Politics and Economics: The Struggle of Reason with Emotion

Politics and Economics: The Struggle of Reason with Emotion February 13, 2012 copies of this presentation can be found at www.antonydavies.org 1

Much valuable discussion fails to occur because of pride and prejudice. 2

Prejudice Humans who work in the private sector are greedy. Humans who work in the public sector are altruistic. 3

Truth The same humans with the same strengths, failings, and desires occupy both sectors. 4

Pride Economic truths are opinion (relativism). 5

Truth The whole point of economic theory is to describe the real world. Disconnects usually arise when we confuse an anomaly for a disproof. 6

Pride Unwillingness to admit limitations (hubris). 7

Truth It is impossible for an economy to provide everything that everyone wants. Corollary: A majority vote does not bestow magical powers to circumvent limitations. 8

How to Avoid Pride and Prejudice Think in terms of first principles. First principles are Either assumed to be true, or Are so self-evident as to be beyond dispute. When thinking about economic and policy issues Begin at first principles, not at outcomes, or End up espousing contradictory or inconsistent views. 9

Example: First Principles Debate: We must help the poor by imposing a minimum wage. We must help employers by removing the minimum wage. Debate: The rights to life and property are natural rights. The rights to life and property are not natural rights. 10

First Principles The rights to life and property are natural rights. Others may not take your life. Others may not prevent you from using your property. Others may not prevent you from selling your labor. Others may not prevent you from paying for labor. We should not have a minimum wage. 11

Unintended Consequences If it is true that: the rights to life and property are natural rights, then government policies that are inconsistent with this truth will yield unintended consequences. Bad things will happen that we didn t intend to happen. 12

Unintended Consequences Requiring car makers to install airbags and seatbelts has little effect on traffic fatalities. Requiring small children traveling in airplanes to be in car seats increases child travel fatalities. Subsidizing ethanol is bad for the environment. Promoting electric vehicles makes us more dependent on foreign countries. 13

How to Avoid Pride and Prejudice Think in terms of first principles. Don t think you can escape the laws of economics. 14

Economic Truths Everything is scarce. Every choice includes a tradeoff. A choice to pursue something is a choice not to pursue something else. 15

Economic Truths People respond to incentives. Airplanes and car seats Entrepreneurship and taxes Russians and dead light bulbs Exchange is (usually) a positive-sum game. 16

Economic Truths Profit happens when someone creates value for others. Profit Plunder 17

Economic Truths You want it. Everything is scarce. Every choice involves a tradeoff. People respond to incentives. What are you going to do about it? You can t have it. 18

Economic Truths The answer lies in community. Everything is scarce. Every choice involves a tradeoff. People respond to incentives. Exchange is a positive-sum game. Profit happens when someone creates value for others. 19

Community Community has (at least) two tools it can use to pursue its goals: Government Markets Tool of coercion Tool of cooperation Crony Capitalism Markets 20

Two ways of looking at markets Markets are opportunities for the strong to exploit the weak. Markets are opportunities for the weak to become empowered. 21

Markets-As-Exploitation Assumption Markets lead to a centralization of political and economic power, decreased competition, and the concentration of wealth. Markets-As-Empowerment Assumption Markets lead to a decentralization of political and economic power, increased competition, and the dissemination of wealth. 22

Markets and Income Market-As-Exploitation Claim Markets result in a transfer of income from the less wealthy to the more wealthy. 23

Per-capita Trade (US$) $40,000 Greater per-capita trade is associated with greater per-capita income. $35,000 $30,000 $25,000 R 2 = 0.56 $20,000 $15,000 $10,000 $5,000 $0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Per-capita Income (US$) Data source: International Financial Statistics, International Monetary Fund. 24

Per-capita Trade (US$) $40,000 $35,000 Greater per-capita trade is associated with more equitable income distributions. $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 Gini Coefficient (0 = equitable, 100 = inequitable) Data source: International Financial Statistics, International Monetary Fund, and Measuring Income Inequality: A New Database, Deininger et al., World Bank. 25

Per-capita Trade (US$) $3,000 $2,500 Greater per-capita trade is also associated with more equitable income distributions among the poorest countries. $2,000 $1,500 $1,000 $500 $0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 Gini Coefficient (0 = equitable, 100 = inequitable) Data source: International Financial Statistics, International Monetary Fund, and Measuring Income Inequality: A New Database, Deininger et al., World Bank. 26

Markets and Income Reality Markets result higher incomes for the rich and for the poor. 27

Markets and Exploitation Market-As-Exploitation Claim Markets result in an increased exploitation. 28

Per-capita Trade (US$, logarithmic scale) $100,000 $10,000 $1,000 GDI measures quality of life (longevity, education, literacy, income) for women relative to men. Greater per-capita trade is associated with R 2 = 0.80 greater gender equality. $100 $10 $1 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender adjusted HDI) Data source: International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme. 29

Per-capita Trade (US$, logarithmic scale) $100,000 Greater per-capita trade is associated with reduced child labor. $10,000 $1,000 R 2 = 0.54 $100 $10 $1 0 10 20 30 40 50 Children 10 to 14 in the Labor Force (as % of age group) Data sources: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank. 30

Per-capita Trade (US$, logarithmic scale) $10,000 $1,000 $100 $10 $1 Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor. 0 10 20 30 40 50 60 Children 10 to 14 in the Labor Force (as % of age group) Data source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002. 31

Markets and Exploitation Reality Markets result in higher gender equality and reduced child labor. 32

Criticism Maybe cross-country data is hiding something. What do we see when we look inside a country? 33

Markets and Unemployment Market-As-Exploitation Claim Markets result in increased unemployment and lower wages. 34

Unemployment Rate 12% January 1975 to June 2006 Greater per-capita trade is associated with reduced unemployment. 10% 8% 6% 4% 2% 0% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% Trade (imports plus exports) as % of GDP Data source: Bureau of Labor Statistics, and Bureau of Economic Analysis. 35

Average Real Hourly Earnings (2000$) $15.00 January 1975 to June 2006 Greater per-capita trade is associated with increased real wages. $14.50 $14.00 $13.50 $13.00 $12.50 $12.00 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% Trade (imports plus exports) as % of GDP Data source: Bureau of Labor Statistics, and Bureau of Economic Analysis. 36

Markets and Unemployment Reality Markets result in reduced unemployment and higher wages. 37

Markets and the Income Gap Market-As-Exploitation Claim As time passes, markets make the rich richer and the poor poorer. 38

Distribution of Household Incomes (2009$) 25% 20% 15% 10% 5% 0% Under $15,000 $15,000 to $25,000 $25,000 to $35,000 $35,000 to $50,000 $50,000 to $75,000 $75,000 to $100,000 $100,000 to $150,000 $150,000 to $200,000 Over $200,000 1970 1980 1990 2000 2009 Data source: Income, Poverty, and Health Insurance Coverage in the United States: 2010, Bureau of the Census.. 39

Distribution of Household Incomes (2009$) 25% 20% 15% 10% 5% 0% Under $15,000 $15,000 to $25,000 $25,000 to $35,000 $35,000 to $50,000 $50,000 to $75,000 $75,000 to $100,000 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. 1970 1980 1990 2000 2009 $100,000 to $150,000 $150,000 to $200,000 Over $200,000 Data source: Income, Poverty, and Health Insurance Coverage in the United States: 2010, Bureau of the Census.. 43

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Fraction of Total Income Received by Each Fifth 50% 45% The rich get richer and the poor get poorer. 46.6% 49.7% 40% 35% 30% 25% 20% 15% 10% 5% 3.8% 3.4% 0% Lowest Quintile Highest Quintile 2000 2007 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678. 45

Average Age 70 60 The old get older and the young get younger. 65.7 66.8 50 40 30 20 10 7.1 6.9 0 Lowest Quintile Highest Quintile 2000 2010 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9. 46

Median Income Within Each Quintile (2006$) $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Bottom Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile Parents Children Source: Pew Economic Mobility Project 47

Markets and the Income Gap Reality As time passes, markets make both the rich and the poor richer. 48

Markets, Wages, and the Poor Market-As-Exploitation Claim Minimum wage (or living wage ) protects lesser skilled workers. 49

Unemployment Rate College Education (1978-2008) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 Minimum Wage as Fraction of Average Hourly Wage Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics 50

Unemployment Rate HS Education (1978-2008) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 Minimum Wage as Fraction of Average Hourly Wage Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics 51

Unemployment Rate Less than HS Education (1978-2008) 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 Minimum Wage as Fraction of Average Hourly Wage Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics 52

Markets, Wages, and the Poor Reality Minimum wage (or living wage ) hurts lesser skilled workers to the benefit of better skilled workers. 53

Lives and Dollars Market-As-Exploitation Claim Markets reduce human lives to dollars. 54

Choose, but choose wisely. Price $23,000 Fatalities per million vehicles 117 Price $44,000 Fatalities per million vehicles 56 Those who chose the compact car just valued their lives at under $3 million. 55

Seat Belts on School Buses It costs (on average) $2.5 million for every child s life saved. Should we install seatbelts on school buses? 56

Spend $2.5 million on: # Lives Saved Annually Seatbelts on school buses 1 Airbags in cars 3 Heart transplants 13 Malaria prevention 975 Midwife training in third world 310,000 HIV tests for sex workers 715,000 If we really care about saving lives, then we will fight against spending money for seatbelts on school buses. 57

Lives and Dollars Reality Markets enable us to make the best decision in the face of distasteful tradeoffs. 58

Stimulus Spending Market-As-Exploitation Claim Markets need to be managed in order for the economy to grow. 59

RGDP per Capita Growth Stimulus Spending and Economic Growth If stimulus spending worked, we should see a relationship like this. 4% 3% 2% 1% 0% -6% -4% -2% 0% 2% 4% 6% -1% -2% -3% -4% Change in Federal Outlays as % of GDP 60

RGDP per Capita Growth Stimulus Spending and Economic Growth (1954.1 to 2011.1) 4% 3% 2% 1% 0% -6% -4% -2% 0% 2% 4% 6% -1% -2% Data source: Bureau of Economic Analysis, National Income and Product Accounts -3% Increased government spending does not -4% appear to increase economic activity. Change in Federal Outlays as % of GDP 61

Maybe stimulus spending doesn t have an immediate effect. What is the effect over time? 62

RGDP per Capita Growth 1 Year Later Stimulus Spending and Economic Growth (1954.1 to 2011.1) 4% 3% 2% 1% 0% -6% -4% -2% 0% 2% 4% 6% -1% -2% -3% -4% Change in Federal Outlays as % of GDP Data source: Bureau of Economic Analysis, National Income and Product Accounts Increased government spending does not appear to increase economic activity one year in the future. 63

Maybe stimulus spending s effects are cumulative. What is the cumulative effect? 65

RGDP per Capita Growth (4QMA) Stimulus Spending and Economic Growth (1954.1 to 2011.1) 3% 2% 2% 1% 1% Increased government spending appears to have a negative cumulative effect over 4 quarters. 0% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% -1% -1% -2% Change in Federal Outlays as % of GDP (4Q Moving Average) Data source: Bureau of Economic Analysis, National Income and Product Accounts 66

RGDP per Capita Growth (4QMA) Stimulus Spending and Economic Growth (1954.1 to 2011.1) 3% 2% 2% 1% 1% Increased government spending appears to have a negative cumulative effect on economic growth. 0% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% -1% -1% -2% Change in Federal Outlays as % of GDP (4Q Moving Average) Data source: Bureau of Economic Analysis, National Income and Product Accounts 67

Stimulus Spending Reality At least in the way it has been practiced, government attempts to manage markets have suppressed economic growth. 68

Catholic Social Thought How can Catholic social teaching be consistent with what we understand about economic truths? What does it mean to be created in God s image? To be created with free will. What is the prerequisite for behaving morally? To have freedom of action. 69

Catholic Social Thought Freedom we must reappropriate the true meaning of freedom, which is not an intoxication with total autonomy, but a response to the call of being, beginning with our own personal being. (Caritas in Veritate, Benedict XVI, 2009) 70

Catholic Social Thought In the four Gospels, the poor are mentioned twenty-one times Four times, the poor are mentioned as a fact. Six times, the poor are called blessed or singled out as a special group who will receive the Gospel. Eleven times, Jesus instructs the listener to give to the poor. Question Why, at no point, do the Gospels justify taking in the name of the poor? 71

Epilogue: The Nagging Doubt What if, in their freedom, the rich don t give to the poor? The poor you will always have with you, but you will not always have me. (Matthew 26:11) The poor you will always have with you, and you can help them any time you want. But you will not always have me. (Mark 14:7) 72

Politics and Economics: The Struggle of Reason with Emotion February 13, 2012 copies of this presentation can be found at www.antonydavies.org 73