Man at the top
The problem with inequality
Writing for The New York Times, Nicholas Kristof criticizes the rising inequality in America, comparing our economic situation to the famous “banana republics.” According to Kristof:
In the past, many of us acquiesced in discomfiting levels of inequality because we perceived a tradeoff between equity and economic growth. But there’s evidence that the levels of inequality we’ve now reached may actually suppress growth. A drop of inequality lubricates economic growth, but too much may gum it up.
First, we can wonder why inequality makes us uncomfortable in the first place. One possibility is that there may be something intrinsically valuable about equality. However, it’s hard to imagine this being the case – even if there was some truth to this, the value of equality would be easily outweighed by many other mitigating factors. Consider this famous thought experiment by Harry Frankfurt:
Suppose that ten people have a deadly disease, and they need two shots of a certain medicine in order to be cured. Anything less would mean certain death. However, there are only ten shots of the medicine available. If we gave the medicine out equally, everyone would get one shot, and all ten would die. Obviously, equality is not the best policy here.
But, some might argue, the economy is different than the medicine example. Read more
Do not pass GO. Do not collect heart transplant.
The complexity of allocating health care morally
ABC News reports that the morbidly obese are unlikely to receive heart transplants because their chances of recovery are so slim. Some transplant centers purportedly have a Body Mass Index cutoff of 35.
Although nobody died in the making of the ABC story, the same cannot be said of this horrific anecdote from Britain, in which a premature baby was unattended to for being born two days too early. Elsewhere in the world, a 69-year old Japanese man who was hurt in a traffic accident was turned away from 14 hospitals before he died. In slightly funnier twist, a Swedish man fed up with waiting sewed up his own leg (successfully) and was charged for the unlicensed use of medical instruments.
Healthcare horror stories seem to crop up everywhere regardless of the kind of system that prevails. The American healthcare system is a mixed-public private system, as are those of Germany, France, Switzerland, and the Netherlands. Sweden, the UK, and Canada are single-payer government-run systems. No examples of a pure free-market healthcare system exist anywhere.
Under a pure free-market healthcare system, care would simply be rationed on the basis of the ability to pay and perhaps the charity of doctors. Supply would meet demand, end of story (nothing like this has ever existed for reasons that are beyond the scope of this post). This strikes most people as at least a little offensive –if a child’s parents cannot afford a life-saving procedure, should that be the end of the story? A pure free-market system would definitely have its share of horror stories too. Read more
Hope and change in schooling are sorely needed
Elitism and egalitarianism in education
Courtland Milloy suggests at the Washington Post that D.C. Schools Chancellor Michelle Rhee’s vision for the D.C. school system is both inspiring and quixotic.
Milloy quotes Rhee as suggesting that elitism, “reluctance by the city’s haves to share classrooms with the have-nots,” is the single largest obstacle to school reform. Overcoming elitism, Warren Buffet once suggested to Rhee, would simply require the abolition of private schools and assignment of all children to public schools by random lottery. The argument goes that well-to-do parents would force schools to improve if they were denied the choice of where to send their children.
Ironically, elitism would militate against the opposite solution as well. Suppose all public schools were abolished and poor families given vouchers and scholarships to attend private schools like their wealthier peers. Milton Friedman’s solution is the polar opposite of Buffett’s –improve education by giving rather than denying choice to all. But in this case, elites too would have to put up with the prospect of rubbing shoulders with the rabble. If elitism is indeed the major roadblock to reform, then this solution, conceptually just as radical, is practically just as unrealistic. Read more
Are you a demand-sider or a supply-sider?
The BBC reports that the Obama administration has designated $50 billion dollars for infrastructure improvements as part of efforts to jump-start the US economy. The claim that the project will help jump-start the economy is contestable, but difficult to prove either way.
Broadly speaking, there are two influential schools of macroeconomic thought. One is the Keynesian or demand-side school, which blames the collapse of demand for economic malaise. During economic downturns, it is the government’s job to make up for the shortfall by employing people, purchasing things, and inducing private actors to do the same. This is the principle behind public works projects, temporary tax cuts, and programs like “cash-for-clunkers.”
By contrast, the neoclassical or supply-side school argues that prolonged economic problems are the result of the economy’s inability to produce an adequate level of goods and services. The government’s response to economic downturn ought to consist of making it easier for individuals to supply labor and firms to supply goods and services. This is the rationale behind permanent tax cuts for all (including corporations and the rich), deregulation, and a reluctance to extend unemployment benefits.
Though economic in nature, these two claims tend to accompany differing assumptions and values about human nature. Put crudely, the Keynesian approach favors the consumer, in hopes that the producers will follow. The neoclassical one favors the producer, in hopes that the consumers will follow.
Of course, all humans are both consumers and producers. But which role is more important? In a crisis, should we try to induce people to buy things, or to induce them to work? Should workers and consumers be favored over entrepreneurs and companies?
There is of course some middle ground between the two extremes. Maybe the answer lies in a bit of both.
-Charles
Image by Flickr user Cain and Todd Benson used under a Creative Commons Attribution License
Executive compensation
A while ago, I investigated how much CEO’s deserve to make. My conclusion, we needed better tools for quantifying the worth of executives to a company.
This presents a further challenge, that of determining the value of the executive to the company. Supporters of current executive salaries would argue that these people are the most important figures in gigantic corporations, and that their salaries reflect their contribution. Given that the ratio of a CEO salary to the average worker in the company is increasing so sharply, this would mean that the relative value of company executives has been rising exponentially.
Debates over executive compensation have ignored these trends, and commentators have failed to seriously investigate metrics that could actually measure the value of a CEO to a company. Unfortunately, that’s the only way to settle this contentious debate.
Trading values
Project Syndicate has an ongoing series by Columbia University economist Jagdish Bhagwati on “The Open Economy and its Enemies.” There is more or less a consensus among economists that free trade promotes economic growth; the law of comparative advantage still holds nearly two centuries after it was formulated. But the opinions of both the public and other social scientists are more ambivalent.
Competition is the means by which actors in an open economy are disciplined. But competition generates losers and winners, too –at least in the short run. Non-economic concerns with free trade include growing inequality, the constant displacement of people under conditions of ruthless competition, environmental degradation, the globe-spanning hazards of mutual dependency, and national security.
Critics of free trade may accuse economists of linear thinking for ignoring the messiness of reality. But economists might equally accuse critics of free trade for ignoring the bottom line –that increased wealth will expand the possibilities of what a society can accomplish.
The free trade debate, like many others, asks how willing we are to trade increased levels of wealth for other values, and under what conditions. Not surprisingly, this debate tends to come to the fore in times of economic uncertainty.
-Charles
Image by Flickr user free range jace used under a Creative Commons Attribution License
It’s the economy, stupid
Equality butts heads with freedom
Jonathan Martin and Ben Smith write at Politico that a new debate about first principles and the role of government has replaced the social issues at stake during the “culture wars” of the last three decades.
This dispute over first principles is deeply entwined with questions of national identity and the appropriate role of the government in the economy.
On one extreme is a minimalist state, in which the government is responsible for little more than upholding the rule of law and providing for a common defense. On the other extreme is a socialist state in which the government manages all facets of economic activity.
Neither extreme applies to any industrialized country today. Rather, the modern world is populated by welfare states of various stripes.
Educating the public
Pay, accountability and teachers’ unions
The Los Angeles Times has a new series “exploring the effectiveness of public schools and individual teachers in the Los Angeles Unified School District.” The study, which relies on standardized test scores rather than more comprehensive metrics, is obviously far from perfect. But, as the LA Times explains, this is surely better than nothing when “…across the country, parents have no access to objective information about teacher effectiveness…” Arne Duncan, Obama’s Secretary of Education, has professed support for the LA Times releasing the data.
However, the program has provoked hostility from the Los Angeles and national teachers unions, who claim that the study unfairly scapegoats teachers, many of whom are in poor districts and face unenviable classroom conditions.
When choice doesn’t matter
Charles asks some provocative questions in his post today about the role of government versus the power of the market to lift people out of extreme destitution.
But his approach, which focuses on individual responsibility and government constraint, begs the question by assuming, first, that all government action counts as a constraint on liberty and, second, that all individuals are capable of personal responsibility.
This account is not baseless, but it leaves little space for one reason people may suffer: structural barriers to opportunity and liberty. Read more
Poverty, choice and coercion
Should the poor be allowed to choose?
The New York Times reports that malnutrition and starvation remain stubbornly entrenched decades after India’s Green Revolution, which modernized agricultural practices, massively increased agricultural yields and eliminated the specter of famine.
The existing government food distribution system relies on bureaucratic rationing, through which the poor are given ration cards to purchase food from government-run distributors. It is notoriously inefficient and plagued by corruption. Some reform proposals emphasize improving monitoring and delivery within the system. Others favor entirely dismantling the system, replacing it with vouchers or cash payments to the needy. Read more
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