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Wednesday, September 27, 2006

Social Science and Our Ignorance part III

In these earlier posts I and II the difficulties of social science and distinctions from physical science were touched upon. Turning once again to one of the finest thinkers in a broad array of areas, we draw upon this book review of a Bruce Caldwell intellectual biography of F.A.Hayek to look at matters in the social science of political economy.

In the 1937 essay "Economics and Knowledge," Hayek formulated the "knowledge problem" this way: "How can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?" Hayek's answer was that market institutions manage to gather the "fragments of knowledge" and coordinate individuals toward efficient outcomes. No one knows just what combination of production inputs will minimize costs and produce the quantity of goods that satisfies demand. But the operations of the market, in which prices are not fixed but respond to changes in supply and demand, are a "discovery procedure" (as Hayek would later put it) for such information.
This discovery process gives us a means of coping with ignorance and uncertainty.

Lest that sound like a small insight — the stuff of an introductory economics textbook — note how Hayek's answer diverges from standard neoclassical economic theory. In the textbook version, individuals are assumed to have perfect rationality and foresight. They then unfailingly make decisions about the allocation of their resources that maximize their utility. While this model no doubt has its uses, its unrealistic assumptions are often seized upon to discredit laissez-faire economics.

Hayek, like many of his peers (and the Austrians in particular), was also inclined toward skepticism of the elusive, perfectly rational homo economicus. But rather than take the apparent implausibility of the standard model as a reason to reject free markets, Hayek saw that free markets helped compensate for the limitations of human knowledge and rationality. By spontaneously gathering dispersed information and coordinating it through the setting of prices, markets make the choices of individual men both better informed and more rational than they would otherwise be. Hayek also understood — long before most, and to his great credit — that the incompleteness of any individual's knowledge makes central economic planning both impossible and undesirable. (Undesirable in that the planner must, as Hayek explained in the 1939 pamphlet "Freedom and the Economic System," "impose upon the people the detailed code of values that is lacking" — paving a path toward despotism.)

Caldwell goes on to show how Hayek's reflection on the knowledge problem led him to conclusions about the methodology of economics. Just as no central planner knows enough to bring about an efficient economic outcome, no economist knows enough to make precise forecasts. Instead, economists must content themselves with offering general explanations of the principles by which economic outcomes arise, and making predictions about the pattern of future events (rather than predicting specific outcomes). This skepticism continues to rub economists of a positivist persuasion — which is to say nearly the entire field — the wrong way.
The nearly obsessive focus on mathematical models in economics may have past a peak, but the positivist bent still remains.

According to Caldwell, Hayek's main message concerned "the limits that we face as analysts of social phenomena." In this vein, Caldwell ends with a plea for a renewed interest in the study of economic history — a field that has been almost entirely displaced by economists' ever-increasing interest in mathematical models and empirical analysis. The positivist hope has been that such work would establish law-like relations between events and economic outcomes; but for Hayek — and, as is clear by the end of the book, for Caldwell too — such ambitions smack of hubris.

None of which is to say that empirical work should be abandoned. Hayek's call is for modesty in the profession's aims, not for complete asceticism. But one doesn't have to be an economist — or a political philosopher, or a cognitive psychologist, or anything else — to reflect on the last century and see the catastrophes to which overly sanguine economic planners can lead. For this reason alone, Hayek's challenge is worth remembering, and Bruce Caldwell has done a great service by reminding us of it.
As a further reminder of what we're up against there is this reminder from Marty Fridson.

Whether or not seers have insight into future conditions is a testable proposition. If it turns out that they don't, governmental attempts to guide the economy also come into question. Such efforts, after all, rely on forecasts generated by the same methodology that private-sector economists utilize.

The imprecision of economic forecasts isn't a comment on the forecasters' intelligence or work ethic. Rather, it demonstrates that the economy is too complex a system to be adequately captured by existing modeling techniques. The rational response to this realization is a combination of caution and humility.

We can debate and discuss ideas but in the world of policy it's usually best to proceed incrementally and on a contingent basis.

The Inflation Tax

Congress is considering legislation to subtract out the inflation portion of capital gains prior to Taxation:

The old fight over indexing the basis for the capital gains tax is starting up again, and this is shaping up to be the best chance ever to finally end the unfair tax on inflationary gains. Legislation sponsored by Reps. Mike Pence of Indiana and Eric Cantor of Virginia, H.R. 6057, would use the Gross Domestic Product implicit price deflator to index the capital gains tax basis for inflation, ending one of the most egregious practices of our tax system. Perhaps more encouraging, it may be possible for the president to introduce indexing administratively, without the passage of any legislation.

The capital gains tax is currently applied to the difference between the sale price of an asset and its acquisition price, adjusting for any capital improvements, but not for inflation. Because there is no inflation adjustment, for a long-held asset, the capital gains tax is largely an inflation tax. When the government levies a tax on assets that have depreciated in real terms, it is actually confiscating assets, which is a violation of basic principles of fairness.

The article then goes on to describe lots of reasons why the inflation tax is bad and how it hurts the economy and I agree with that analysis.

Yet, I still think that getting rid of the inflation tax is a bad idea. While inflation is a monetary phenomena, I'm wondering if there are certain near crisis situations where an increased inflation rate coupled with the inflation tax may be beneficial. In a deep recession, where both the economy and government revenues are shrinking in real terms, increasing the rate of inflation to keep nominal GDP growth positive may enable a quicker recovery, basically by diluting existing debt, allowing continued government spending without raising income tax rates, and stimulating demand (since investment becomes less desirable in such an environment). In the early years of the Great Depression, this was not done and look what happened. In the 1970s, this was done (unwittingly), and though the stagflation was considered to be very bad thing for the economy, I have a snearking suspicion (unprovable) that the economy needed to go through a restructuring, and that part of the subsequent 25 years of high growth was partially enabled by the 1970s' stagflation. I realize that I'm about the only person on earth to think this, but I never let little things like that bother me.

The best way to keep the inflation tax low is to keep inflation at a manageable level. I think we should keep the inflation tax.

Tuesday, September 26, 2006

Climate Change and the Media

This is a very good compendium of the problem with media coverage of the issue of global climate change.

Thursday, September 21, 2006

Willing to learn

Interesting post over at tcsdaily.

The centre-right four-party Alliance won the elections in Sweden this Sunday, ending 12 years of Social Democrat rule. The Alliance promised to do stepwise market-oriented reforms, as opposed to the Social Democrats promise to do nothing.

In sum, Sweden became internationally known as the country that went from rags to riches with the second highest growth rate in the world between 1890 and 1950. Then, economic policy took a more socialist turn and it became a prime example of a society with a big state taking care of people from the cradle to the grave - using their own money. And in the 1990s, there was quite a lot of attention around the Swedish market-oriented reforms.

The summary of Swedish success and failure is a story of markets against the state. Every time Sweden has taken a step towards freer markets, it has been very successful. And every time it has increased the size and power of the state, success has sooner or later faded away.

In fact, the tax pressure rose only from 10 to 20 per cent of GDP between 1890 and 1950.

This seems to be a workable tax take most places around the world.

During the socialist phase, however, the size of the state exploded. The tax pressure increased to 50 per cent of GDP during the three decades up to 1980. Many companies were socialised by the state. The state interference in markets grew and the ultimate aim was a more centrally planned economy.

This tends to result in stagnation eventually...

Where does that put Sweden today? A neo-liberal country that became socialist and then embarked on market-oriented reforms in several areas. Today, Sweden contains both socialism and free markets. But the same truth as before applies: where there has been free-market reform, there is success, and where there is socialism, there are problems.

The labour market is probably the best example of Sweden's problems. McKinsey estimated the total unemployment rate to be 15 per cent. Sweden has decreased the size of the labour force more than any other European country during the last 15 years, shuffling away hundreds of thousands of people from being called "unemployed" to "early retired". In EU-15, between 1995 and 2003, employment grew more in 11 countries than in Sweden. Youth unemployment is 22 per cent, the fifth highest in EU-25, and the number of people under the age of 30 that are "early retired" has increased from 13, 000 to 22,000 during the last six years.

Again, hard to prove things in social science, but there seem to be some general patterns.

Wednesday, September 20, 2006

Song remains the same

In this earlier post I wondered if politicians in Connecticut contributed to their own woes through bad policy choices. This Rich Lowry column makes me ask, might the same question apply to Michigan?

Liberals dissatisfied with the Bush economy have, through the wonders of federalism, an alternative. They can move to Michigan. The state represents a rough approximation of ideal liberal economic policy. It is heavily unionized, taxed, and regulated in a failed attempt to close its eyes to the dynamic forces of the market and globalization all around it.

This stew has helped make Michigan the economic sick man of the Midwest. It is suffering from a one-state recession all its own, mostly because it has failed to foster the most profound economic force in the universe — opportunity.

Michigan was the only state in the country not hit by Hurricane Katrina to lose jobs between September 2004 and September 2005.

Michael LaFaive of the Mackinac Center calls Michigan “the France of North America.” Economically competitive states might have a personal income tax, or corporate income tax, or sales tax — Michigan has all three. It has long been the only state with a European-style, value-added tax — the Single Business Tax.

The state still insists on trying to target tax incentives and other special breaks to favored businesses, in a doomed replay of 1970s-era industrial policy.

It used to be that unions could force unnaturally high wages and benefits on U.S. manufacturers, and the costs would be passed along to consumers. Those were the days prior to globalization when the U.S. auto industry had a lock on the domestic market and experienced little international competition. It was inevitable that Michigan would find the new competition disruptive, but not that it would react to it so poorly.

The way to thrive in a globalized environment is to create a low-tax economy without the rigidities that come with heavy unionization and regulation. For those who disagree, Michigan beckons.

The story sure seems familiar.

Friday, September 15, 2006

Skeptical Optimist Watch: Wake-up Call

I'm starting a new category of post which I'll affectionately call "The Skeptical Optimist Watch." I find the Skeptical Optimist blog, run by Steve Conover, one of the most frustrating I've ever encountered for two reasons: (1) I reach many of the same conclusions as he does but I believe some of his logic is deeply flawed (my logic, of course, is always perfect); and (2) he doesn't support a comment forum where I can point out those flaws (in all fairness, the few times I've emailed him, he's been quite responsive, but it's not the same as having a comment forum). The only reason I follow his site at all is that I know many of the readers of this site read it.

Today, I'll start with his post Wake-up call to Concord: It’s not about the money. The Concord Group is for limiting spending and government deficits. As I've written before, my belief is that the current federal government deficit of a bit over 2% of GDP is both sustainable and desirable and Steve Conover seems to agree with that. The first statement of his that gives me pause is:
My career in corporate finance taught me that if a given investment meets or beats the risk/reward criteria (“what we get for the money”), it should be funded—period.

I think that the concept of equating corporate and government finance is flawed for a variety of reasons. A critical portion of the above sentence is "risk/reward criteria." I'm one of the management/founders in a small business and I have a variety of pending investments that meet or beat my risk/reward criteria. Yet they're not funded. Why? Because those with funds are not willing to lend me money to fund those projects. Why? Because lending me that money doesn't meet their risk/reward criteria.

The first point is that there are important checks and balances in the corporate world that help ensure that money is efficiently allocated while balancing risk and reward for all of the stakeholders. For the most part, that's either missing or much more indirect at the level of the federal government. Whose risk/reward criteria are we using at the federal level? A bunch of older congressmen who are interested in being re-elected at any cost and who will die before the impact of their poor investment decisions affects us all?

The second point is that the results are much more measurable in the corporate world. You know, the old "bottom line". After being funded, did the investment increase profitability? Again, this is often much harder to measure at the federal level. It's hard to know the effect of large, national projects because there's nothing to compare it to - there's generally no control group. Did those education dollars really provide a good return on investment? Did the extra money spent on defense really help? Who knows?

The third point is that Conover is a little too confident in (not Skeptical enough of?) his own analysis. I think the combination of folks like the Concord Group and Conover and everybody else ends up arriving at a reasonable balance. Part of that balance includes the dialog between Conover and the Concord Group so I have no interest at all in stifling that debate. I just want to point out some problems in his argument.

The other excerpt from Conover's post is this:
I am a Peacenik—correction, a PeaceThruStrengthNik—and I am willing to continue purchasing Treasury bonds to help fund the necessary national security investments.

I would claim this concept doesn't quite work either. To actually have a strong military, you need to fight wars. I think an illuminating metaphor is the concept of buying weights in order to be strong. Buying the weights isn't enough. You actually have to use them to get strong. Buying military equipment isn't enough. You actually have to fight wars to have a strong military. I'm completely convinced that our military is hugely stronger because of its experiences in Afghanistan and Iraq. But once you support the fighting wars, you're not any sort of Peacknik. You're a hawk, though there's not necessarily anything wrong with that in my opinion.

Saturday, September 09, 2006

Amazing Webtool for Bloggers

There are a variety of different blog posting styles that I use. Some of my posts are essentially just links to some other webpage (this is Instapundit's main operating mode). Other posts are completely standalone - that is, they contain no links whatsoever. But by far, my most common post format is what I call the excerpt format. I excerpt (with a link) a significant portion of some other document and then provide an analysis or opinion regarding that excerpt and the article that contains it.

But the process of creating an excerpt post has, up till now, been inefficient for me. Typically, I'll see an article that I'm interested in analyzing and commenting on. Usually a particular passage catches my eye. I usually don't have time to blog about it right then, so I bookmark it. Then it sits in my bookmarks, but the title of the bookmark doesn't remind me of why I bookmarked it in the first place, so it languishes forever. I add more and more bookmarks and my bookmarks become unmanageble. I then delete them all to start with a clean slate only to later realize that I've deleted something important.

But now there's a new tool called Diigo. It automates the bookmarking process, allowing a user to highlight specific passages of a webpage and add comments to specific excerpts. The bookmark contains not only the title, but the highlighted information and all of the users' comments. With this functionality, Diigo is essentially providing highlighter and post-it capabilities for the Internet.

But it doesn't stop there. With a single click it will post all of that information to your blog (or blogs) via an editing window. That bookmarked information can also contain the images.

Hopefully, with this new tool my blogging frequency and quality will go up substantially. I also highly encourage my team blogger (that'd be you, Howie) to install Diigo. Comments and highlights can be made public which means that others can see them so we can have more interactive comments on our posts. Of course, I also highly encourage the rest of the post-Judd alliance to at least check it out and see what you think.

I don't have a lot of experience yet, but I've played with it and I'm amazed! I'll give a second report in a few weeks after I have more experience so you can wait till then to check it out and/or install it if you like.

Friday, September 08, 2006

Social Science and Our Ignorance part II

Beyond the inherent difficulty of dealing with the complex phenomena that are such a large part of the social sciences there came to be an adoption of methodologically flawed approaches of study. Initially arising in the Age of Reason, they constituted the abuse of reason. This fine book review captures some of the important elements of this abuse.

In his The Counter-Revolution of Science, first published in 1952, Hayek carefully dissects and systematically analyzes positivism and historicism—two sociological doctrines which helped provide the basis for modern socialistic theories. This critique is profound and well worth the while of anyone seriously interested in the methodology of the social sciences and the history of economic thought.

It is not very surprising, therefore, that it became fashionable to try to adapt the physical science methods to almost every discipline. However, they are completely inappropriate to the study of human action and society. Explaining why this is the case is the subject of Hayek’s book.

Hayek points out that all science starts with classification. In the physical sciences, objects are classified by unchanging characteristics that are both measurable and distinguishable by controlled and objective tests. But not in the social sciences. The social sciences deal with the actions of men. And men are not automatons. Men think. They have different values, varied goals and many purposes. Men choose among alternatives. They act purposively. Their actions cannot be classified without reference to their subjective (personal) ideas, values and goals. The results of their actions cannot be quantified, measured or predicted in advance. Moreover, changes are always taking place. The ideas, values, aims, choices and actions of men vary from time to time, depending on actual conditions and the knowledge available to them.

Individuals Ignored

Modern socialists, and their intellectual predecessors whose doctrines Hayek examines, sought to analyze and plan society as a whole. In doing this, they ignored individuals and their ideas, values and purposes. And they also overlooked the inevitability of change. Yet many professors and authors, whose teachings and books are widely respected today, are still influenced by the fallacies Hayek criticizes, which stem from the belief that society may be analyzed and planned by using the methods of the physical sciences—observation, experimentation and measurement.

Those who seek to reform society and cope with social problems must learn to appreciate the role of freedom in the evolution of useful, if unplanned, social institutions.

This book should help readers recognize the impossibility of successful central planning and of trying to create social institutions by design. It will also explain to serious scholars the important distinctions between the methodologies of the physical and social sciences.

Social Science and Our Ignorance part I

In light of some of the recent posts and the highlighted problems of economic measurement, much less prediction or policy prescription I offer a series of posts.

This column by Don Boudreaux is primarily about the minimum wage. I find this excerpt to be highly relevant:
Empirical research in economics is notoriously difficult because wages, prices, unemployment rates, product qualities, and all other data of the social sciences are, as Friedrich Hayek said, "complex phenomena." Having so very much constantly going on in the real world, having no laboratory in which reliably to isolate more than a handful of these phenomena at any one time, and unable to read directly the minds of the many persons whose perceptions and choices combine to generate social outcomes, empirical researchers can easily overlook or misread important variables.

This situation distinguishes the social sciences from the physical sciences in two notable ways. First, a higher proportion of empirical research in the social sciences is subject to legitimate -- oftentimes irresolvable -- dispute. Second, as a consequence, in the social sciences theoretical considerations inevitably play a larger role in navigating around these disputes and in forming judgments about desirable public policies.
The data problems can be worked on and the theory can be grappled with as well. Ultimately, this problem points to the appropriateness of less ambitious objectives in the realm of social science.

Those Stalinist Democrats

This post over at The American Thinker is rather revealing. It states that:

Senate Democrats are now making not-so-veiled threats against ABC if it goes ahead and runs The Path to 9/11.
A letter sent to ABC by these Senators makes this not so veiled threat:

The Communications Act of 1934 provides your network with a free broadcast license predicated on the fundamental understanding of your principle obligation to act as a trustee of the public airwaves in serving the public interest.
The post concludes with this:

Nixon was a piker. This is a threat far more direct than ever made by the Nixon Administration on the TV licenses of the Washignton Post about which so much was made in the Watergate affair. But it is just business as usual for the party that thinks they can do what they want without consequence. If this had been issued by the Nixon Administration, we would still be reading about in it the history books as the next-to-last step to a fascist takeover of the Republic.
Tolerance and free speech for me but not for thee? In touch with their inner-tyrannt.

More on Who's Getting Richer

There's a really excellent post by Russell Roberts at Cafe Hayek today on the cost of living versus the standard of living related to the recent flurry of pontification on stagnating median incomes. There's no particular excerpt that does it justice, so I'll just heartily endorse it and provide the link.

Wednesday, September 06, 2006

Fodder for the NY Times

Second quarter GDP growth was revised upward last week to 2.9% from 2.5%. At nearly three percent, that's pretty respectable growth. It was yet another upward revision and it left me wondering just how often GDP growth estimates are revised upwards and how often they're revised downwards. So I decided to do a bit of investigation.

The BEA (Bureau of Economic Analysis) releases three estimates of GDP growth for each quarter. The "advance" estimate comes out toward the end of the first month after the quarter, the "preliminary" estimate comes out toward the end of the second month after the quarter, and the "final" estimate comes out toward the end of the third month after the quarter. Each estimate incorporates additional information as it becomes available and, in theory, should be more accurate.

When comparing the advance estimate to the final estimate, one might think that the difference between the two estimates would be more or less randomly distributed. In particular, one might think that about half of the time the advance estimate would be higher than the final estimate and the other half of the time the final estimate would be higher and that the averages of the estimates would be about the same.

But, as the graph above shows (click to enlarge), that's not the case. In the last 34 periods, the advance estimate has been lower than the final estimate 25 times, while being higher only 9 times. The advance estimate average is approximately 11.3% below the average of the final estimates which represents a delta of 0.34% of GDP. While I haven't run any formal statistical tests on these data, I'm very confident that the delta between the averages and the discrepency between the number of upward and downward revisions is statistically significant given the sample size.

So the BEA's advanced estimate is usually too low. This is apparently built into the formulae used by the BEA to calculate these estimates. I'm sure they follow their methodology consistently and rigidly each and every quarter and that's certainly their job.

But there are a couple things that are interesting here (I'm sure you were hoping something in this rather dry analysis would be interesting). The first is that when you read an article containing an advance estimate, adding 0.34 to it will give you a better estimate approximately 74% of the time (25/34). The BEA could do this same calculation to enhance their estimates, but consistency in the method of calculating the estimate is more important than accuracy. It's easy enough for us to take their estimate and modify it accordingly to make it more accurate.

The second thing of interest to me is that the consistent underestimates coupled with the estimate reporting calendar gives the NY Times and other liberal media yet another opportunity to describe the economy as weakening. Each time the advance estimate comes out, they can compare it to the final estimate for the previous quarter. Because the advance estimate is lower than it should be, on the surface it always looks like the economy is starting to soften more than it actually is (by 0.34% of GDP). So the next time you see a statement in the NY Times that comes out just after the advance estimate becomes available which claims that the economy is starting to soften or that the economy is losing steam, and their evidence for this claim is based on a comparison of the advance estimate and the previous quarter's final estimate, you should probably heavily discount that.

Tuesday, September 05, 2006

Who's Getting Richer

There's been a flurry of activity lately on the topic of the income disparity between the rich and the poor. It was started by a New York Times article titled "Real Wages Fail to Match a Rise in Productivity" which basically argues that wages for most people have stagnated for many years, even decades. This article sparked heavy debate between socialist and free market economists and pundits. I tend to line up pretty closely with the free market crowd and their analysis is pretty comprehensive. Here are some excerpts:

In TCSDaily, David Henderson argues that wage statistics don't mean squat and that people are better off regardless of what the wage statistics tell us:
Take home ownership. In the first quarter of 1965, the first date I could find quickly, 62.9 percent of American households owned their homes. That was during Meyerson's golden era. In the second quarter of this year, the "dead middle-class era," it was 68.7 percent, an all-time high. Cars? What's relevant, as with homeownership, is the percent of the population that owns cars. And this has boomed. In 1970, presumably near the peak of Meyerson's golden era, there were 108.4 million vehicles registered in the United States; by 2003, this had soared to 231.4 million, an increase of 113.5 percent, while the population had risen by only 42.4 percent. And note that Meyerson doesn't even mention air travel, which, due to deregulation and technological improvement, has become so much cheaper that even poor Americans, let alone middle-class ones, can now afford to fly. How about college? In 1970, only 10.7 percent of the population 25 years old or more had a college degree; by 2004, this was up to an all-time high of 27.7 percent.
Nicholas Eberstadt argues in the Washington Post that income is meaningless - the measure to focus on is spending:
Among low-income households in the United States, the gap between reported income and reported spending has widened gradually since the 1960s and now has taken on chasm-like dimensions. In the early 1960s, the poorest quarter of U.S. households spent 12 percent more than their annual incomes. In 1973, spending by America's poorest fifth surpassed their income by almost 40 percent. And in 2004, spending by the poorest fifth of American families exceeded income by a whopping 95 percent; in effect, spending was nearly twice as much as income.
Don Boudreaux at Cafe Hayek poses a thought experiment:
But I ask: would you prefer to live in 1967 with today’s real median household income ($46,326) or live today with 1967’s real median household income ($35,379)? (These figures are expressed in 2005 dollars, by the way.)

He answers his own question:

Given these two options, I’d choose to live today with only 1967’s real median household income. The reason is that the economy today offers so very many more options than did the economy in 1967 – or even the economy of that halcyon year, 1973. Today I can buy cell-phone service; today I can buy cable television with hundreds of channels, including ones that specialize in sports, cooking, history, and science; today even the cheapest automobiles are safer and more reliable than were the finest cars for sale in 1967; today I can buy telephone answering machines (with caller-ID), microwave ovens, CDs, personal computers, Internet service, and MP3 players. Today I can watch movies in my own home – in color – whenever I want without having to wait for one of the three or four available television stations to telecast a movie for viewing on a black-and-white television...
And Don continues on and on and on with all things new and improved.

Other factors that mitigate the wage statistics include general measurement errors. For example, many economists think inflation is overstated by over one percent per year. If so, wages and compensation increases since 1960 are actually pretty impressive.

But the other side does have a couple of good points. First, the value of wages is subjective. It's my observation, that for some people, the value to them of everything while living under leadership of the Democrats is much higher than the value of everything while living under Republican leadership. Thus, considering Professor Boudreaux's thought experiment above, they would subjectively (and rationally) choose the today's median income in 1967, when the drugs were good and the love was flowin'. I suspect this description happens to at least partly describe many NY Times readers, so they really are worse off now - since there is no "objective" economic sense, only their subjective perceptions.

Also, even to me, all other things being equal (including GDP per capita, GDP growth, etc.), I would prefer a system that was more egalitarian. I personally wouldn't put that preference ahead of GDP per capita growth, and since I don't personally believe that we could have a more egalitarian system and maintain the current rate of growth, I'm willing to let the egalitarian preference slide. But to many people, they would simply rather be poorer (and even have the poor be poorer in the future) and have a more egalitarian system. Once again, the value of everything to them under such a system would be higher and it would make up for lower wealth and income.

Both of these last two concepts draw heavily from an emotional, intuitive point of view, but that's not to say they aren't valid. They're certainly, in my opinion, valid enough to act on (or vote on). Trying to show why they're rational is a little tougher. Economist Brad DeLong tries by positing:

I'm enough of a touchy-feely sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor.

In other words, the rich can put on their diamonds and look down their noses at the poor while feeling superior and "a good chunk" of the value of being rich comes from that. This implies that it's hardly worthwhile being rich if you can't do that. I find this a little tough to believe. But let's assume that it's true. If one is a utilitarian (one who wants to maximize overall utility of the economy to society), it may turn into an argument to try and increase the disparity between rich and poor. After all, the rich now have additional utility for their wealth (the feeling of superiority), yet this extra utility doesn't cost the non-rich anything at all! In other words, not being rich, it doesn't cost me anything for the rich to feel superior to me - all the more power to them as far as I'm concerned. I'm not worse off because of it.

Yet I have a hunch status does have something to do with DeLong's statement. Let's say there were no rich and therefore status had nothing to do with wealth. Then people would derive status from other traits: beauty, strength, height, intelligence, and job, to name a few. Brad DeLong, though short on beauty, strength, and height (relative to girth), would still get a bigger share of status from his exclusive job as an economics professor at UC Berkeley and the supposed intelligence that got him that position.

So it's interesting that in the zero sum gain of status, many of those belaboring income inequality and trying to increase the taxes on the rich have the most to gain.

Friday, September 01, 2006

Climate Change Problems Endured

Paco, a commenter on Tim Blair's blog, is having a rough time with climate change!
Climate chaos; tell me about it! I was shoveling snow from around the saguaro cactus in front of my home in Richmond, VA, and as soon as I finished, a fissure opened in the earth and a steam geyser sprayed hot water all over the place. All that work for nothing! If it hadn’t been for the fact that torrential rains had created so much humidity that the doors to the gun cabinet had swollen shut, I probably would have shot myself. Instead, I just chilled a few beers in the frozen goldfish pond, grilled some burgers over the creek full of magma that flows by the back fence, and settled down to enjoy the bright green sunset.
He must've been watching too many of those climate disaster movies!