Left and right

Recently The New Republic reviewed a book that had the thesis that "conservatism is always and everywhere a resentful attack on those who seek to make the world more fair." The reviewer quotes the book as saying, “Conservatism has been a forward movement of restless and relentless change, partial to risk taking and ideological adventurism, militant in posture and populist in its bearings, friendly to upstarts and insurgents, outsiders and newcomers alike.” Despite this, "all conservatives are reactionary."

The reviewer ultimately dismisses the thesis of the book and its claim that there are no real differences between the social conservatives and the libertarians, the Randians and the evangelicals. I suspect that the book tells us much less about conservatives than about the author. Conservatives simply do not worry about income and wealth inequality in the same way that the Left does. There are at least three reasons for this. First, income inequality, which is the focus of the left, is only one dimension of inequality and rarely the most important. Some people are healthy some are not, some people have loving parents and some people have abusive parents, some people have exceptional athletic, artistic, or intellectual ability and others have little ability. Even if it were possible to totally eliminate income inequality, the other forms of inequality would remain and they are more important than income inequality. Second, inequality seems more important if you view the world statically. The right tends imagine the world as dynamic and does not worry about inequality if there is mobility. They worry about immobility more than inequality. Finally, those on the right suspect that attempts to reduce inequality derived from market outcomes tends to increase inequality derived from the political process, and they fear that form of inequality more because it comes with coercion that is missing from market-derived inequality.  The gap between Bill Gates and the average citizen is much less than the gap between President Obama and the ordinary citizen.

Rather than seeing the differences between left and right as founded on differences in how each side views inequality, an alternative and in my view a far more insightful way is to consider how they view the marginal costs and benefits of more government. Aristotle argued that virtue was in the middle--either too much or too little of something could be bad. Economists get to the same idea with the concept of diminishing returns. The cost of most things not only rises as we get more of it, but the rate of rise increases. Though the benefit of most things rises as we get more, the rate of rise decreases. Without this idea economists would have a hard time discussing profit-maximizing for business or utility-maximizing for a consumers.

The figure below applies this idea to government. Not everyone would agree that this diagram is appropriate. An anarchist, for example, would have the cost of even a little government as greater than the benefit of even a little--there would be no intersection of the lines. But the vast majority of people would find this diagram captures at least a simplistic view of the matter.

People who believe that the amount of government is too small usually argue that much private spending is pointless or wasteful, while there are important collective goods that are not being produced. It was this argument in several books that made John Kenneth Galbraith famous. For people with his position, the country is currently to the left of the intersection. On the graph the labels for socialists and liberals are placed to indicate where these groups believe the county to be. They believe an expansion of government brings more benefit than it adds to costs.

Libertarians and most other conservatives believe that the country is to the right of the intersection. Even if some amount of government is essential in a modern economy, more government may not be better. If the size of the government were cut, there would be a reduction of benefits from government activity. However, if the funds needed for this government activity were left in the private sector, they would be used for more important things than they are used for by the government.

Some on the right go even further, however, They argue that the government has become so big that additional government activity does not have small benefit but it is harmful. Some of those who identify as supporters of the Tea Party movement seem to believe this, and their label indicates where they think the country is.

This approach is a simplification because the government does many things, and both those on the left and right may argue that in some areas the government does too much while in other areas it does too little. Nonetheless, it captures an essential difference between conservatives and liberals. Conservatives have more trust in market processes than in political processes and worry that the scope of government is too large. Liberals have more faith in political processes than in market processes and worry that the scope of the market is too large.

Problems in academia

The Wall Street Journal has a review of a book critical of higher education. A sample paragraph:

A lot of criticism of academia hasn't stuck in the past, Mr. Hacker and Ms. Dreifus imply, because people have almost unthinkingly believed in the economic power of the degree. Yes, you didn't learn a lot, and the professors blew you off—the reasoning went—but if you got a diploma the job offers would follow. But that logic may no longer be so compelling. With the economy tightening and tales of graduates stuck in low-paying jobs with $50,000 in student loans, college doesn't look like an automatic bargain.

 There is also an interesting comment on salary differences in academia, which is the center of concern about fairness in pay:

Take the adjunct issue. Everyone knows that colleges increasingly staff courses with part-time instructors who earn meager pay and no benefits. But who wants to eliminate the practice? Administrators like it because it saves money, professors because it saves them from teaching labor-intensive courses. And adjuncts themselves would rather continue at minimum wage than leave the profession altogether. In a "coda," Mr. Hacker and Ms. Dreifus declare that "it is immoral and unseemly to have a person teaching exactly the same class as an ensconced faculty member, but for one-sixth the pay."

It is interesting that although the faculty at the elite colleges fret over the inequalities of American, they are an important part of the system that promotes inequality. 

OPM or other people's money

Margaret Thatcher once said, "...Socialist governments traditionally do make a financial mess. They always run out of other people's money." Her statement has been paraphrased as, "The trouble with Socialism is that eventually you run out of other people's money."

In the past week we have watched what happened as Greece ran out of other people's money because not enough lenders will extend credit. Greece almost certainly will not be the last European country to be in this situation.

It is also worth noting that another name for systems that run out of other people's money is "Ponzi Scheme." Ponzi schemes are often very popular in their early stages and people who get caught in them are very resistant to any warnings that what seems to be too good to be true usually is. Too few people realize that the social welfare systems of the West are Ponzi schemes that depend on ever-increasing population growth. They are not sustainable with the low fertility rates of the industrialized world. Everyone who looks at the data recognizes this, but no politician dares to act on it.

Is fairness a social construct?

Economists have used the ultimatum game to discuss fairness. In this game one player splits a sum of money and the other player either accepts or rejects the split. If the second party rejects the split, neither party gets anything. Many people in the role of the second player will reject splits that they consider unfair to punish the first player even though they suffer a loss as a result.

Joseph Henrich in "Does Culture Matter in Economic Behavior? Ultimatum Game Bargaining Among the Machiguenga of the Peruvian Amazon" (American Economic Review, Sept 2000 pp 973-979; pdf here) found that a pre-industrial group in the Amazon basin did not play the game in the same way most groups in the U.S. play the game.

Machiguenga proposers seem to possess little or no sense of obligation to provide an equal share to responders, and responders had little or no expectation of receiving an equal share nor any desire to punish unequal divisions. The modal offer of 15 percent seemed quite “fair” to most Machiguenga.
This evidence generates at least three important questions: (1) Where do people get their rules, expectations, or notions of fairness from? (2) Why do these rules, expectations, and notions seem to vary among groups of people? and (3) How much can these varying rules, expectations, and notions affect real economic behavior? (p 978)

This result raises the question of whether fairness is socially constructed. If it is, why should we pay attention to it?

A big loser

The Wall Street Journal has an article about a man who lost over $100 million in Las Vegas.

During a year-long gambling binge at the Caesars Palace and Rio casinos in 2007, Terrance Watanabe managed to lose nearly $127 million.

Should we feel sorry for him?  Las Vegas exists to separate fools from their money. "The money you bring to Las Vegas stays in Las Vegas."

Cash for clunkers

The Cash for Clunkers program that ran out of money after just a few days in operation is an interesting program from many perspectives. It is firmly in the tradition of some of the New Deal Programs--it immediately brings to mind the agricultural program that paid farmers to kill livestock. It seems to have a considerable amount of political appeal because it seems to be effective.

I have not read economists on the program, but I am confident most of them, other than some of the extreme partisans, would give it thumbs down. Economists have certain criteria by which they evaluate programs. One of them is equity or fairness. Who does the program benefit? The problem that this program has from an equity point of view is that it seems largely arbitrary. It is as if the government held a lottery and gave random people several thousand dollars. To qualify, one must have an car that has low value. Lots of lower and middle class families have those, often as a second or third or fourth car. I do not know enough about the rich to know if they tend to have old clunkers. Then one must be willing and able to buy a new car. For some of the poor, that may not be an option--they will not be able to make the payments. As time goes one, someone will figure out if this program subsidized the rich, the poor, or the middle. My guess is that it was a subsidy that went largely to the middle--or to the dealers, who were able to charge higher prices because of the program.

A second criteria is efficiency, which asks the question of whether the program increases value. Here the program is clearly a disaster because it destroys things that have value. The cars traded in with the program must be destroyed, as must their parts. The program is taking a lot of cars that are worth a couple thousand dollars each and converting them into scrap worth a few hundred dollars each. This brings up a secondary equity point. For many of the poor, the purchase of used cars is their best option in getting vehicles. This program will tend to raise the price of older used cars because it reduces their supply. The poor will pay more, and most economists believe that programs that hurt the poor should be condemned on equity grounds.

However, are these bad effects worth enduring for the good of stimulating the economy? We can see that sales of autos have greatly increased as a result of the program--so much so that the program ran out of money after just a few days in operation. A key question here is to what extent were those sales new sales, sales that would not have taken place without the program, and to what extent were those sales simple shifted in time. If you wanted to buy a new car and had a car that qualified as a clunker, you would have had a strong incentive to wait until the program was in force. Or if you were planning to buy a new car sometime in the future, you would have had a strong incentive to move the purchase forward in time to take advantage of the several thousand dollar grant. It is not clear that the program did more than shift sales in time, and if that was its primary effect, it was meaningful stimulus.

Addendum: People find ways to game the system, another example of people responding to incentives.

Update: Econbrowser had a post on the program with many comments.