Markets and Sentiment

In recent years, we have seen growing discontent with the distributional effects of free trade, widespread favor-seeking from businesses, and a recurring sentiment that the economy is rigged.

Distributional concerns. The 2016 election of Donald Trump likely stemmed from graphics like those below that demonstrate the geography of job losses and gains. According to this Bloomberg article, the goods-producing sector that includes manufacturing, construction, and mining lost 1.2 percent of their jobs during the Obama administration.

Favor-seeking. The Occupy Wall Street Movement was viewed as an expression of the frustration that government privileged banks above individuals despite their irresponsible business practices.

It’s all rigged. A recent survey from Pew finds that 70 percent of Americans believe the economy unfairly advantages the powerful. Dean Baker outlines three ways in which the financial sector benefits from rent-seeking activities. Nobel Laureate Angus Deaton discusses rent-seeking as a threat to capitalism.

The notion that the economy is harmful to some and the deck is stacked against most is damaging the reputation of capitalism. According to a 2019 Gallup Poll, positive views of capitalism among young adults (ages 18-39) have declined from 66 percent in 2010 to 51 percent in 2019 and positive views of socialism are now at the same level as positive views of capitalism.

While this same group does hold a favorable view toward free enterprise, even that is down to 83 percent in 2019 from 89 percent in 2010. Individuals also view small businesses favorably but many of those local businesses are having difficulty weathering the shock of COVID-19 and that could tilt the composition of the economy toward big business which is viewed less favorably.

This constellation of public opinion is the milieu from which calls for “common-good capitalism” (focuses policies on firm and government obligations to workers) have emerged. Personally, I do not have great confidence in proposals like higher minimum wages, increased tariffs, and more that aim to address the pain that underlies these attitudes about the market economy.

At the same time, I do not have a clear path forward. The favorable views toward free-enterprise suggest individuals want others to exercise their talent and freedom in markets. That is good! At present, we do not want to kill the goose that lays the golden eggs. On the other hand, it is difficult for me to fathom how we can have a government big enough to help workers and one that creates conditions of fairness. It is wishful thinking to assume that the rent-seeking that has undermined the credibility of the market will go away if we turn to “common-good capitalism” or something else.

There is an old Jewish aphorism that, “the clever man can extricate himself from a situation into which the wise man never would have got himself in the first place.” Leadership in the United States lacked the wisdom to adhere to the limited and enumerated powers in the Constitution and Congress has long abandoned being jealous guardians of their authority that undermines checks and balances. Hopefully we are not all out of clever.

Veil of Ignorance

A few months back, I received a call for essays from the AEI Initiative on Faith in Public Life. The question was: In the contemporary United States, what would a truly humane economy look like? and it has been rattling around my head for a couple months. Occasionally I’ll write down some thoughts. In this post, I want to share with readers an excerpt from those thoughts.

“… I will situate a humane economy in the literature on fairness and justice and turn to a well-known philosophical device called the “veil of ignorance”. From behind this veil, there is no knowledge of race, sex, abilities, etc. From behind this veil — unencumbered by bias — a person would choose a humane society. John Rawls believed individuals, not knowing where they would be located in the income distribution, would seek to maximize the lowest income. This is what he called the “difference principle”.

In 1987, three political scientists conducted an experimental test of the veil of ignorance (Frolich et al., 1987). Students were presented with distributions of income that reflected different philosophical convictions like utilitarianism, egalitarianism, the difference principle, and utilitarianism with a floor constraint. Then students were asked to vote on their preferred distribution without knowing their ultimate position in the distribution. Students then deliberated with each other for a minimum of five minutes and unanimous vote was required for the adoption of a distribution otherwise one would be chosen randomly.

Rawls was right that individuals come to unanimous agreement behind the veil, however, the difference principle failed. The authors write, “Under all experimental conditions, all groups reached consensus and no group ever selected maximizing the floor as their preferred principle.” From behind a veil of ignorance, what did most people want? Overwhelmingly groups chose utilitarianism subject to a floor constraint. For a majority of people, prosperity is not dirty and undesirable. The economic pie can be large and some people can do very well. However, there is some willingness to limit the ceiling to raise the floor.   

The direction of Rawls’ instincts were correct. People do think about the folks on the bottom rung and this experiment, and others like it, reveal something about human nature. We want the opportunity for great prosperity and we want to care for those less fortunate …”

After this discussion of the veil of ignorance, the essay proceeds with a reminder that if we are attempting to secure some material threshold, the poor in the United States are materially doing well by historical and global standards. But, for the remainder of the essay I focus on a different kind of poverty: unmet needs. Specifically the needs for purpose, security, and opportunity. Then I make the argument that to best meet these needs we need a more robust civil society and federalism.

The taste buds of justice

What is justice? It’s a lofty question, up there in the pantheon of “What is the meaning of life?” and “Who let the dogs out?”. There is no great answer for that, but, essentially justice is about doing the right thing. What is right? That’s a good question.

There are three taste buds to justice: merit, need, and equality. When people make an argument for something being right they will draw on one or more of these taste buds. These criteria become especially important when groups decide to allocate goods through non-market institutions.

Here is a favorite example from Peyton Young’s book Equity: In Theory and Practice. At the end of World War II, the United States was demobilizing soldiers in Europe. Some had to be retained to fight Japan while others could come home. Which soldiers should come home first?

After debate, the U.S. Army decided to survey thousands of soldiers in the United States to identify relevant factors. There were four important factors: length of time in the Army, age, amount of overseas service, and number of dependents. Then troops completed a pairwise-comparison of each criteria like in the picture below.

You can see among the transitive rankings (90 percent of those surveyed satisfied transitivity) the two most important features to those surveyed in the United States was overseas service and number of dependents.

But, it turns out there was an important write-in candidate among the soldiers: exposure to combat. A large swath of soldiers mentioned that this should be an important criteria but the Army hadn’t considered it in their survey.

The Army devised another survey that attempted to develop how much different criteria should be weighted. You can see a sample question below and the resulting points system (from a series of questions like the sample question).

What matters most to the troops: exposure to combat and number of dependents. Put another way, what matters most is merit and need. The right thing to do regarding who comes home first involves consideration of whether you merit coming home (exposure to combat elevates you over others) and need (a child needs their parent).

So I do not have a precise definition of justice. But, I have noticed that when people talk about doing the right thing they often rely one one or more of merit, need, and equality.

Running on Fumes

Friday afternoon has come and gone, we’re now into the evening, and I am just now writing a product review. I nearly cast dispersions on our blog name, “Economists Writing Everyday”! It won’t be a lengthy product review and my wit-producing engine is bereft of gas. It’s been that kind of week. I am torn between reviews of booze and theology …

There is something wonderful about the charm of making classic cocktails and also putting a twist on them. My favorite drink is an Old Fashioned and I like the weight of a quality glass, the large ice cube (I’ll have to check out Jeremy’s recommendation!), the quality of these cherries, and I enjoy experimenting with different bitters that put a twist on the classic cocktail. For example, my recent favorite combination involves black walnut bitters and chocolate bitters. Your mileage may vary.

One wonderful treasure that I discovered this summer was the series of books, “The Ancient Christian Commentaries on Scripture“. The 29 volume set is a whopping $1,499 on Amazon. But, you can start small and buy the different books piecemeal. These books provide a wealth of insights from the Church Fathers. The commentary on the book of Acts added a new dimension to my summer Bible study (maybe the subject of a future blog post).

Do not let the brevity and unremarkable quality of this product review undermine the wonderful products I’ve linked to. They are great and if you have someone in your life that loves theology and an Old Fashioned perhaps they might like some of these products too.

The Sabbath

According to a recent CDC Report on the mental health effects of COVID-19 lockdowns, 1 in 4 young adults (ages 18-24) have had suicidal ideation. Even before COVID-19, many of you may also know about the so-called “deaths of despair” that refers to the rise in mortality among middle-aged white men starting in the late 1990s from suicide, overdose, chronic liver disease or cirrhosis.

With so much existential anguish, my book review is on a slim little book called The Sabbath by Abraham Joshua Heschel. The book is packed with zeal for a day Heschel calls, “a palace in time”,

“The seventh day is a mine where spirit’s precious metal can be found with which to construct a palace in time, a dimension in which the human is at home with the divine; a dimension in which man aspires to approach the likeness of the divine. For where shall the likeness of God be found? There is no quality that space has in common with the essence of God. There is not enough freedom at the top of the mountain; there is not enough glory in the silence of the sea. Yet the likeness of God can be found in time, which is eternity in disguise.”

Heschel divides the world into two categories: space and time. Both are means to understand God. The toil that we experience happens in space and allows us to better understand God as Creator. But, Heschel spends more pages writing about time.

In thinking about time, there is a tension because Genesis 2:2 reads, “On the seventh day God finished his work,” Exodus 20:11 reads, “In six days the Lord made the heaven and earth.” How is it possible to finish making heaven and earth in six days but not to be finished until the 7th day? The rabbi’s resolved this tension by stating that menuha was created on the Sabbath. Menuha is not an object that we create that can be grasped in our hands. Heschel states menuha means something akin to “tranquility, serenity, peace, and repose”. God created an architecture in time and menuha is the special attribute of the seventh day.

The fact that God blessed the seventh day, and not the other days, should hint that the seventh day is special. What this means is that time is not homogeneous —some time is different than other time. So it seems there is time for creating and time for remembering that we were created. On the seventh day we remember our relationship with God, that remembrance is a refuge from a fury of sound and distraction. What is more, this remembrance carries us through the rest of the week.

This was a great joy for me to think about The Sabbath today. It was also a reminder. If you are like me and still trying to find your groove amidst Coronavirus, consider setting apart one day from the others. Create a palace in time, a time that is different from all the other time. Remember, time is not homogenous. Your palace will look different depending on your position in life but it should be restorative and help you to remember and be grateful.

At one point, Heschel asks, “. . . is there any institution which holds out greater hope for man’s progress than the Sabbath?” I do not know. But, genuine rest — not diversion — seems necessary in the tensions of our present moment.

Certificate of Need Laws

In 1960 $1 out of $20 in the United States was spent on healthcare. Sixty years later, nearly $1 out of $5 is spent on healthcare.

A dozen facts about the economics of the US health-care system

There are many reasons for this increase in spending (e.g. demographic shift, increased income, and more). In this post, I want to focus on competition in the healthcare industry. There is an excellent Brookings Institution piece from earlier this year on competition in healthcare. Martin Gaynor writes,

“The research evidence shows that hospitals and doctors who face less competition charge higher prices to private payers, without accompanying gains in efficiency or quality … the evidence also shows that lack of competition can cause serious harm to the quality of care received by patients.”

If there are benefits to competition in healthcare, the question becomes how we can increase competition. One of Martin Gaynor’s proposals is to eliminate or reform Certificate of Need (CON) regulations that require health care providers to obtain permission slips from a state health planning agency before the provider opens a new facility, purchases new equipment, or supplies a new service.

These laws were enacted federally in 1972 in an effort to control rising healthcare costs. The logic was that healthcare providers who are reimbursed for services would have incentive to invest in facilities and equipment that allows them to perform more services.

There is mixed evidence that CON regulations have achieved their goals. But, what is clear is that requiring permission erects barriers to entry. Moreover, these barriers to entry become more pronounced if the state health planning agencies are captured by existing hospital interests. Consumers like competition but suppliers do not.

In a new paper titled, “The Impact of Certificate of Need Laws on Heart Attack Mortality: Evidence from County Borders”, economist Kevin Chiu reports that the introduction of Certificate of Need Laws resulted in 6-7 additional heart attacks per 100,000 people. He focuses on heart attacks because the acute nature of heart attacks means you can’t “shop for care”.

The paper is an improvement over the existing literature because it zooms in on counties along state borders with and without CON regulations to get more apples-to-apples comparisons. For example, there could be regional trends that make a Florida to Washington comparison less valuable than a Florida to Georgia comparison. He also performs a number of tests that make the result more believable. For example, CON regulations have zero impact on suicides that normally take place outside the hospital.

Competition reduces prices, increases quality, and encourages innovation. Certificate of Need is one way in which laws have reduced competition in healthcare. The consequences are life-and-death without much apparent upside from cost containment. Currently 35 states still have Certificate of Need Laws. If you’re interested in finding out where your state stands, check out this map from the National Conference of State Legislatures.

Economists and Cocktail Parties

Sometimes I remark to my students, “This is why economists don’t get invited to cocktail parties.” This post is about that.

From 2008 – 2011 I taught a course at Florida State called “Economics of Compassion”. It is a course co-designed with my mentor Mark Isaac. The class discusses historical and contemporary problems related to poverty, both at the domestic and international levels. Having heard about the course, the Social Justice Living Learning Community at Florida State wanted me to teach the course to their incoming freshman. 

It was quite different from other courses they were taking that seemed to talk in terms of solutions without regard for scarcity. My role was to put parameters on their utopia and get the students to think carefully about a couple questions related to issues they care about:

  • Compared to what?
  • What happens next?

The students seemed to like the class, but, for a committed group of people who want to change the world it was also quite a downer. It was a downer for them the same way economics is a downer for people at cocktail parties.

We start with scarcity. Scarcity is a fact of life. There are never enough resources to satisfy everyone and there will always be unmet desires. For the economist, the notion of trade-offs — you must give up one thing to get another — flow from this scarcity. It means that anytime a solution to a problem is attempted you are always giving something up.

For example, the death of George Floyd this summer sparked conversation about how to reduce police violence. One approaching to curbing this important social problem is to eliminate or reform qualified immunity (QI). This is a legal doctrine intended to protect police and others from frivolous lawsuits. The problem is that QI has made accountability extremely difficult. The logic of reforming QI is that doing so will increase accountability, raise the cost of police violence, and therefore lead to less police violence. That’s good economics.

But, remember there are trade-offs. In a new world where police are opened up to lawsuits, local government might need to increase police compensation to retain or attract qualified men and women. Where does the money come from? Can you reduce the number of police and/or will you have to raise taxes? There are other trade-offs too. Will police become more reluctant to enter dangerous neighborhoods? After all, there is a greater chance that inserting themselves into a risky situation will lead to financial ruin.

Moving from heavy to light. If you haven’t seen Yoram Bauman’s comedic schtick on Principles of Economics Translated, take five minutes and check it out here. As he illustrates, “economic profit” depends on alternatives: A Snickers bar valued at one dollar with no alternative implies an economic profit of $1. However, if the alternative was M&Ms that you value at 70 cents then your economic profit is 30 cents … Your profit from pursuing one course action declines as the value of the alternative increases.

By accounting for trade-offs the net benefit of a course of action goes down. When we bring up trade-offs in conversation, economists effectively eat into people’s mental profits for some course of action.

Another thing to consider, when you’re intervening, that intervention can sometimes have dramatic side effects that you didn’t even think about. You cannot merely move people around as if they’re pieces on a chessboard (head nod to Adam Smith).

For example, it is possible that eliminating qualified immunity leads to less police violence but more neighborhood violence overall if police decide not to insert themselves into situations that could be more costly. Beyond this hypothetical example I have been using, there are loads of other unintended consequences economists talk about.

Thinking in this way is the bread and butter of economists. This is how we see the world. But, don’t try this in social settings. As EconTalk host Russ Roberts once commented (this podcast), a pleasant picnic veered into chilly company when he pointed out someone’s proposed minimum wage could have negative employment effects. The others at the picnic started to inch away from him on the picnic blanket. At parties, I’ve had people talk about the idea that a tax won’t effect them because it is only on sellers, homeowners, etc. I’ve had to ask myself, “Is it worth it to bring up that the tax is likely to be passed through?”

So while my last couple posts sing the praises of economics, I should let you know, at cocktail parties people don’t like to think about scarcity, tradeoffs, and unintended consequences. Economists like to think about the seen and unseen. Many others, especially in social settings, would rather the unseen remain unseen.

Experience at a lower price

In an earlier post, I discussed the idea that memorable and persuasive arguments have the force of logic, credibility, and emotional appeal. Economists who stink at emotional appeal do so to their own detriment. One strategy to make an emotional appeal is to use the power of beauty to promote a sense of wonder and awe (see here). In this post, I discuss the use of experience in the classroom. 

This idea really hit home with me in an EconTalk podcast with Milton Friedman. In that episode, Friedman suggested that public appetite for price controls was low — not because economists educated the public on their dangers — but because people still remembered the long waiting lines for gasoline. Once those memories faded, or the people who experienced those lines died, there would be a renewed desire for price controls.

Gas Lines Evoke Memories Of Oil Crises In The 1970s : The Picture Show : NPR

Experience is important. But, the gas lines were a costly way to learn that lesson, especially if the lesson needs to be re-learned in every generation. How can we give students experience at a lower price? We can tell them stories from experiences around the world. I am in favor! I love case studies and their thick descriptions. At some point I will blog about my favorite stories to tell. But, for this post, let me propose the widespread use of classroom experiments.

The basic idea of a classroom experiment is to embed students inside an economic environment and give them a goal to maximize. For example, in an experiment on supply and demand students are embedded in a market institution and serve as either a buyer or seller. Their goal is to buy something at a low price or sell at a high price. These experiments can be run either with paper-and-pencil or electronically.

Talking Through the Results: Competitive Market Game

To show how these experiments can result in emotional appeal, let me recount a story. In a unit on price controls, I had students participate in a market without price controls followed by a market with a price ceiling. Back when I taught the Economics of Compassion class at FSU — specifically to the Social Justice Living Learning Community — I remember the following (quoted from here): 

“The market without a price control demonstrated smooth convergence to the equilibrium prediction. The double auction with the price ceiling was chaos. Once the frenetic burst of trades stopped, buyers started yelling at sellers, “Post some asks!” and “Why aren’t you selling anything? We’re posting bids, why aren’t you doing anything?” The sellers of course shot back, “If we sell [at the max price] we will lose money!” It was chaos! I remembered that visceral reaction, the frustration, and the silence as all students waited with no trades happening … tick-tock, tick-tock, until the clock timed out. They felt the shortage. Students would stop me on campus (sometimes years later) saying they remembered playing that game.”

Experiments enhance credibility through engaging students in theory testing. But, to close I want to emphasize that experiments also help provoke visceral reactions and audible sighs. Experiments can help provide experiential punch in different institutional contexts at a low price. All of that connects students to the material in a way our logic and credibility alone cannot do.

On Co-production

In my undergraduate training, I never came across the term “co-production” but after learning about it a few years back, I find I return to the concept frequently. Co-production is the idea that a consumer’s input is important to production. The term was coined by Nobel Laureate Elinor Ostrom. Examples include:

  • Police protection – We lock our doors, buy security systems, and engage in neighborhood watch groups.
  • Fire protection – We buy appliances with improved safety features and have fire extinguishers in our homes.
  • Education – Parents involve themselves in the education of their children through practice, ensuring the child does their homework and gets plenty of sleep.

Once you start to think about co-production, you see it everywhere. For example, I am currently teaching health economics and it is not uncommon to come across graphs like this (see below) from The Washington Post. Some suggest these differences highlight how the U.S. needs a less market-oriented health system. But, when I see the graph, I think of all the ways in which the United States is different. Specifically, I question the extent to which we are good co-producers of our health.

In the United States, 36 percent of adults were considered obese in 2016. The most among OECD countries. You can present similar data on drug use disorders, alcoholism, mental health disease burden, and so forth. I do not mean to suggest we have equal control over all of these outcomes but we are often not powerless.

The debate about government v. market provision of health services is a discussion for another time and sure to feature in the upcoming presidential debates. But, I do think any intervention in the health sector that does not address co-production will oversell and underdeliver.

Economists, look to beauty

When you mention you teach economics, who among us hasn’t heard someone blurt out, “Oh, I hated that class!” or sigh, “I just never ‘got it’”? There are probably many reasons for this but I suspect their teacher did not have an appreciation for the “rhetorical triangle” or Aristotle’s modes of persuasion: Logos (logic), ethos (credibility), and pathos (emotion). Economists often act like logos and ethos are enough. They are not!  When we construct arguments with only the two it’s like trying to create a stable two-legged stool. Good luck, something is missing.

Economists need pathos to create an argument that is memorable and doesn’t fall apart. In this short post, I want to explore the role of beauty to make that emotional appeal.

Christian author Donald Miller writes, “Sometimes you have to watch somebody love something before you can love it yourself. It is as if they are showing you the way.” How can we show students our love for economics and the beauty of the economic way of thinking? Through discussion of what excites us. From helping students to see economics “in the wild” of everyday life to helping students see the magic of markets. All of this improves their understanding of principles and economic concepts. First, let me discuss the mundane and then we can discuss the magic.

When I was an undergraduate, every Friday night I would head to Sonny’s BBQ with some buddies. On Friday nights they had the all-you-can-eat baby back ribs. Normally, the rib re-orders came promptly and the sweet tea refills flowed. But, on one particular Friday night the service was pretty bad and we talked over empty plates and cups.

Why? It wasn’t busier than normal. They didn’t seem understaffed. Our waitress was paying attention to other tables but not our table. Why? Well, our normal group was a party of four but we invited a couple more friends that week. For six person tables, automatic gratuity kicked-in and the waitress was paying attention to tables where her gratuity could still rise or fall with the quality of service. She had us locked in at 18 percent, and being poor college students, she likely didn’t expect us to tip more than 18% if she gave good service. Economics in the wild! The power to explain the mundane.

Share your own stories with your students (or on this blog!). When is the first time you saw economics in the wild? When is the first time you realized you were an economist? For inspiration on the mundane, check out Robert Frank Economics Naturalist and his conversations with Russ Roberts on that book as well as dinner table economics.

For a transition from the mundane to the magic consider having students read, “I, Pencil” by Leonard Reed. Though the video with Uncle Milt is wonderful too. The remarkable journey of a simple pencil!

Build on those ideas either before or after you have them read “I, Pencil” or watch Milton Friedman. Hand out chocolate chip cookies to students and ask them to describe in as much detail as possible how to make a chocolate chip cookie (no, not their grandma’s recipe). Then, help them to see something so simple like a cookie required vast networks of exchange coordinated through a price system that nobody controlled. Inconceivable!

For another great magical treatment of economics, check out Russ Roberts’ poem, “It’s a Wonderful Loaf” (accompanying video on the same site). The emergence of order from seeming chaos is profound.  

We rarely feel more human than when we are on a journey. Beauty has the power to place us on that path of inquiry that awakens a desire to know more. In that search for beauty, we shouldn’t discount the mundane. I tell students there are few things more exhilarating than seeing economics in the wild. You feel like you have a decoder ring to explain the puzzles of our social world. On the other hand, I have always found the magical explanations special and profound, to be appreciated like works of art. Yes, they increase understanding but they also evoke a sense of awe. Both the mundane and magical are beautiful and economists should look to beauty more. Our arguments will be better if we do.