevailing payments and financial structure to support full employment would of course have consequences. For example, we might discover that, under conditions of full employment, the rich would need to bear substantial risk in order to achieve sustained compound growth on their wealth. As Keynes argued, full employment would “lead to a much lower rate of interest” and thereby function as the “euthanasia of the rentier.” So be it. To maintain their glitzy lifestyles, the rich would either have to draw down their capital or wager it on risky enterprises.
Supporting full employment also may turn out to require higher and more progressive taxes, and it may lead to public-debt levels that would seem unfathomable to those who lived through the 1970s. So be it. If sky-high debt is required to achieve full employment in the medium term, it is justified. The only way that it could become dangerous is if the economy were to shift out of its current secular stagnation, at which point sky-high debt would no longer be necessary.
Finally, restoring and maintaining full employment may require that we divert demand from elite consumption to labor-intensive sectors like public health. It also may require a large-scale labor-intensive public-works program. So be it. It’s time to make full employment our highest priority. Once we have done that, everything else will fall into place.
First Draft: There is no rational reason why the coronavirus depression has to be both deep and long. We have immense social power in terms of our technological and organizational competence and immense reserves of skill and energy in our workforce. We are poor or as a result of coronavirus: a lot of valuable activities that involve sustained close human contact, especially in places at all reminiscent of the batcaves in which the ‘rona evolved, now have costs greater than benefits. That means that many of us need to find different productive things to do, many of us temporarily and some of us permanently, and those different things will be somewhat less valuable to us than the sustained-close-human-contact jobs used to be.
But all of that does not provide a single rational reason why it should take, say, a decade before the share of Americans with jobs gets back to its pre-‘rona sustainable full employment level.
The problem is that there was no rational reason, a decade ago, why it should have taken a decade after the subprime financial crisis before the share of Americans with jobs ggotets back to its sustainable full employment level. Yet it did. The housing construction sector had already shrunk back to its normal size before the subprime crisis hit. There was no sectoral structural adjustment required. There was on need to grope for what previously unproduced commodities it was now to society’s benefit to make. The crisis itself did not make our workers less skilled or our technology less effective and powerful. In the short run, the subprime financial crisis destroyed a great deal of the network of social trust that supports our extremely powerful and fine societal division of labor. But in the long run the only durable effect of the crisis was to destroy investor confidence that private-sector financial institutions could create truly-safe properly AAA-rated financial assets.
And yet it took a decade after the subprime crisis before the share of Americans with jobs gets back to its pre-‘rona sustainable full employment level.
Why? Because the world was short of safe assets in the aftermath of the destruction of the confidence that private-sector financial institutions could create such. And governments failed to properly step in, either to create institutions to mobilize extra private-sector societal risk-bearing capacity to reduce the demand for safe assets, to create public safe assets in sufficient quantity themselves, or to stand up and print money and buy stuff and employ workers themselves to rapidly return the North Atlantic economy to sustainable full employment.
There is not a single rational reason why it should take, say, a decade before the share of Americans with jobs gets back to its pre-‘rona sustainable full employment level. But right now the odds are that it will. For the same forces in the factors that led the great and good of the north Atlantic to declare victory over the economic emergency of unemployment in 2010 and turn it toward “austerity“ are at work today. These forces and factors can be beaten: but they could have been beaten over 2010 to 2014, and they were not.
Over the next month the United States will in all probability do nothing on the policy level— nothing either to prevent the coronavirus depression from being deep and long nor to keep America’s public health response to coronavirus from being among the worst if not the worst in the global north.
America’s Republican Party has no valid ideas for how to create a V-shaped path for the economy. More text cuts for the rich would do exactly as much to boost demand and employment as the McConnell-Ryan-Trump TCJA did to boost demand and employment 2.5 years ago: zero. Cutting social insurance benefits relative to what they ought to be Will make more workers desperate to find jobs, but if the spending is not there workers’ desperation to find jobs has no more effect than does commuters’ desperate wish to go faster in a bumper to bumper traffic jam.
Nobody in the Trump White House with enough authority to make policy has any idea how to figure out what good policy might be, or even how to implement a good policy if they by accident uncovered one.
And with strongly partisan Republicans in charge of three of the four federal veto points—Presidency, Senate, and Supreme Court—in the U.S.’s antiquated orrery of a system, the Democratic Party can do nothing effective until January, and can operate then only if Republican voter suppression efforts are unsuccessful and if the voters trust the Democrats enough.
So what should the Democratic Party do, should there be a chance in January 2021 to rescue America from another lost decade like the one that followed 2007?
I believe that they should grasp onto one principle, and hold on to it for dear life. Every American who wants a job and is willing to work should be easily able to find one. It may not be a great job. But it will be a job. And it should keep their family above the poverty line. Every policy should be judged first by: is it part of that commitment?
Some will say that such a full-employment commitment—a commitment that Harry S Truman and his wing of the Democratic Party wanted to make back in 1946, when they proposed the “Full Employment Act”—is not something that we can afford. Here I remember what John Maynard Keynes said on the radio in 1942: “What we can do, we can afford”. The financial and payments structure exists to support our activities. It is not an independent binding constraint on them.
And surely finding useful jobs for people willing to work is not something we cannot do?
Now arranging the payments and finance structure to support full employment will have consequences. It may well not be possible for the rich to see their wealth compound without doing their job as substantial risk-bearers. Keynes certainly thought that was the case—that successful attaining full employment meant the euthanization of the rentier, and that the rich who wished to live in high style would be able to do so only by drawing down their capital, or making massive bets on risky enterprise. If so, so be it. Full employment may well turn out to require higher and more progressive taxes as part of its financing. So be it. Full employment may turn out to require levels of national debt the curl the hair of those who live through the 1970s. So be it: if sky-high debt is required for full employment, it is not dangerous; and if it were to be dangerous it would be because the economy will have shifted out of its current secular stagnation into a configuration in which sky-high debt is not necessary. Full employment may require that we divert demand from elite consumption to labor-intensive sectors like public health. So be it. Full employment may require a large-scale labor-intensive public-works program. So be it.
Prioritize full employment. And then all other policies will fall into their natural places around it.
#coronavirus #highighted #macro #orangehairedbaboons #2020-06-02
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Escaping Paternalism Book Club: Part 1
Rizzo and Whitman (R&W) begins with a primer on the “new paternalism” – the influential policy reform movement powered by the engine of behavioral economics.
For most of history, paternalists have drawn their support from religious or moral notions of goodness. They have claimed special knowledge, from God or some other source, about how people ought to live. The overtly religious character of temperance movements in the nineteenth and early twentieth centuries exemplifies this kind of “old” paternalism. Given their moral convictions, the old paternalists did not usually appeal to the preferences and desires of those whose behavior they wished to regulate. The very desire for alcohol – or drugs, or deviant sex – was condemned directly.
Behavioral economists, like most economists, still accept subjectivism. However, they have rejected the notion of accurate preference revelation. Experimental evidence suggests that individuals may systematically deviate from the behavior that would best satisfy their own preferences. The list of alleged deviations from strict rationality includes – but is not limited to – status quo bias, optimism bias, susceptibility to framing effects, poor processing of information, and lack of willpower or self-control. To the extent that these phenomena cause people to make errors, paternalist policies can in principle help them to do better – not by some exogenous standard, but by their own standards. This is the defining feature of new paternalism that distinguishes it from the old: the new paternalists claim to help people better achieve their own preferences, not someone else’s.
Cass Sunstein and Richard Thaler are the popular and intellectual leaders of the new paternalists. As R&W succinctly explain:
Cass Sunstein and Richard Thaler, coming from an economic perspective, support policies that will make people better off “in terms of their own welfare.” That welfare is best advanced by the choices people would make “if they had complete information, unlimited cognitive abilities, and no lack of willpower” (Sunstein and Thaler 2003, 1162). In other words, Sunstein and Thaler define the correctness of choices in terms of what people would choose for themselves – if only they were not afflicted with cognitive biases.
New paternalists then present novel rationales for a wide range of government interventions. For example, they advocate “sin taxes” to help not society, but the “sinners” themselves. Fat taxes help fat people weigh what they “really want to weigh.”
R&W close the chapter by explaining their multi-stage argumentative strategy.
Our case will consist of a series of challenges – in effect, hurdles that behavioral paternalist proposals must clear in order to be justified as a matter of policy. We will begin with the most abstract and conceptual, then proceed to more pragmatic and applied challenges.
The most abstract: Behavioral economists take simple models of rational choice too literally.
We refer to the traditional economic definition of rationality, adopted by mainstream and behavioral economists alike, as “puppet rationality.” It is a brand of rationality well suited for building models of how the world works. Models are not unlike stage plays, and puppets are the players. The puppets are always well behaved. They play the roles they were designed to play. They follow the rules. They have no motive force of their own. Real human beings, however, are not puppets. Their preferences and behavior may deviate from what is expected of agents in a model. But such deviation does not provide sufficient warrant for deeming them irrational.
But even if standard notions of rationality are solid, the much-hailed experimental evidence is sorely lacking in external validity:
Much of the evidence for “failures of rationality” derives from experimental settings that are effectively context-free. Such experiments may identify “raw” or unmodified propensities in human behavior in the laboratory. But they do not tell us how strong those propensities are “in the wild,” where people make real decisions…
We also argue that people are often (though not always) aware of their cognitive biases, and sometimes they act to counteract or control them. People “self-debias” in myriad and idiosyncratic ways…
Pragmatically, R&W argue that the new paternalism suffers from a massive yet neglected knowledge problem. Most fundamentally: “If actions do not reveal preferences, then what does?”
Last, the book explores public choice and slippery-slope problems with paternalism in great detail.
This is only Chapter 1. In Chapter 2, R&W appeal to “inclusive rationality” to critique behavioral economics at its root.
Are human beings rational? …But it is not easily answered, because the word “rational” has many meanings. Rationality can simply mean purposefulness, that is, trying to use the best means available to satisfy your goals or preferences given your beliefs about the world. It can mean taking an abstract approach to solving problems, applying universal systems of thought and inference, and following scientific methods. It can mean avoiding errors of logic and reasoning. It can mean revising one’s beliefs in accordance with Bayes’ Rule. It can mean having preferences that conform to certain axioms – transitivity, completeness, and so forth – which together guarantee the preferences are internally consistent and have a certain structure. In neoclassical economic theory, it has historically meant all of the above.
In this book, we will defend what we call inclusive rationality. Inclusive rationality means purposeful behavior based on subjective preferences and beliefs, in the presence of both environmental and cognitive constraints. This notion of rationality preserves the core notion of purposefulness, and in that sense it should seem familiar. But unlike other notions of rationality – many of which were invented for modeling purposes but have since taken on a life of their own – inclusive rationality… allows a wide range of possibilities in terms of how real people select their goals, form and revise their beliefs, structure their decisions, and conceptualize the world.
[R]eal people may do all of the following and still qualify as inclusively rational:
- Experience internal conflict that has not yet been (and may never be) resolved;
- Have preferences that change over time;
- Have preferences that are indeterminate or incomplete – i.e., that do not specify attitudes over all possible decisions at all possible times and states of the world;! Have preferences that are in the process of being created or discovered;
- Have preferences that depend on context, including both the options available and the way in which decisions are framed;
- Hold beliefs that serve purposes other than truth-tracking, such as providing motivation or intrinsic satisfaction;
- Make inferences based not on the strict rules of classical logic, but on contextual and linguistic cues they have learned from human interaction;
- Indulge “biased” modes of decision-making when the costs are low and rein them in when the costs are high;
- Economize on scarce mental resources by refusing to impose perfect consistency on their preferences and beliefs;
- Structure their environments, possibly in ways that constrain their own choices;
- Adopt personal rules and resolutions that create internal incentive systems;
- Enlist the help of friends, family, and other groups to assist in attaining goals;
- Rely on institutions, social customs, and market structures to assist in attaining goals;
- Employ heuristics that minimize cognitive effort and/or informational input.
R&W are well-aware of the methodological objection:
Because our notion of inclusive rationality is very broad, we might be accused of offering a theory that cannot be falsified. We should therefore clarify that we do believe positive claims should, in principle, be falsifiable. But some claims are more easily tested than others, and there is no guarantee that the most easily tested claims are also normatively relevant.
In Chapter 3, R&W flesh out this critique in great detail. To take one example: In real life, people often seem to change their preferences. Yet behavioral economists either refuse to consider this possibility, or treat changing preferences as ipso facto “irrational.”
The second interpretation is that the agent’s preferences have simply changed over time. In other words, if someone chose A over B on Monday but B over A on Tuesday, that could be the result of consistent (complete and transitive) preferences on Monday, and a different set of consistent (complete and transitive) preferences on Tuesday.
In general, economists resist preference change as an explanatory strategy because it feels ad hoc. Virtually any change in behavior can be rationalized as resulting from changing preferences, but economists usually wish to show the reasons why behavior may change even if tastes do not – for example, because of changing relative prices. To resort to saying preferences have changed seems like cheating. These are valid concerns from a positive perspective. But from a normative perspective, they hold little weight. There is no reason a person’s preferences should remain fixed. Rational people may change their minds – and we have not encountered anyone arguing otherwise.
1. Escaping Paternalism focuses almost entirely on the “new paternalism.” Yet the more I read the book, the more I concluded that “new paternalism” is largely an attempt to repackage “old paternalism” for an elite, secular audience. Even today, no more than 5% of people who want to forcibly reduce alcohol consumption think they’re helping heavy drinkers “achieve their true preferences.” Instead, they seek to give drinkers “what they need, instead of what they want.” The main audience for the new paternalism is: meddlers who also have an ideological ax to grind against the want/need distinction.
2. On present bias, behavioral economists don’t go far enough. It’s not enough to have exponential discounting rather than hyperbolic discounting. Instead, I say the rational discount rate for utility is no time discounting at all. Contrary to what you may have heard, this would not lead you to starve to death. And you should still discount for uncertainty, finite life, and so on. But, pace Hume, ’tis contrary to reason to prefer a present pleasure to a future pleasure solely because the present is now and the future is later.
3. R&W repeatedly mention behavioral economists’ support for mandatory “cooling-off periods.” I wonder how many behavioral economists have ever examined how often people even take advantage of this opportunity to cancel a contract. The last time I refinanced, we had to sign paperwork apprising us of our right to renege. When I asked the banker how often people exercised this right, he furrowed his brow and laughed, “Never.” I believed him.
4. R&W repeatedly discuss behavioral economists’ support for “employee-friendly” labor contract defaults. Given all the evidence that unemployment breeds misery, a wise paternalist would strive to “nudge” labor’s total compensation down, not up!
5. R&W insist that “inclusive rationality” is falsifiable, but I don’t think they name a single concrete counter-example. This is arguably intentional, for they often say things like:
We do not, however, claim that everyone is always fully rational. We are happy to concede that they are not. But it is one thing to say people make mistakes; it is another to clearly and definitively identify which actions are, in fact, mistakes.
Strikingly the word “opioid” does not appear in the text. (“Heroin” does, but sans empirics). I sincerely wish they had provided an “inclusive rationality” take on the putative opioid crisis.
6. One of my favorite passages:
We don’t expect that every reader will find all of our challenges to paternalism equally compelling. Some may find our conceptual objections persuasive, others may see the knowledge problem as definitive, etc. But our hope is that, taking the gauntlet of challenges as a whole, readers will recognize just how tenuous the entire new-paternalist enterprise is. Behavioral paternalism’s proponents often present it as just common sense – a set of smart, simple, straightforward corrections that will make us all better off. All we’re trying to do is correct some mistakes; who could be opposed to that? But the reality is far more difficult, complicated, and even dangerous.
As you’ll see, I find the conceptual objections only moderately persuasive, but the rest of their critique is strong indeed.
7. R&W go through a lengthy list of defensible “mistakes” people make in experiments. Let’s consider them one-by-one:
When real people take tests designed to test neoclassical rationality norms, they do not leave their inclusive and contextually shaped rationality at the testing room door. Instead, they may behave as they do in the real world. For example:
- They may assume, in accordance with ordinary conversational norms, that experimenters provide only information that is relevant to solving the problem – i.e., no irrelevant or “tricky” information. They do not immediately assume the experimenters are trying to fool them.
- They may resist the distinction between the validity of a syllogistic inference (e.g., “People with red hair are Martians, John has red hair, therefore John is a Martian”) and the truth of a conclusion itself (John is not a Martian). Normally, in everyday life, it is the truth that is more important.
This isn’t entirely wrong, but the ability to recognize such logical errors really is a crucial real-life skill. Anytime you propose an explanation for anything, logical reasoning opens your theory up to testing. Even for an explanation as simple as, “If I go to McDonald’s before 7 AM, the line will be less than 5 minutes long.”
- They may not assume that prior probabilities about something – such as the likelihood that someone has a disease – must be equal to the “base rates” from the population provided to them. Instead, their priors may be affected by their evaluation of the significance of the base rates to a particular problem in front of them – say, whether a specific person who chose to visit the doctor and chose to take a test has the disease. Treating priors in this way is fully consistent with the subjectivist Bayesian view that prior probabilities are subjective – a fact frequently ignored in the rush to deem subjects “irrational.”
- They may not agree with model-builders on the informational equivalence of different descriptions of a situation. Instead, they may infer implicit information or advice from how a problem is presented. For example, they may perceive an important difference between a stated probability of success equal to 0.7 and a stated probability of failure equal to 0.3. Perhaps the former conveys greater optimism, despite the formal mathematical equivalence of the two statements. Conversational norms and expectations do not always align with logic and probability theory. The former can be adaptive in the real world while the latter is adaptive on experimental tests. Which is more important?
Seems pretty crazy to me. Sure, if you’re marketing a product, you’re better off saying “70% success” rather than “30% failure.” Yes, the former phrasing suggests “greater optimism.” The only reason such rhetoric works, however, is that some potential customers are confused.
- They may attach satisfaction or utility to things other than what the analysts expect. For instance, they may value an object more because it is theirs already. Or they may care about feelings of gain and loss experienced during the experiment, not just how much money they have when they leave the laboratory. Or they may gain satisfaction purely from having a particular belief, irrespective of its truth (“My wife is beautiful and my children are gifted”).
Somewhat reasonable, though it’s usually tempting to call such behaviors “childish.” Picture a kid who wants his teddy bear, not an identical teddy bear that’s a hundred miles closer.
8. While we’re on the subject, R&W never discuss children. Are they, too, “inclusively rational”? If so, should parents stop treating them paternalistically? Or what?
9. Suppose someone has inconsistent preferences. How are we supposed to identify their “real” preference? While this might seem like nitpicking, R&W show that behavioral economists have been cavalier at best.
Some defenses have been offered for favoring some preferences over others in cases of conflict, but we find these defenses weak:
Verbal Statements and Survey Responses: When asked, people may say they would rather behave differently or have different preferences. For instance, smokers may say they would rather not smoke, and overweight people may say they would like to eat less. It is indeed possible that these statements reveal “true” preferences. However, the incentives for speech differ from the incentives for other kinds of action. Behavioral research has cast doubt on many economic principles previously taken as given, but the principle that talk is cheap remains intact. Speakers who say one thing while doing another may simply be expressing what they regard as socially approved attitudes – a phenomenon known as social desirability bias (King and Bruner 2000; Grimm 2010). Or their statements may simply reflect “experienced opportunity cost,” i.e., the dissatisfaction that always results from options the agent has forgone.
Note: If we take Social Desirability Bias seriously – as I think we should – we can readily identify the “real” preference. Namely: Contrary to the new paternalists, the real preference is what people really do!
Regret: A person may feel, and express, feelings of regret about the choices they have made: “I wish I had not done that.” Although regrets are real, they do not necessarily reflect all costs and benefits associated with an action. specially for intertemporal choices, such as getting inebriated last night and having a hangover today, the regret is typically experienced while the cost is being experienced in the present and the benefit is already in the past. That does not mean the costs outweighed the benefits at the moment of choice – only that the remaining costs outweigh the remaining benefits. In addition, it’s worth noting that regret can also be felt about the kinds of choices that behavioral paternalists favor. When approaching death, people often express regret at not having lived a more spontaneous and present-oriented life (Ware 2012).
They’ve got them there!
If regret may be experienced regardless of the action taken, then it offers little guidance to the paternalist about which preferences are “true.” As with verbal statements, regret can simply reflect the experience of opportunity cost…
Self-Constraint and Commitment Devices: People will often use various devices and strategies to try to keep their vices under control: planning automatic deductions for savings, avoiding locations where they will be tempted to smoke or drink, etc. These activities do provide further evidence of conflicting preferences, and we will discuss them more in future chapters. They do not, however, show which preferences are superior. Commitment devices reveal one set of preferences at work – but other choices show other preferences at work. Furthermore, the outside observer has no means of knowing whether the right amount of self-constraint has been performed.
Planned versus Unplanned Choices: Behavioral paternalists often favor the preferences of a “planning self” over the spontaneous or “acting self.” The idea is that the planning self is more likely to take all costs and benefits into account and render a considered decision. But the planning self does not necessarily represent a disinterested party; rather, the planning self may represent only the longer-term and more self-denying parts of one’s personality (Cowen 1991). This becomes most apparent in the case of extreme behaviors such as anorexia, where the planning self dominates an acting self that might wish to indulge more often.
10. When I began Escaping Paternalism, I skipped over chapters 1-5, fearing they’d be long-winded, half-baked Austrian philosophy. I was so impressed with chapters 6-10, however, they I started reading the book from the beginning as soon as I finished chapter 10. I swiftly concluded that unlike so many other Austrian-inspired works, Escaping Paternalism was not only conceptually thoughtful, but eager to engage with an array of empirical literatures. If you’re impatient with economists waxing philosophical, I urge you to make an exception here.
What If Public Schools Were Abolished?
In American culture, public schools are praised in public and criticized in private, which is roughly the opposite of how we tend to treat large-scale enterprises like Walmart. In public, everyone says that Walmart is awful, filled with shoddy foreign products and exploiting workers. But in private, we buy the well-priced, quality goods, and long lines of people hope to be hired.
Why is this? It has something to do with the fact that public schools are part of our civic religion, the primary evidence that people cite to show that local government serves us. And there is a psychological element. Most of us turn our kids over to them, so surely they must have our best interest at heart!
But do they? Murray N. Rothbard’s Education: Free and Compulsory explains that the true origin and purpose of public education is not so much education as we think of it, but indoctrination in the civic religion. This explains why the civic elite is so suspicious of homeschooling and private schooling: it’s not fear of low test scores that is driving this, but the worry that these kids aren’t learning the values that the state considers important.
But to blast public schools is not the purpose of this article. There are decent public schools and terrible ones, so there is no use generalizing. Nor is there a need to trot out data on test scores. Let me just deal with economics. All studies have shown that average cost per pupil for public schools is twice that of private schools (here is a sample study).
This runs contrary to intuition, since people think of public schools as free and private schools as expensive. But once you consider the source of funding (tax dollars vs. market tuition or donation), the private alternative is much cheaper. In fact, the public schools cost as much as the most expensive and elite private schools in the country. The difference is that the cost of public schooling is spread out over the entire population, whereas the private school cost is borne only by the families with students who attend them.
In short, if we could abolish public schools and compulsory schooling laws, and replace it all with market-provided education, we would have better schools at half the price, and be freer too. We would also be a more just society, with only the customers of education bearing the costs.
What’s not to like? Well, there is the problem of the transition. There are obvious and grave political difficulties. We might say that public education enjoys a political advantage here due to network effects. A significant number of “subscriptions,” etc. have been piled up in the status quo, and it is very difficult to change those.
But let’s pretend. Let’s say that a single town decided that the costs of public schooling are too vast relative to private schooling, and the city council decided to abolish public schools outright. The first thing to notice is that this would be illegal, since every state requires localities to provide education on a public basis. I don’t know what would happen to the city council. Would they be jailed? Who knows? Certainly they would be sued.
But let’s say we somehow get past that problem, thanks to, say, a special amendment in the state constitution that exempts certain localities if the city council approves. Then there is the problem of federal legislation and regulation. I am purely speculating since I don’t know the relevant laws, but we can guess that the Department of Education would take notice, and a national hysteria of some sort would follow. But let’s say we miraculously get past that problem too and the federal government lets this locality go its own way.
There will be two stages to the transition. In the first stage, many seemingly bad things will happen. How are the physical buildings handled in our example? They are sold to the highest bidder, whether that be to new school owners, businesses, or housing developers. And the teachers and administrators? All let go. You can imagine the outcry.
With property taxes abolished, people with kids in public schools might move away. There will be no premium for houses in school districts that are considered good. There will be anger about this. For the parents that remain, there is a major problem of what to do with the kids during the day.
With property taxes gone, there is extra money to pay for schools, but the assets have just fallen in market value (even without the Fed), which is a serious problem when it comes to shelling out for school tuition. There will, of course, be widespread hysteria about the poor too, who will find themselves without any schooling choices other than homeschool.
Now, all that sounds pretty catastrophic, doesn’t it? Indeed. But it is only phase one. If we can somehow make it to phase two, something completely different will emerge. The existing private schools will be filled to capacity and there will be a crying need for new ones. Entrepreneurs will quickly flood into the area to provide schools on a competitive basis. Churches and other civic institutions will gather the money to provide education.
At first, the new schools will be modeled on the public school idea. Kids will be there from 8 to 4 or 5, and all classes will be covered. But in short order, new alternatives will appear. There will be schools for half-day classes. There will be large, medium, and small schools. Some will have forty kids per class, and others four or one. Private tutoring will boom. Sectarian schools of all kinds will appear. Micro-schools will open to serve niche interests: science, classics, music, theater, computers, agriculture, etc. There will be single-sex schools. Whether sports would be part of school or something completely independent is for the market to decide.
And no longer will the “elementary, middle school, high school” model be the only one. Classes will not necessarily be grouped by age alone. Some will be based on ability and level of advancement too. Tuition would range from free to super expensive. The key thing is that the customer would be in charge.
Transportation services would spring up to replace the old school-bus system. People would be able to make money by buying vans and providing transportation. In all areas related to education, profit opportunities would abound.
In short, the market for education would operate the same as any other market. Groceries, for example. Where there is a demand, and obviously people demand education for their kids, there is supply. There are large grocery stores, small ones, discount ones, premium ones, and stores for groceries on the run. It is the same for other goods, and it would be the same for education. Again, the customer would rule. In the end, what would emerge is not entirely predictable—the market never is—but whatever happened would be in accord with the wishes of the public.
After this phase two, this town would emerge as one of the most desirable in the country. Educational alternatives would be unlimited. It would be the source of enormous progress, and a model for the nation. It could cause the entire country to rethink education. And then those who moved away would move back to enjoy the best schools in the country at half the price of the public schools, and those without children in the house wouldn’t have to pay a dime for education. Talk about attractive!
So which town will be the first to try it and show us all the way?
[This article was originally published April 7, 2008]
Economists Think Congress Could Create An Economic Disaster This Summer
Congress has less than a month to hammer out a deal on the next round of stimulus before expanded unemployment benefits expire. State and local governments are starting to feel the pinch of budget shortfalls. And while the U.S. got a piece of (relatively) good news in last week’s jobs report, which featured an unemployment rate 2.2 percentage points lower in June than it had been in May, the economy has been thrown back into chaos in the meantime, with a number of states pulling back on their reopenings amid spiking COVID-19 infections and hospitalizations.
Our newest survey of economists highlights just how consequential governmental decisions over the next month may be: On average, these economists think that a refusal by Congress to extend unemployment benefits or bail out state and local governments is just as likely to hurt the economy as local economies staying open in spite of COVID-19 spikes — or even closing because of the virus.
In partnership with the Initiative on Global Markets at the University of Chicago Booth School of Business, FiveThirtyEight asked 31 quantitative macroeconomic economists what they thought about a variety of subjects around the coronavirus recession and recovery efforts. The most recent survey was conducted from July 2 through 6, which means the June jobs report was fresh on respondents’ minds — but so was the state of the pandemic, along with challenges ahead for lawmakers.
“There’s a distinct risk that between now and November, Congress’s ability to continue fiscal support will be very limited by election-year politics,” said Jonathan Wright, an economics professor at Johns Hopkins University who has been consulting with us on the design of the survey. “That could be more of a drag on the economy than the local and state shutdowns just because the effect would be so huge.”
With a congressional showdown looming, we asked the experts to estimate the probability that several policy decisions would have the biggest negative impact on U.S. gross domestic product in the fourth quarter of 2020. Among the five options we presented, the single most important to the economists was a decision by state and local governments to reclose their economies because of COVID-19 outbreaks. But a decision by Congress not to provide funding to state and local governments was close behind. And the weight given to choices made by the federal government — bailing out local governments, extending unemployment insurance and providing ongoing aid for small businesses — added up to be even more important when taken as a whole:
|Local or state response options||Avg. Probability|
|Decision to reverse local economic openings due to COVID-19 spikes||26%|
|Decision to keep local economies open despite COVID-19 spikes||17|
|Federal response options|
|Not providing funding for state and local governments*||23%|
|Ending/reducing expansion of unemployment benefits||20|
|Ending/cutting back on aid to small businesses||14|
“[State and local governments] are facing severe budget crises and will be laying off workers to balance their budgets,” said Julie Smith, a professor of economics at Lafayette College. That, she said, could lead to longer periods of high unemployment and financial pain for many households. Meanwhile, she added, cutting back or ending the federal unemployment extension would cause many people’s incomes to decline dramatically, leaving them with much less money to spend — which could make a big dent in GDP.
Perhaps for this reason, there’s a lot of uncertainty in the economists’ fourth-quarter real GDP predictions. When we last asked the panel for its forecast, it thought that GDP would be growing by 4.1 percent at the end of the year, a big improvement from the -28.2 percent quarter-over-quarter annualized growth it foresaw for the second quarter of 2020. This time around, the panel is calling for less negative growth (-25.5 percent) in the second quarter and a very similar fourth-quarter growth rate to last time (3.8 percent). But the range around that end-of-year forecast has gotten a lot wider — a sign of just how much things could go wrong. The gap between our consensus forecast’s 10th and 90th percentile predictions for fourth-quarter GDP growth was 10.9 percentage points in the last survey; now that gap is 12.8 percentage points, with almost all of the extra uncertainty coming in the form of downside risk. (The panel’s consensus 10th percentile GDP growth forecast has dropped from -2.0 percent to -3.5 percent.)
The economists weren’t especially optimistic about the trajectory of the unemployment rate over the course of 2020, either. The consensus prediction was that the unemployment rate in December would be 10.1 percent, which is only 1 percentage point lower than the rate in June — and is still comparable to the unemployment rate at the height of the Great Recession. Stephen Cecchetti, a professor of international finance at the Brandeis International Business School, pointed out that workers are increasingly likely to be losing their jobs permanently, rather than temporarily, which will make it harder for them to get back into the labor force. And he added that it will take time for the economy to adjust to a new reality where working from home is the norm, which could also keep the unemployment rate from falling quickly. Cecchetti was also among the economists who thought that in a worst-case scenario, the unemployment rate could skyrocket again by the end of the year.
“There are a lot of people who haven’t been exposed to the virus,” he said. “It’s not hard to imagine new outbreaks in places like New Jersey or Massachusetts that force us to shut down all over again.”
About half of the economists in the survey also thought the country’s top earners would end the year with an even greater share of the nation’s personal income. In order to get a sense of how much the panel thought the COVID-19 recession would increase income inequality, we asked about a new metric created by the Bureau of Economic Analysis, which found that in 2016, households in the top 10 percent of incomes (adjusted for household size) accounted for 37.6 percent of the country’s personal income. Fifty percent of the respondents thought this number would be significantly higher by the end of 2020 as a result of the COVID-19 pandemic, while 47 percent thought it would be about the same. Only one respondent thought it would be lower.
“My best guess is that this pandemic is going to worsen income inequalities,” said Sarah Zubairy, a professor of economics at Texas A&M University. She hypothesized that this was because job loss has been concentrated among lower-wage workers who can’t do their jobs remotely, and who may find themselves ricocheting in and out of the labor force if states have to abruptly pull back their reopening plans.
And in another sign that the U.S. has been knocked off course by the virus — and the subsequent leadership response — our survey panel overwhelmingly believes (with 90 percent agreement) that China will beat both America and the European Union on the road back to pre-crisis real GDP levels. In retrospect, according to Wright, this was kind of a “no-brainer” because China’s economic growth so far has been quite swift, and it has tools to enact sweeping fiscal stimulus that aren’t available to less centrally controlled economies like the U.S. or the E.U. But some of this might also be based on the Chinese government’s reputation for — how should we put this? — releasing overly favorable public data. “When all is said and done, if they don’t like the actual data they can fudge the numbers,” Wright said. “Put those three things together, and there’s almost no way they can’t be the first back.”
Wright also pointed to another ominous result in the survey: 19 percent of respondents thought that the 10-year average real U.S. GDP growth rate would be reduced by 1 to 2 percent per year. To be sure, the vast majority (77 percent) of economists thought the 10-year average growth rate would be reduced by less, although only one person thought it would go up. But the responses were still alarming, Wright said, because they indicated a serious degree of pessimism about the speed with which the economy will not just return to where it was at the end of 2019, but also catch up with where it would have been if the COVID-19 pandemic hadn’t happened.
However, Allan Timmermann, professor of finance and economics at the University of California, San Diego — who has also been consulting with us on the survey — was encouraged that the majority of respondents didn’t expect more long-term damage to growth. “This is still a large impact in terms of its cumulative effect on the economy,” he wrote in an email. “But it does suggest that most respondents think the economy will bounce back in due course — as opposed to leading us to a ‘lost decade’ scenario (as we have seen in Japan) with growth slowing down by an even larger amount.”
Overall, though, the latest survey responses paint a picture of America’s still-precarious road back to economic health. So much depends on the course of COVID-19 itself and how much the virus forces local economies to shut down again to slow its spread. But a lot is also riding on important policy decisions around the virus, which are still being debated. “I think economists have been surprised so far by the pace of the rebound,” Wright said. “But that hasn’t made them less worried about the weeks or months ahead.”
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