Synopsis: Charles Wheelan - Naked Economics
Dec 4, 2003, 10:45p
Charles Wheelan - Naked Economics
* Free international trade can improve the standard of living of the trading countries
* Assumption #1: Individuals act to make themselves as well off as possible. However, maximizing utility is not the same as living selfishly
* Assumption #2: Firms attempt to maximize profits
* Concern for the environment is a luxury good
* It is not fair for us who live comfortably to impose our preferences on the rest of the world
* The "Superstar" Phenomenon: small differences in talent tend to become magnified into huge differences in pay as a market becomes very large (e.g. pop music, pro sports)
* Price discrimination: selling the same item to different people at different prices (e.g. plane tickets)
* The market economy is a powerful force for increasing our material wealth
* The market is amoral, in that it doesn't make things that we may need, but things that we want to buy
* A capitalist market uses prices to allocate scarce resources; a communist market uses waiting in a line
* IDEA: We need an economic system that allocates scarce resources in the right places (not on a doggy birthday cake but vaccines for Africa)
* Communal resources generally have free-rider problems that leave society worse off overall; people most directly impacted need an incentive to conserve the communal resource (e.g. rhinos and locals incentivized by tourism)
* Incentives matter; When we work on commission, we work harder
* The pocketbook is mightier than the conscience
* "Law of unintended consequences" - a specific policy designed to solve a problem may only make it worse ("perverse incentives") (e.g. requiring child seats on planes and resulting increases in overall child deaths due to more driving)
* A principal-agent problem - both parties do not have the same incentives (e.g. Burger King and cashier)
* Being able to buy goods cheaper is essentially the same as having more income
* Markets frequently have "creative destruction"; this is good for the long, but unfortunately most people don't pay their bills in the long run
* IDEA: Define the true Laffer curve
* Raising taxes to provide services to disadvantaged Americans may simultaneously discourage productive investments that could make them better off
* People want to work
* Tax gas instead of income
* Economists favor taxes that are broad (small tax on large group), simple (easily understood), and fair (similar people with similar income pay similar taxes)
* "Dead weight loss" - taxes that make people worse off without making anyone better off
* Regressive vs. Progressive taxes
* Earned income tax credit - income tax refund to subsidize low wage workers
* One role of government is to deal with economic externalities
* What if value was categorized as a % of income? People wouldn't work as much (like the Finnish law that makes speeding tickets a % of income)
* Good government allows for a market economy to exist; governments that don't have a strong market have their government policies to blame
1) Gov't defines and protects property rights
2) Can undertake complex deals with complete strangers
* Gov't could buy out patents once new drugs are developed
* Public goods (e.g. missile defense system):
1) Cost of offering good to additional users is near zero
2) It's hard to exclude people who don't pay from using it
* Our sense of well-being is determined at least as much by relative wealth as by absolute wealth
* Compliance with international quality standards is lower in countries with greater regulation
* "fiscal drag" of taxes
1) Taxes take money away, reducing purchasing power and utility
2) Taxes cause individuals to behave in ways worse for the economy without providing new gov't revenues (by discouraging work and investment)
* Economic growth may be more effective at combatting poverty than programs for the poor (?)
* Policies that supply some part of the pie for everyone will slow the growth of the pie (?)
* Adverse selection: clients sign up for programs based on private information (e.g. Hope scholarships)
* Irrational discrimination is bad; rational discrimination is good
* By preventing choice and imposing a service on a large group of individuals, one can avoid adverse selection (e.g. Social Security)
* There are ways to elicit private info (e.g. cost of premium vs. deductible)
* Branding provides an element of trust required in a complex economy
* We've built a society that values civil liberties over social order
* The more nearly unique a set of skills, the more compensated you will be
* The price of a skill bears no relation to its social value but to its scarcity
** The most insightful way to think of poverty is as a dearth of human capital, or less useful human capital due to other factors (e.g. substance abuse)
** There IS NOT a fixed amount of work to be done in the economy; jobs are created every time someone provides a new good or service or finds a better/cheaper way to provide an old one
** Technology may displace workers in the short-run but provide for better products in the long-run; governments need not block the technology but rather provide job retraining and other transition services for displaced workers.
* Human capital is the most important investment, as it's what's left when you are stripped of all other assets and it can never be taken away
* Strong correlation between human capital and economic well-being;
Lack of correlation between natural resources and standard of living (Guns, Germs, and Steel would disagree on this point, at least in early development)
* The current poverty line is at a level of real income achieved only by the top 10% of the income distribution 100 years ago
* Improvements/growth in productivity is what increases our standard of living
* Productivity growth and economics are not zero-sum games
* The rise of income inequality is real, but should we care? Book says no, because
1) Income inequality sends important signals in the economy
2) As long as everyone is living better, why care about the gap
- because we can. this should be the next step in the evolution of our economy, while preventing regression in overall economic well-being
* Financial instruments are for
1) Raising capital (e.g. microcredit)
2) Storing, protecting, and making profitable use of excess capital
3) Incurring against risk (e.g. catastrophe bonds)
4) Speculation
* Paying the rent on capital is the same as paying rent on anything else
* Firms and industries often benefit from regulation
* Small interest groups are more influential than large groups for their size because the costs of their policies are distributed in small chunks over many people, none of whom care more about the policy than the special interest group
* Measure items in time cost, not monetary cost
* Lack of infrastructure causes more damage than a lack of product at reasonable prices (e.g. cheap drugs in India but no infrastructure for diagnosis and distribution to those who need it)
- IDEA: Create this infrastructure
* Period of rising real incomes (1970-1999) coincide with decrease in "very happy" from 36% to 19%
- this makes sense, since income inequality has increased and people's sense of economic well-being is dependent on income inequality
- however, this is a growing sense and needs to be dealt with
* Okun's law: GDP growth of 3% per year will leave unemployment unchanged
* Gini index to measure income inequality
* US Savings rate has steadily declined from 9% in 50s to ~0% today
- this seems risky, and perhaps has contributed to lower GDP growth since the 70s
* The fed is appointed, and it works best that way; we made a democratic decision to create a relatively undemocratic institution; if not, the fed could throw parties before elections (by lowering interest rates at the expense of longer-term damage due to inflation)
* Our standard of living is high because we are able to focus on the tasks we do best and trade for everything else
* Globalization driven by the profit motive has done more good for more people than foreign aid driven by human goodness has ever done.
* Trade -> Specialization -> Better productivity
* Poor access to drinking water kills 2M and sickens 500M per year
IDEA: provide device/infrastructure for creating drinking water
* Developing countries should not be held to the workplace and environment safety policies (luxury goods) of the developed world to start, though eventually they should
* 800M don't get enough to eat
* IDEA: Airlift 10,000 university grads to a small African nation to fix the country
* What do developing countries need?
1) Effective government institutions (no corruption)
2) Property rights (possess your most valuable asset-land)
3) No excessive regulation (gov't consumption - minus education and defense - is negatively correlated with per capita GDP growth)
4) Increase human capital
5) Geography (focus on tropical development solutions)
6) Openness to trade (w/o incubation - closed economies grow 0.7% while open economies grow 4.5% annually)
7) Responsible fiscal/monetary policy (for currency exchange control)
8) Democracy
* Is there a "rich enough"? I don't think so.
* EXPORT OUR HUMAN CAPITAL FOR THE BETTERMENT OF THE WORLD
Read comments (1) - Comment
Anonymous
- Dec 12, 2007, 1:58p
thx
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