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Will Wilkinson, whose CRaSTO rating (Cantankerous Rants as a Share of Total Output) has lately approached one, wrote a cantankerous rant about the apparent atrocity against logic, language, and political theory that Sunstein and Thaler have committed in coining and promoting “libertarianism paternalism.”  Without quoting the whole thing, I want to start by singling out this part:

But there aren’t any “anti-paternalist” objections to making organ donation the default or featuring healthy food in cafeterias, because these ideas have nothing to do with paternalism.

I mean, what could organ donation possibly have to do with paternalism? How can the disposition of one’s organs after one dies possibly redound to the welfare of one’s corpse? This whole discussion is rife with this sort of conceptual and linguistic muddle.

So Wilkinson has basically committed a somewhat-offensive omission, here, since lots of people, for personal or religious or cultural reasons, may actually strongly object to having their organs removed from their body after their death, or object more narrowly to the way that organ donation is practiced, or are fearful that the institution of organ donation may incentivize doctors to, on the margins, alter the way they perform care. So, in fact, a traditionally paternalistic law that mandated organ donation would, in fact, be paternalistic and the subject of no small controversy.

It’s what he concludes, however, that really cuts to the heart of it – but the wrong way, methinks:

Paternalism has to do with making people go in a direction they don’t want to go. The gist of paternalism is that it takes away choices other people think are bad for us to make. By definition, “choice-preserving” policy is not paternalistic policy. By definition, paternalistic policy is not libertarian…

If the sensitivity of human decision-making to the vagaries of context calls into question the wisdom of leaving citizens free to make decisions about their own welfare, then that would suggest an argument against libertarianism and for paternalism. Go ahead. Make the argument against autonomy, if you think it’s an argument worth making. But, for God’s sake, leave the English language alone.

Will: the reason the organ donation example is such a classic example of why “nudging” works is because there is no neutral option. The non-neutrality of choice architecture is, in fact, a fundamental assault on one of the central conceits of libertarianism: that such a thing as “leaving citizens free to make decisions about their own welfare” actually exists as a single, obvious thing.

Classical and neoclassical economics models do not include choice architecture in their factors of what will incentivize individuals to make certain decisions. Yet, these architectures can and do have a very large influence on the choices people make. Libertarianism, at least a certain popular form of it, is if not entirely predicated then strongly reliant on the predictions of classical and neoclassical economic models that laissez-faire policies are not only desirable philosophically but also pragmatically. But there is no one thing that is “leaving people alone” and “giving people choice.” The costs, in thought, time, and effort in opting in or opting out of organ donation are trivial in almost every way. But yet in Germany, where you opt in, 12% are donors, and in Austria, where you opt out, 99% are donors.

So let’s go back to the root of paternalism and say that, much like parents and children, governments have ideas about what is best for citizens and society. But smart parents know that simply issuing orders is often both disrespectful to the autonomy and personhood of the child (especially older children) and likely to backfire as a practical matter. Similarly, smart states know that there are ways to preserve the fundamental freedom that choice offers while still structuring choice in a way that, while not unfair or exploitative, results in socially-beneficial results. That’s libertarian paternalism. It’s a thing, man. It’s cool.

In the end (and I know Wilkinson no longer identifies as libertarianism, but frack it) I think the failure to grasp not simply that local and private power will usually fill the vacuum left by the absence of federal power (and usually to the detriment of freedom and welfare), but that even before you reach that point there is no obvious form that “being left alone” or “having choice” entails is one of the major flaws in libertarian thinking, and why libertarian solutions to problems that don’t engage with that fall flat. It’s especially frustrating since thinkers like Sunstein and Thaler are practically duct-taping a road map to the steering wheel of the libertarian car and it still finds itself spinning circles in abandoned parking lots claiming to be the last defenders of freedom.

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I was listening to The Economist’s podcast summarizing their special report on Germany and and when I got to the equivalent of this line:

It is the largest creditor country in the euro zone, and as chief paymaster it has the biggest clout in determining the single currency’s future.

And I guffawed. And it’s worth explaining why.

When a creditor loans money to a debtor, there is the potential for everyone to be better off – the debtor can make an investment they could otherwise not afford, and the creditor receives some interest in return. However, there is a large potential opportunity for the debtor to rip off the creditor and never pay back their money, thus getting free money. Therefore, creditors have traditionally tried to employ both the power of the state and extra-legal threats to ensure compliance. There is a long history of violence and threats of violence in this regard, from Mafia kneebreaking on the black-market side to the Venezuelan blockade on the macro-side. The reason the Iron Bank of Braavos* gets paid back is because they have proven their willingness in the past to depose and assassinate kings to collect.

But modern norms have changed that. Sure, you can still be imprisoned for debt in certain parts of the United States, but remember that the entire state of Georgia was originally envisioned as a debtor’s colony. And on an international scale, while you will suffer for sovereign default, you won’t be invaded and expropriated, and note that countries like Argentina have done surprisingly OK after even a spectacular sovereign default. Not that being shut out of most financial markets, both as an individual and a nation, is without consequences, but it’s a lot better than being behind bars or under the gun.

What’s the point? The key is the huge power of social and cultural norms, and how many can persist even as related ones change. For example, our increased unwillingness to use violence and imprisonment to punish debtors would seem to encourage double-dealing by borrowers and recalcitrance by lenders; yet our powerful social norm in favor of paying back debts and in viewing creditors as virtuous (“savers” “investors”) and debtors, especially debtors who fail or struggle to repay, as sinners (“deadbeats” “spendthrift” “profligate”) then debtors will largely continue to pay and creditors will largely continue to lend even though debtors, not creditors, are gaining in leverage and material power. They have your money! Germany isn’t invading Greece or Italy or Spain or Portugal or Ireland! But debtors don’t have anyone’s respect and that matters tremendouslyAnd economic models (and economic commentators) fail to account for it.

*You seriously thought I was going to go all day on this blog without a reference to “A Song of Ice and Fire?” Ha! Ha, I say, ha!

Ryan Avent says some things he probably considers uncontroversial, because he says so:

That’s because there are relatively uncontroversial ways in which high levels of government debt can and do affect growth. Government borrowing can crowd out private investment, induce uncomfortably high levels of inflation, and create a need for distortionary taxation.

I’m going to go ahead and say – some of this is at least somewhat controversial! A bold stance, indeed.

Let’s say the government wants to spend some money. The government can choose to finance it in two ways:

1) It can raise taxes.
2) It can borrow.

Obviously. But what does that mean?

In the first scenario, the government identifies a place where there is some money and takes it. It’s good to be the king.

In the second scenario, the government makes an offer – anyone who wants to patriotically volunteer their money to the government will get a series of small reward payments for many years, followed by the eventual full refund of their nominal volunteered sum.

Either way, the government has withdrawn an equal amount of money from society. The primary difference, it seems to me, is two-fold:

1) The money comes from different places.

2) In the latter scenario the government has obligated itself to future payments.

Item 1) is what’s usually paraphrased as "crowding out investment" – the presumption that money borrowed would have been put to use in ways that engender long-term growth, whereas money taxes would have come from mere "consumption." Regular readers (if you exist, that is) know I am not a fan of the saving/consuming dichotomy, but I am willing to indulge the idea that resources withdrawn by the private economy by government borrowing are systematically different than those withdrawn by government taxation. Let’s come back to this.

Can government borrowing "induce uncomfortably high levels of inflation?" Not if the Fed says it can’t! And the Fed has been pretty good at keeping inflation limited since the Volcker era.

Can government borrowing "create a need for distortionary taxation?" Sure! But so does taxing the money in the first place. If the government spends money and funds it all through taxes, there will be a lot of deadweight loss. If it funds at least some of it through borrowing, there will be presumably less deadweight loss since the money was coughed up voluntarily.

But look – here’s the data

Here’s real federal debt held by the public v. real federal interest payments since 1970:

Inline image 3

So, not a terribly correlated series.If you’re the naturally loggish type:

Inline image 4

Which shows a more correlated series at least during the 70s and 80s but note that starting in 1985 while the debt begins to rise and rise the total interest payments mostly stall out.

So, given the large increase in public federal debt over the last 30 years, we have seen decreased inflation, stagnant real interest payments (which means shrinking real interest payments as a share of GDP) and…so where’s the "crowding out?"

Any discussion of these issues without talking about the financial system, the central bank, the status quo ante of the macroeconomy, etc, isn’t very useful.

did ya miss me?

Thinking about the Wolfson Prize whilst walking about DC this evening, a notion struck me:

There are three futures for Europe. The first is total federation and integration. This seems, at the moment, unlikely. The second is constant crisis and panic with long periods of recession and tepid growth in-between, similar to the United States between the Civil War and the Great Depression. That choice is woefully undesirable. Barring either of those, it seems as thought the Eurozone may have to be, if not unwound, reduced in scope.

But how do you leave the Eurozone? Specifically in the current crisis, forgetting the logistical nightmare of endless private contracts denominated in euros, the sovereign debt is also denominated in euros; to leave the euro and refuse to pay back creditors in euro is default, the outcome everyone is trying so hard to avoid. So how can you leave the euro?

Well, I had one idea. Let’s say this – Greece leaves the Euro and re-institutes the drachma as the national currency at an initial 1:1 exchange rate. Obviously this rate will not last, and the drachma will plummet in value, leaving Greece poorer in the sane, proper way that independent nations do so – monetary devaluation. Yet Greece now has to pay its debts. How can they do this?

What if the European Central Bank offered Greece a special privilege – the Greek treasury can, up to a certain limit, exchange drachmas for euros at a 1:1 rate with the ECB. Greece can then turn around and use those euros to pay its pre-drachma debts.

Now clearly, the ECB will be taking a loss here. However, it won’t be a bailout – as far as Greece is concerned they are paying their debts fair and square with tax revenues. So there is no (or at least much less) moral hazard. Also, this avoids the dread specter of inflation that has so gripped the ECB. So even though they take a loss, it’s an outcome where a) Greece still pays 100%, b) the creditors are paid back in full in Euros, and c) there is no default, bailout, or inflation.

This still leaves the question of private debts; I’m not sure a program like this could work for every contract denominated in euros between a Greek and a non-Greek party. You wouldn’t want to allow anyone other than the Greek treasury to exchange drachmas for euros at a fixed, favorable rate, since you’d have a mad dash to dump the drachma in anticipation of devaluation. But if you could at least solve the sovereign debt problem perhaps the magic of the market could work out private debts on a case-by-case directly negotiated basis.

Anyway, just an evening thought on the issue d’jour.

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