Friday, September 16, 2016

Edward Glaeser VS John Quiggin

Who doesn't love a good juxtapose?

Edward GlaeserIf You Build It...
John Quiggin: Face the facts:

I'm pretty sure that Glaeser wins this round.

Am I biased?  Well yeah.  I'm biased towards markets... but I'm also biased towards Quiggin.  He's my favorite liberal economist.  So my biases cancel each other out.  Yup.  I love markets just as much as I love Quiggin.  Errrr... well...

Sooner or later the advocates of reform will have to answer the Edison-Blair question: “What works?” And what works is traditional public provision. Through all of these failed experiments, the public sector, much-maligned and chronically underfunded, has carried on with the hard work of educating young people, treating the sick and providing the vast range of services needed in a modern society, on a the basis of an ethic of service to the entire community, and not merely those who can pay for premium service. - John Quiggin, Face the facts:

Does public provision really work?

As I’ve argued previously, a serious consequentialist analysis suggests that war usually has more bad consequences than good. In particular, anyone who takes consequentialism seriously must reckon with the fact that war is a negative sum game. This means either that at least one side in a war has miscalculated or that the costs of war are being borne by people who don’t have a say in the matter. In addition, it’s necessary to take account of rule-based concerns about the effect of decisions to go to war in particular cases weakening generally desirable rules to the contrary. - John Quiggin, War and its consequences

In case you missed it...

This means either that at least one side in a war has miscalculated or that the costs of war are being borne by people who don’t have a say in the matter. - John Quiggin, War and its consequences

Which sounds very similar to this...

The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. - Adam Smith, Wealth of Nations

Which sounds a lot like this...

Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. Large-scale federal involvement in transportation means that the people who benefit aren’t the people who pay the costs. The result is too many white-elephant projects and too little innovation and maintenance.  - Edward Glaeser, If You Build It… 

And...

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A second common feature of pro-war analysis is a failure to take account of the opportunity cost of the resources used in war. The $300 billion used in the Iraq war would have been enough to finance several years of the Millennium Development project aimed at ending extreme poverty in the world, and could have saved millions of lives. But even assuming this is politically unrealistic, the money could surely have been spent on improved health care, road safety and so on in the US itself. At a typical marginal cost of $5 million per live saved, 60 000 American lives could have been saved. This is morally relevant, but is commonly ignored. - John Quiggin, War and its consequences

Given the performance of the Bush Administration so far, it is tempting to agree with Harry that any money saved from the Iraq war would have been wasted elsewhere. But I think this is incorrect, in part because there’s no sign that the Bushies recognise a budget constraint. For them, the war is free: it isn’t even included in the regular Budget which is, in any case, massively in deficit with extra items regularly added to the slate. The bills will have to be paid in the end, but there’s no easy way to predict who will pay or in what form. - John Quiggin, Opportunity costs redux

Even at the cost of lining up with Friedman, I’d be pleased if the idea that war is a mostly futile waste of lives and money became conventional wisdom. Switching to utopian mode, wouldn’t it be amazing if the urge to “do something” could be channeled into, say, ending hunger in the world or universal literacy (both cheaper than even one Iraq-sized war)? - John Quiggin, War and waste

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See the part about "switching to utopian mode"?

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least 300 years. - Michael Munger, Unicorn Governance

I certainly can't blame Quiggin for switching to utopian mode.  Utopian mode is super essential.  I spend lots of time in utopian mode.   It's why I favor government expansion.  But do I imagine a State different from the one possible in the physical world?

Hey Munger... would it be possible in the physical world to have a State where people can choose where their taxes go?  Would it be more or less possible in the physical world to have a libertarian government?

However we spin it, a libertarian government would still be a command economy.  It's certainly true though that a smaller command economy is better than a larger command economy.  But is it possible in the physical world to have a smaller command economy that stays small?  If you're going to trust politicians to determine how much money should be spent on war.... then where, when, why and how do you draw the funding line?

Wartime spending needs are such that the threshold of decision can be crossed with newly imposed taxes or with substantial increases in rate levels of existing taxes. The additional real costs, in opportunity-cost terms, of the expanded spending program are accepted in the emergency setting. Once these needs disappear, however, the bias is shifted in favor of a continued high level of public activity, as opposed to a return to some pre-emergency balance between the public and the private sector. Not having to undergo the apparent sacrifice of real resources generated by new-tax financing, the individual is more willing, in post-emergency periods, to approve spending on the provision of services than he should have been in the pre-emergency fiscal setting. A corollary hypothesis is, of course, that the longer the emergency, the more pronounced this effect will be; that is to say, the older the tax, the more routine the institution, the greater the likelihood that it will be continued in existence. - James Buchanan, Public Finance in Democratic Process

Does a limited government sound like an oxymoron?  If not.... then what about a limited command economy?

The issue is not, in the end, one of public versus private. Rather it is the fact that market competition and the profit motive inevitably associated with it is antithetical to the professional and service orientation that is central to human services of all kinds. - John Quiggin, Face the facts:

Let's say that we created a market in the public sector by allowing people to choose where their taxes go.  Then we'd have a market in the public sector and a market in the private sector.  Wouldn't the issue be, in the end, one of public versus private?

What's the difference between public services and private services?

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Thus, considered in themselves, in their own nature, in their normal state, and apart from all abuses, public services are, like private services, purely and simply acts of exchange.  -  Frédéric Bastiat, Private and Public Services

Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them.  - Adam Smith, Wealth of Nations

The extent and range of public services are determined by the collective willingness of individuals to purchase them.  Services will be extended as long as the aggregate benefits are held to exceed the costs.  For the total of all public services, aggregate benefits should approximately equal total costs in terms of sacrificed alternatives.  Ideally, the fiscal process represents a quid pro quo transaction between the government and all individuals collectively considered.  The benefit principle must be applied in this sense. - James Buchanan, Fiscal Theory and Political Economy

It is these needs which are essentially deficits in the organism, empty holes, so to speak, which must be filled up for health’s sake, and furthermore must be filled from without by human beings other than the subject, that I shall call deficits or deficiency needs for purposes of this exposition and to set them in contrast to another and very different kind of motivation.  - Abraham Maslow, Toward a Psychology of Being

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes. - Frédéric Bastiat, What Is Seen and What Is Not Seen

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Public services and private services both fill holes.  There are lots of public and private holes that genuinely need to be filled.  Because society's resources are limited, it's a really good idea to prevent the government from filling the wrong holes.

According to Quiggin's Implied Rule of Economics (QIRE)... society's limited resources should be put to more, rather than less, valuable uses.  How do we prevent QIRE from being regularly and massively violated?

If people are willing to pay to use infrastructure, we can assume that that infrastructure provides social value. - Edward Glaeser, If You Build It… 

A. willing to pay to use infrastructure
B. willing to pay for infrastructure

The correct fix for crowded roads is to charge people for the social costs of their choices. Singapore instituted congestion pricing in 1975, and now operates state-of-the-art electronic road pricing, with tolls that vary by usage and time of day. London has now had congestion pricing for a decade. Both cities have eased traffic as a result. Yet America still acts as if charging drivers is a crime. - Edward Glaeser, If You Build It… 

Sure we can charge people for the social costs of their choices... but what are the chances that the charges will accurately reflect the costs?  Super slim.  This is because one price really does not fit all.  A cost, like a benefit, is entirely in the eye/mind/heart of the consumer.

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Simply considered, cost is the obstacle or barrier to choice, that which must be got over before choice is made.  Cost is the underside of the coin, so to speak, cost is the displaced alternative, the rejected opportunity.  Cost is that which the decision-maker sacrifices or gives up when he selects one alternative rather than another.  Cost consists therefore in his own evaluation of the enjoyment or utility that he anticipates having to forgo as a result of choice itself.  There are specific implications to be drawn from this choice-bound definition of opportunity cost:
 
1. Cost must be born exclusively by the person who makes decisions; it is not possible for this cost to be shifted to or imposed on others.
2. Cost is subjective; it exists only in the mind of the decision maker or chooser.
3. Cost is based on anticipations; it is necessarily a forward looking or ex ante concept.
4. Cost can never be realized because of the fact that choice is made; the alternative which is rejected can never itself by enjoyed.
5. Cost cannot be measured by someone other than the chooser since there is no way that subjective mental experiences can be directly observed.

- James Buchanan, Introduction: L.S.E Cost Theory in Retrospect

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Everybody perceives that they see society.  But this perception is wrong.  We don't actually see society.  What we actually see is a reflection of society. All we can ever see is a reflection of society. This is because all we can ever know about what's really inside people depends entirely on what they choose to reveal.  People's projections create society's reflection.

The accuracy of society's reflection is critical.  Command economies fail because the reflection is terribly inaccurate.  Market economies succeed because the reflection is far more accurate.  If we can truly understand why, exactly, there's such a huge disparity in the accuracy of the reflections... then it should be really easy to understand how to improve market economies.

If we have a market in the private sector and a market in the public sector... then we will be able to see two different reflections of society.  Will both reflections be equally accurate?  Of course not.

Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his "true" preferences for public goods. - James M. Buchanan, The Economics of Earmarked Taxes

In the public sector, people would not have any incentive to conceal their true preferences.  This means that people's public projections would be more honest than their private projections.  As a result, the reflection in the public sector would be more accurate than the reflection in the private sector.  This is why I favor the expansion of government.  To be clear, I favor the expansion of a pragmatarian government.  I definitely don't favor the expansion of the current government.

Let's take a closer look at one-price-fits-all (OPFA).  If we did charge for roads, what could we say about the people who were willing to pay the price?  We could say that their payment (allocation) was equal to, or less than, their perception of relative scarcity (valuation)...

allocation <= valuation

What are the chances though that a user's allocation would be equal to their valuation?  The chances would be super slim.  In most cases the user's allocation would be greater than their valuation.

valuation - allocation = consumer surplus

But what if, rather than charging people to use the road... we gave people the freedom to allocate their taxes to the road and all the other goods in the public sector?  Then people would no longer have an incentive to conceal their true preference for the road.

allocation = valuation

valuation - allocation = $0.00

Would tax choice truly eliminate all the consumer surplus in the public sector?   Let's imagine a two good public sector with tax choice...

1. Roads
2. Education

The tax rate is essentially the amount of money charged for these two goods.  With tax choice, taxpayers would have the freedom to decide how they divvied up their payment between these two goods.  If the tax rate was too low then it would mean that most taxpayers would perceive that at least one of these goods was relatively scarce.

Let's say that Frank has a tax obligation of $3,000 dollars.  He allocates $2,500 to education and $500 to roads.  Does his allocation equal his valuation?  Not if he perceives both goods to be in short supply.  If he perceives both goods to be in short supply then his allocation will be less than his valuation...

allocation < valuation

valuation - allocation = consumer surplus

Perhaps a diagram would help...



In this diagram we can see that, with user fees, Frank pays a lot more for roads than he pays for education.  Which intuitively seems a bit off.  Logically it seems pretty intuitive that the user fee for roads should be a lot lower than the user fee for education.  Right?  But what is the basis for this intuition?  Education is more costly than roads?  Or, education is more valuable than roads?  Or, the demand for education is greater than the demand for roads?  Perhaps the intuition looks like this...

education > roads

Education is greater than roads.  Ok, sure.  But how much, exactly, is it greater?

Thanks to the diagram we can clearly see that Frank's valuation of education is greater than his valuation of roads.  We know that Frank is willing to pay more for education than for roads.  But user fees can never be custom tailored to Frank.  So the user fees he pays for roads and education will never communicate exactly how much he perceives education to be greater than roads.  The same is true of all the other users.  As a result, with user fees, the proportion of funding for roads and education will never ever be optimal.  The balance will always be suboptimal.

With user fees the proportions can only ever be roughly correct.  But with tax choice, the proportions will always be 100% correct.

And I suppose that if I was as good at math as Paul Samuelson was then I'd be able to prove this with a beautiful model.  Unfortunately, I'm not as good at math as Samuelson was.  However, I'm far better at economics than he was.  In the grand scheme of things, being good at economics is far better than being good at math.  Maybe, in fact, there's something about being good at math that prevents a person from being good at economics.  Have any of the seriously good economists been seriously good at math?  Nope.  I don't think so.  So if an economist is good at math then don't trust their economics.

But perhaps I'm seriously overestimating my own econ skills.  It's entirely possible.  But until I'm proven wrong I'm going to continue believing that I'm right.

A. willing to pay to use infrastructure
B. willing to pay for infrastructure

The difference might seem subtle... but it's fundamentally important.

Glaeser is correct that willingness to pay is the only way to accurately measure the social cost/benefit of public services... but Quiggin is correct that public services shouldn't only be available to those able and willing to pay for them.

How cool is that?  They both win!  But Glaeser wins bigger because his article contains a fundamentally important economic truth that Quiggin, in another place and time, acknowledged, or recognized, at least to some extent...

This means either that at least one side in a war has miscalculated or that the costs of war are being borne by people who don’t have a say in the matter. - John Quiggin, War and its consequences
Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. - Edward Glaeser, If You Build It… 
Until people are made to bear the full costs of their decisions, those decisions are unlikely to be socially sound, in this as in other areas of public policy. - Richard Bird, Charging for Public Services: A New Look at an Old Idea 

When it comes to war, we especially want people to make the wisest choices possible.  So it's imperative that we determine people's willingness to pay for war.

Last year Jeremy Corbyn made the wonderful argument that British taxpayers should be free to boycott the military...

Could the Minister consider whether it would be right to introduce such a measure? The Italian Parliament has draft legislation before it that would allow Italian taxpayers to divert a proportion of their tax from the armed services to peace building, and there are three relevant petitions before this House. Given the huge rebuilding costs that will fall to this country and others in Kosovo and elsewhere where there has been conflict, perhaps we should have a peace-building fund that could invest in conflict resolution, reconstruction and trying to prevent terrible wars and civilian conflicts. 
British taxpayers have a right of conscience not to participate in the armed forces in time of conscription and should have a similar right in time of peace to ensure that part of their tax goes to peace, not war. - Jeremy Corbyn, Taxpayers (Conscience)

Willingness to pay is the only way to prevent QIRE from being violated.  So if some people are not willing to pay for war... then they shouldn't be forced to.  Conversely, if other people are very much willing to pay for war.... then they should be free to.

What's so incredibly funny (not "haha" funny) is that liberals and conservatives largely oppose this idea.  How could they both oppose it?!   Ok, it's kinda "haha" funny as well.  Right?  This paradox is super easy to resolve...

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community's utility and sacrifice against each other. - Knut Wicksell, A New Principle of Just Taxation

Politicians have no clue which side would "win" and which side would "lose".

With the market we really don't think of "sides" winning or losing.  This is simply because there aren't any "sides".

From the economic perspective, is there any benefit to having "sides"?  Do we really need "sides" in the public sector?  Why can't there simply be organizations in the public sector that have the strongest possible incentive to effectively and efficiently serve people?

Public services are not exempt from basic economic truths.  It's a basic economic truth that incentives matter.  It's a basic economic truth that every allocation has an opportunity cost.  It's a basic economic truth that society's limited resources should be put to more, rather than less, valuable uses (QIRE).  It's a basic economic truth that people's willingness to pay the opportunity cost is the only way to prevent QIRE from being regularly and massively violated.  It's a basic economic truth that the pragmatarian model is the best way to reveal people's willingness to pay.  It's a basic economic truth that people's allocations should reflect their valuations.

Ideally, economists should do a really good job of informing everybody of these basic economic truths.  Ideally, the public sector should be based on these basic economic truths.  When it finally is, then society's reflection will be far more accurate and everybody's decisions will be far more beneficial.

Like I said in the beginning, John Quiggin is my favorite liberal economist.  He's my favorite liberal economist because, out of all the liberal economists, he does the best job of acknowledging/addressing basic economic truths...


But does Quiggin really need to be a liberal economist?  Do we really need "sides" in economics?   I really don't want to say that Quiggin is my favorite liberal economist.  I would really prefer to say that he's my favorite living economist.   But I'll only be able to honestly do so when his economic story is more coherent than Tabarrok's economic story.

It's pretty easy to test the coherence of an economist.  First have them explain to you why the free-rider problem is a problem.   And then have them explain to you why consumer surplus is not a problem.

Here's what will happen if they aren't coherent.  First they'll say that a big disparity between allocation and valuation is a bad thing and then they'll say that it's a good thing!



For example...



I think that if economists made the effort to get their story straight then there would be far more interest in tax choice.  In any case, there would be far more concern with the elephant in the room (a command economy in the public sector).

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