Thinking like economists and thoughts about economists

Chris Auld finds that people without a high school education are most likely to think that economists are know-nothings. The proportion of GSS respondents having such views is mostly declining in education. From Auld:

This is consistent with what I'd found on correlates of economic thinking in New Zealand - the more educated are more likely to agree with what I'd taken as consensus economist views. And, with what Bryan found in the States. But I don't recall seeing anything like that uptick among grad school folks, though I'd have to double check. The questions I'd used as indicating economic thinking all touched on microeconomic rather than macro issues: whether wage and price controls are a good idea; whether high income taxes make people less willing to work hard; whether we should have import controls.

Perhaps folks who've gone to grad school encounter too many folks who've done too much macro?

Rationality and economists

Andrew Gelman takes a swipe at economists. I think he's got things wrong. Let's work through it.

First, Gelman argues economists are inconsistent in arguing for consumer rationality while arguing that people need economists to help them overcome their irrationalities, largely about government policies. But these arguments are hardly inconsistent. In environments where individuals face real costs of being wrong or irrational, they consume little irrationality. At the voting booth, their likelihood of decisiveness is sufficiently low that they can indulge biased but comforting beliefs about the true state of the world. That's Caplan's rational irrationality model; I find it rather convincing.

Here's how Gelman thinks we square the circle:

OK, now to return to the puzzle that got us started. How is it that economics-writers such as Levitt are so comfortable flipping back and forth between argument 1 (people are rational) and argument 2 (economists are rational, most people are not)?

The key, I believe, is that “rationality” is a good thing. We all like to associate with good things, right? Argument 1 has a populist feel (people are rational!) and argument 2 has an elitist feel (economists are special!). But both are ways of associating oneself with rationality. It’s almost like the important thing is to be in the same room with rationality; it hardly matters whether you yourself are the exemplar of rationality, or whether you’re celebrating the rationality of others.

I think it's rather that economists recognize that there can be a rather large disconnection between policies that are politically popular and ones that would maximize a reasonable conception of a social welfare function. You can get it through the combination of rational ignorance and logic of collective action or other public choice problems; you can also get it through Caplan's rational irrationality.

Now, I know Gelman rejects that the expected instrumental benefits of voting are low; he says that an altruist weighs the benefits to everybody else of his voting to make things better and consequently voting passes a rational instrumental cost benefit analysis. But surely if your vote is the decisive one making everybody better off as you see it, it's also the one that makes half the voting population worse off as they see it. And so Gelman's argument fails unless the voter can place himself in an epistemically privileged position: he has to know that he's making the voters who disagree with him better off. And I just can't see how that happens. That half the population disagrees with you at the ballot box ought to make you more uncertain about the benefits of your preferred policy unless you truly have expert knowledge.

Fortunately, we economists often do have expert knowledge about economic policy. Well, maybe not about macro beyond a short list of "don't do these twelve things lest you completely ruin everything". But in micro and applied price theory, we're decent.

I rather liked Gelman's PS:

P.S. Statisticians are special because, deep in our bones, we know about uncertainty. Economists know about incentives, physicists know about reality, movers can fit big things in the elevator on the first try, evolutionary psychologists know how to get their names in the newspaper, lawyers know you should never never never talk to the cops, and statisticians know about uncertainty. Of that, I’m sure.

Expressive voting

Hamlin and Jennings survey the expressive voting literature. It's a nice piece, and I like how they've brought Kuran's preference falsification arguments. I'll quibble on two points, mostly because I like the word quibble and need excuses to use it. They write:

Caplan is careful to distinguish between [rational irrationality and expressive voting]: 'In expressive voting theory, voters know that feel-good policies are ineffective. Expressive voters do not embrace dubious or absurd beliefs about the world ... In contrast, rationally irrational voters believe that feel-good policies work.'

Therefore, a further condition would need to be fulfilled in order to judge a vote to be expressive of true preferences rather than rationally irrational ones; we would need to check how well informed the voter is. One suspects that this issue may be similar to social pressure. If voting is both expressive and 'rationally irrational', making information available might be expected to result in a rapid and significant shift in the political equilibrium. If, by contrast, voting is an expression of truly-held expressive preferences, the political equilibrium will be much more stable.

I doubt that Caplan would argue that rationally irrational voters need only be provided more information in order to improve outcomes. If information provision were the sole problem, voters wouldn't be openly hostile to the provision of information with which they disagree. And the rise of the Econoblogosphere would have quickly led to substantially better economic policy.

Here would be a rather better test of Caplan's rational irrationality model. I've not seen it conducted, but more experimental economics applications have been melding voting and markets. Here goes. Set up an experimental double-auction environment framed in a salient way - buyers and sellers of labour, for example. Run a few rounds of the experiment as baseline. Then, let folks vote on whether they'd like to make a change to the trading environment: policy changes that either improve or reduce overall efficiency. A price floor, for instance - a minimum wage. Set treatment groups that vary in individual expected decisiveness: the odds that any player's vote will determine the trading structure for the next round, with the sum of all player odds being less than or much less than one. Then run a few rounds with the (potentially) changed trading environment before offering other votes - some which augment and some which attenuate efficiency, with varying expressive framing. If traders make better choices when more decisive, that would be consistent with rational irrationality. It wouldn't distinguish between expressive voting and rational irrationality, but I'm more interested in testing the broader concept anyway.

Hamlin and Jennings later discuss the implications of expressive voting for constitutional choice. Brennan and Hamlin worried that constitutionalism exacerbates expressive voting problems and suggested that constitutional questions be left to small but statistically representative groups in order to avoid the Veil of Insignificance. They write:

Perhaps these proposals should be decided by small (but representative) groups, which might be more likely to take an all-things-considered view. Crampton and Farrant make explicit the potential problem that such a small group might design institutions that enrich themselves if they are not fully representative in a relevant sense. Therefore, a trade-off may exist between the problem of expressiveness, on the one hand, and allowing too much room for the narrow self-interest of unrepresentative groups, on the other.

It's probably semantics (a lot can be packed into "in a relevant sense"), but our main worry (ungated) was that the perfectly statistically representative group would have, by virtue of being the constitutional committee, a newly granted interest in enriching the members of the committee. If the group is small enough to overcome expressiveness problems, it may also be small enough to solve internal collective action problems and set itself up as effective dictator post the constitutional phase. The only way of breaking past the Veil of Insignificance is by reintroducing the problem that constitutional political economy in the Buchanan sense was meant to solve: separating individuals at the constitutional level from their particular interests in order that the constitution foster the general interest. Absent the Veil of Insignificance, the constitution serves the general interest of those writing the constitution.

Paper gated permalink below:

Expressive Political Behaviour: Foundations, Scope and Implications

Alan Hamlin and Colin Jennings (2011).

British Journal of Political Science,
Volume 41, Issue 03, July 2011 pp 645-670

http://journals.cambridge.org/abstract_S0007123411000020

Fractional reserve banking

Bryan's post at EconLog critiquing Rothbard on fractional reserve banking is entirely correct.

And it brings back memories of the Rothbard Graduate Seminar that I attended in the summer of '99 in Auburn. I pressed a couple of the folks there: if we were in a free banking system and people chose, with full knowledge, to use deposit accounts that paid interest in exchange for the bank being able to lend that money out to others, we could hardly call the arrangement fraudulent. The answer I'd then received, if I recall correctly, was that such an arrangement was fine, but it shouldn't be called banking.

I'd be pretty surprised if the nominal change resulted in less confusion. Jimmy Stewart reminded folks pretty well how banking as we now know it works.


And the Simpsons reminded us a bit more recently.

Fiscal externalities of population

Bryan Caplan's changed my mind again. I'd always expected that the overall fiscal externality of having more children was small and, perhaps, slightly negative. Public schooling isn't cheap and neither are the per student subsidies for tertiary education. But I'd not thought too hard about it. I choose to mood-affiliate with Julian Simon and consequently tend to expect that increased population is generally beneficial; I'd just not expected that the effect on the government's coffers was particularly positive on average.

Bryan cites Wolf et al's finding that replacing the average non-parent with the average parent provides a $217,000 net fiscal benefit: total taxes paid by the children less total government services consumed by the children. Since lots of government services like national defence are non-rivalrous, having a bigger population reduces the average burden. The average additional child confers $83,000 in additional net fiscal benefit. The greater is the proportion of spending on rivalrous rather than non-rivalrous goods, the lower will be the fiscal benefit: the numbers for New Zealand would have to be lower since more of our spending is on transfer payments relative to defence.

Bryan argues for child tax credits to encourage greater fertility. Relatively small baby bonuses can push folks at the margin into having an additional child - Bryan says about $9000 would do it, citing work by Kevin Milligan. If folks whose children are expected to have lower than average positive fiscal contributions were more responsive to the tax incentive, the policy's consequences would not be what Bryan's expecting. But the Milligan paper finds the opposite: richer couples' fertility was much more responsive to the Quebec tax credit. There's reasonable heritability of income generating capacity; the baby bonus would increase the average positive fiscal effect over time rather than reduce it.

There's still something weird in the Wolf et al paper.

Nonparents pay about $327,000 more in taxes than they receive in benefits, while parents pay about $278,000 more in taxes than they receive in benefits. The offspring of the parents, in turn, pay over $266,000 more in taxes than they receive in benefits. In each case, the excess of tax payments over benefit consumption results partly from the exclusion of pure public goods from the benefit side of the balance sheet: whereas all tax payments represent a reduction in private consumption possibilities, only the “excludable” part of public expenditures belong in these accounts.

Suppose that the "non-excludable" part of public expenditures totals $300K per capita, giving a slight overall deficit. If those expenditures are invariant to new persons' entry, then we're right to exclude that portion since the benefits received by the new persons come at zero marginal cost. The bulk of the new entrants' taxes help defray the average cost of providing a fixed set of public goods.

But why should we expect that government expenditure on nonrivalrous goods is invariant to population? If spending instead is elastic, then we'd need to count the new spending on rivalrous goods for which the new person's entry were responsible. Depending on that elasticity, we could quickly get back into the world where the fiscal effect is ambiguous.

I'm generally very nervous about taxes intended to rectify fiscal externalities. If the numbers came out showing a negative fiscal effect of additional children, would Bryan recommend per-child taxes? Suppose that more disaggregated data showed that the negative fiscal externalities of children born to poor unwed mothers were large and that abating subsidies for such births weren't sufficient to counteract the negative effect. Taxes? Regulatory measures? Note that the Wolf paper shows a much smaller positive fiscal effect for parents with less than a high school diploma; the required responsiveness of government spending on nonrivalrous goods to increased population need not be large to there flip the sign of the effect.

The permissible boundaries of taxation, regulation, and subsidy effectively disappear if policy needs to correct fiscal externalities.