Here's another thought relating to this post. Our basic notion of social insurance is that each of us is placed, at birth, in a set of circumstances beyond our control. Before birth, we're not able to write insurance contracts that will compensate us for being born poor, for being born with a serious disease or birth defect, or for other possible bad events. There is then some role for the government in stepping in to provide the insurance that the private market cannot provide, by redistributing income from the rich to the poor, providing health care, or other interventions.
The problem we have to deal with is that, as we teach students in Econ 101, prices help to allocate resources efficiently. To a degree, people are rich by virtue of the fact that society puts a high value on their services, and society puts a high value on their services because these are the services society wants. To provide the services that society wants, people have to be motivated to provide them. Becoming a skilled brain surgeon requires time and effort, and people won't do it if there is no payoff.
Thus, what we have here is a very standard economic problem. We are trading off insurance with incentives. The same problem occurs in employment contracts, and in designing unemployment insurance; it's what canonical principal-agent problems are about.
Now, I don't think this is the way a lot of people, particularly non-economists, think about the problem of income distribution. For them, it seems to be all about theft. On the one hand, some people look at CEOs and bankers, for example, and think that these people are rich because, effectively, they have been stealing from the rest of us. As economists, we know that theft is a serious problem. At best, the time and effort of thieves is a pure social loss. This time and effort simply moves wealth around and the time and effort could be put to productive use. At worst, theft provides a disincentive to the productive people. Why work if others are going to steal your wealth? On the other hand, hard core libertarians, for example, are worried about another kind of theft. For them, the government is simply a mechanism for theft. Whoever runs the government can use its power to steal wealth from the people who have it. From a libertarian's point of view, the government is a parasite, and a good parasite can in fact extract resources from its host without killing it.
What are the lessons here? Theft exists, but we should not be too quick to ascribe bad motives to the rich, or to the government. That said, it is certainly legitimate to ask whether some kinds of financial activities, the creation of complex derivatives for example, are more about obfuscation - theft, effectively - than socially desirable innovation. As well, we have to watch our government carefully. Dictators with armies are well-known for their confiscatory exploits, but democratic governments can go overboard too.
There are often tradeoffs with insurance, but it must always be remembered that the goal is to maximize utility, or expected utiltiy, this kind of thing, at least to me, and I think most people if they were explained the concepts well.ReplyDelete
With fire insurance you may get a tad bit less carefulness about fire – maybe, because there are strong incentives besides the monetary ones – but expected utiltiy is far higher because the risk of financial disaster plummets.
Thus, it's really efficient to have the insurance, because it does what really counts, increases total expected utility given the inputs you have to work with.
If what you really care about is maximizing total societal utils, then social insurance, smart social insurance in judicious amounts, is highly efficient. It gives you higher output (of total societal utils) for your given inputs – plus, and this is huge, it pools risk, and so it encourages high expected return risk taking which is high risk for an individual alone, but not for society as a whole, an example is starting an entrepreneurial venture. And it lowers negative externalities, like lower crime and disease from social insurance.
Also, with regard to that Gruber and Saez article that annonomous mentioned, I'm still looking at it, but it looks like that’s about tax elasticity due to greater use of deductions and loopholes, not working less. The Gruber quote I use from his text book is obviously about work hours, "the total amount of income actually generated through work or savings does not respond in a sizable way to taxation."
"There is then some role for the government in stepping in to provide the insurance that the private market cannot provide..."ReplyDelete
I would guess the market actually can provide insurance for birth-defects, at least theoretically; the "insurance" a market cannot provide is usually not insurance; it's charity.
Can the charity be provided by the market? Depends on the definition of the market, it definitely can be provided by the people. And, as is typical for these cases, if a society is poor, the state cannot provide the charity. If a society is rich, the state can tax people and do it, however there would be _a lot_ of charity even without state. If a society is corrupt, you will have huge corruption when providing forced charity.
I guess it was Buchanan and Tullock (?) who wrote about the constitutional choices and that people may ex-ante be wanting to agree on some redistribution scheme. One can question the validity of the argument though - if asked about drug prohibition, one would get probably significant agreement though the results would be likely abysmal...
Anyway, I still wonder why 'unemployment insurance' is called 'insurance'....
I guess you can call it charity if you want, but it looks like insurance to me. You say that poor societies can't provide charity, but it seems to me that even primitive (and quite poor) societies have insurance arrangements. People are provided for in the event their crops fail, children are provided for if their parents die, etc.ReplyDelete
To comment on your original post that you link to....you say:ReplyDelete
'Who is to say what the distribution of income "should" be? Who should be rich and who should be poor? In a free society, that isn't something we want the government to decide.'
You realize the irony of this, right?
Let me rephrase what you said:
"In a free society, we SHOULD not let the government decide."
There's that word again...turns out your normative judgment is no less arbitrary or valid than the original commenter's.
Maybe you SHOULD work harder on "not making value judgments."
"Becoming a skilled brain surgeon requires time and effort, and people won't do it if there is no payoff."ReplyDelete
Imagine cleaning toilets in a sports stadium and being a brain surgeon paid the same, and you had the intellectual capacity to do either one. Which would you choose?
"Imagine cleaning toilets in a sports stadium and being a brain surgeon paid the same, and you had the intellectual capacity to do either one. Which would you choose?"ReplyDelete
You notice that's not the choice I'm talking about. So, suppose that cleaning the toilets and doing the brain surgery pay the same. Now, do I want to drop out of school at 16 and clean toilets, or do I want to spend 8 more years (not sure if that's what it takes, but suppose) in school to become a brain surgeon? Maybe with all the money I would have spent going to school and staying up late studying I can travel the world for 8 years, learn to surf, hang out in bars, and have a good time, before I have to even start thinking about cleaning the toilets. Maybe my mother would like me to be a doctor, but I explain the choices to her, and she starts to boast about her son who will be making a load of cash cleaning the toilets. Now, by the time I've used up my savings on my world trip, I'm ready to come home and clean the toilets. It's actually not so bad. I wear nose plugs, and become accustomed to all the piss, shit, and barf left behind by all the football fans. Besides, brain surgery is a pretty messy job too (brains and blood, yuck), and the hours are a lot longer - more stress as well. Actually, I'm doing pretty well in the toilet cleaning department, so I cut down on my hours so that I can spend more time playing golf. I can still afford the private club fees anyway. I'm pretty happy, I have lots of friends, and life is great.
"Maybe you SHOULD work harder on "not making value judgments."
Tricky business, isn't it?
That was kinda my point...you're an economist pretending not to make value judgments, pretending to apply purely economic rational for problems which are not neither purely rational nor purely economic. I understand why you do it (you're an economist) but did it ever occur to you that maybe that's the problem?ReplyDelete
You spout off about "freedom" as if it is inversely proportional to the redistribution of wealth. Hint: it isn't. That is just your preference. Some others think economic mobility ("opportunity") is essential for "freedom," not just a tax rate that approaches 0%. I doubt i'd feel less "free" in denmark than somalia.
Are we at least in agreement that your initial statement ("Becoming a skilled brain surgeon requires time and effort, and people won't do it if there is no payoff.") is not at all correct? Unless by "payoff" you mean something else altogether?
PS. You know surgeons only make so much because they are a government enforced monopoly, correct? If this wasn't so - how many do you think we'd have and how much would they make? Do you think that maybe more people would do it?ReplyDelete
Any chance the number of brain surgeons is limited by the number of people with the ability and the skill to do it, instead of the effort to become one?
Why don't you personally maximize your revenue? Why are there any economics teachers who could be rich bankers instead?
Are wall street bankers the same story as brain surgeons in your estimation? You ever meet anyone stupid on wall street?
1. I'm not pretending anything. Economists can tell you a lot about the consequences of particular policies. If you do this, here are the consequences. These people will be better off, these ones will be worse off. Some policies which might seem like good ideas - rent control for example - look particularly bad when we apply some simple economics. Now, when it gets down to making real world policies, and deciding what is best, if we applied a rigid notion of what we would call Pareto efficiency - everyone has to be better off - then we would not implement anything. Making policy in practice requires making value judgements. Some are going to be better off, some worse off. You can't avoid that.ReplyDelete
2. "You know surgeons only make so much because they are a government enforced monopoly, correct? If this wasn't so - how many do you think we'd have and how much would they make? Do you think that maybe more people would do it?"
Sure, but that's another issue.
3. "Any chance the number of brain surgeons is limited by the number of people with the ability and the skill to do it, instead of the effort to become one?"
Right again. Of course ability matters, but it's not "instead of," since the cost of becoming one has to matter for whether I want to become one.
"Any chance the number of brain surgeons is limited by the number of people with the ability and the skill to do it, instead of the effort to become one?"
Academic economists are paid much better than philosophers, for example. Why? It's because we can work on Wall Street. Many PhD economists have done it; many academics have moved to Wall St. Some people do both. Ask Gary Gorton.
"Are wall street bankers the same story as brain surgeons in your estimation? You ever meet anyone stupid on wall street?"
I've met many dim bulbs in my life. Some work at Harvard, some are brain surgeons. Some work on Wall St.
I still think you don't realize your "time and effort" hypothesis is incorrect. Another example: people who are famous for no real reason - say, "reality tv stars." How many of them do you think undertake it not because of some sort of decision calculus based on time/effort, but out of pure vanity? And luck into it with no education, but are compensated well?ReplyDelete
And as you said about SOME people choosing to be stadium workers - you'll also concede that in said example, SOME people would still choose to be brain surgeons, correct?
Finally, if you'd stick to just "economic analysis" and "telling us what the results are" instead of making value judgments ("low redistribution = freedom") then we never would have had to engage in this discussion...
BTW, i don't recall where i said that we had to choose only options that make us all better off - although i'm not sure i agree that said policies don't exist. Its impossible, as far as i can tell, to determine exactly all of the different outcomes of any policy (not that i think this should prevent us from engaging in policymaking). I understand that its a high probability that any policy would probably make some people worse off in some way, its not a guarantee. Just as taking taxes from me makes me "worse off" at first glance, i actually end up better off with more efficient public goods than i could otherwise purchase on my own.
Take perfect equality - if a policy was implemented that took from all equally, we all could easily be better off. With perfect inequality, a policy that affected the one person with everything would always make him worse off. I'm willing to bet that the closer we get to perfect equality, the closer we can get to implementing pareto optimal policies.
"I'm willing to bet that the closer we get to perfect equality, the closer we can get to implementing pareto optimal policies."ReplyDelete
Steve, can you make people choose some sort of name for themselves? I can't keep track of who is making what argument and who is replying to whom.ReplyDelete
(Thank goodness I am not a brain surgeon, huh?)
Yes, it would be good if those who chose to remain anonymous (why I cannot quite figure out) would give themselves a number. In the Great White North, we would say "Good I'm not a brain surgeon, eh?"ReplyDelete
Yeah, I find the anonymous thing interesting too. Some of these people seem like they could be in the field. I'm curious as to their reasons for not revealing themselves. Any annonymi want to offer their explanations?ReplyDelete
It's also interesting that you seem to have more annonymi who are possibly in the field than other blogs, wonder why.
We need an enforcement mechanism.ReplyDelete
Reasons for remaining anonymous?ReplyDelete
Two words for you: Witness protection.
I could imagine many reasons for anonymity, but obviously the annonymi won't tell us, as that would defeat the purpose. I'm very forgiving though. If I bore grudges against everyone who criticized what I said, that would be a very heavy burden of grudges. Who needs that?ReplyDelete
Being anonymous allows you to run the risk of saying stupid things without having it registered forever in the internets that you were the one who said it.ReplyDelete
I've just decided to claim two standards:ReplyDelete
Commenting is like informal conversation. It's not a vetted final product, and like informal conversation it's largely for the learning process, partly to get any mistakes out of your system, to expose them and learn from them. Posting on your own blog is more of a vetted final product. One reason I comment vastly more than I post.
If you couldn't discuss anything until you had thoroughly vetted it there's so much you would never have time to discuss, and learning and discovery would be greatly slowed.
In any case, it would be nice to know who the messengers are and to establish track records for them. In such a complicated world you often cannot judge the veracity of a message as well purely by the content of the message.
What about requiring that people adopt pseudonyms?ReplyDelete
1. Yes, pseudonyms would be useful. Not sure if it's possible to require it.ReplyDelete
2. Richard, I disagree about one thing. When I write a blog post, I'm in part disciplined by not wanting to look stupid. I want to make sure that I'm at least being factually correct. However, if this process is useful, that's in part due to its immediacy. When I write a journal article I'm careful to appropriately attribute ideas, through citations, I spend more time on the writing, etc. A blog post I write quickly, I go through it once for typos, and off it goes. This is all a learning exercise, and you have to cut people some slack. A little mud gets slung around, but you shouldn't worry too much about getting hit by a few mud balls. Maybe anonymous folks could be a little more bold and tell us who they are. But it's OK if you're not ready for that.
Sorry, all the anonymous posts on this post were by one person, SM. The owner of the blog can can verify with IP addresses if necessary.ReplyDelete
I choose to remain anonymous because 1) i believe ideas should be judged on their merits (argument from authority anyone?), and 2) it was an available option. If i had to log in, i probably wouldn't have responded.
In the future, i will start my posts with "SM" to make everyone happy.
'"I'm willing to bet that the closer we get to perfect equality, the closer we can get to implementing pareto optimal policies."ReplyDelete
How much closer do we have to get to perfect equality? Or? What is your exact question?
You said you wanted to bet. I said, "how much?"ReplyDelete
SM just claimed all the Anonymous posts, but some were mine. I guess this is what happens when you don't sign your comments ;)ReplyDelete
Yes, in spite of SM's claims to altruism, he/she doesn't mind laying claim to the comments of others.
Ok, i stand corrected - all the anonymous comments of substance were mine, which can be verified. The two that were not mine were the two that contained no substance, but instead were about signing comments - which i thought would be obvious from inference...but, for clarity, the only two anonymous comments that were not mine when i said "all" were mine...ReplyDelete
Being anonymous allows you to run the risk of saying stupid things without having it registered forever in the internets that you were the one who said it."
What about requiring that people adopt pseudonyms?"
Not sure exactly why one would assume i "laid claim" to those posts...would i be closer to my nobel prize if i could claim their wonderful prose as my own?
You can remove yourself from the soapbox RV...
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