Failure at all scales

The premise of most political systems since the enlightenment is that the individual is a rational actor. The classical liberal (now called libertarian) tradition believes that social and economic ills are due to excessive government regulation and intervention. If the individuals are left to participate unfettered in a free market then these problems will disappear.  Conversely, the traditional Marxist/Leninist left posits that the capitalistic system is inherently unfair and can only be cured by replacing it with a centrally planned economy. However, the lesson of the twentieth century is that there is irrationality, incompetence, and corruption at all levels, from individuals to societies. We thus need regulations, laws and a government that take into account of the fact that we are fallible at all scales, including the regulations, laws and the government.

Markets are not perfect and often fail but they are clearly superior to central planning for the distribution of most resources (particularly consumer goods). However, they need to be monitored and regulated. When markets fail, government should intervene. Even the staunchest libertarian would support laws that prevent the elimination of your competitors by violence. Organized crime and drug cartels are an example of how businesses would run in the absence of laws. However, regulations and laws should have built-in sunset clauses that force them to be reviewed after a finite length of time. In some cases, a freer market makes sense. I believe that the government is bad in picking winners so if we want to promote alternative energy, we shouldn’t be helping nascent green industries but rather tax fossil fuel use and let the market decide what is best. Making cars more fuel-efficient may not lead to less energy use but just encourage people to drive more. If we want to save energy, we should make energy more expensive. We should also make regulations as universal and simple as possible to minimize  regulatory capture. I think means testing for social services like medicare is a bad idea because it will just encourage people to find clever ways to circumvent it. The same probably goes for need-based welfare. We should just give everyone a minimum income and let everyone keep any income above it. This would then provide a safety net but not a disincentive to work. Some people will choose to live on this minimum income but as I argued here, I think they should be allowed to. If we want to address wealth inequality then we should probably tax wealth directly rather than income. We want to encourage people to make as much money as possible but then spend it to keep the wealth circulating. By the same reasoning, I don’t like a consumption tax. Our economy is based on consumer spending so we don’t want to discourage that (unless it is for other reasons than economic).

People do not suddenly become selfless and rational when the political system changes but systems can mitigate the effects of their irrational and selfish tendencies. As the work of Kahneman, Tversky, Ariely, and others have shown, rational and scientific thinking does not come naturally to people. Having the market decide what is the most effective medical treatment is not a good idea. A perfect example is in a recent Econtalk podcast with libertarian leaning economist John Cochrane on healthcare. Cochrane suggested that instead of seeing a doctor first, he should just be allowed to buy antibiotics for his children whenever they had an earache. The most laughable part was his idea that we have rules against self-administering of drugs to protect uneducated people. Actually, the rules are to protect highly educated people like him who think that expertise in one area transfers to another. The last thing we want is for even more antibiotic use and more antibiotic resistant bacterial strains. I definitely do not want to live in a society where I have to wait for the market to penalize companies that provide unsafe food or build unsafe buildings. It doesn’t help me if my house collapses in an earthquake because the builder used inferior materials. Sure they may go out of business but I’m already dead.

There is no single perfect system or set of rules that one should always follow. We should design laws, regulations, and governments that are adaptable and adjust according to need. The US Constitution has been amended 27 times. The last time was in 1992, which just changed the rules on salaries for elected officials. The 26th amendment in 1971 made 18 the universal threshold age for voting. We are thus due for another amendment and I think the 2nd amendment, which guarantees the right to bear arms, is a place to start. We could make it more explicit what types of arms are protected and what types can be regulated by local laws. If we want to reduce gun violence then gun regulation makes sense. People will do things they later regret. If one is in the heat of an argument and there is a gun available then it could be used inadvertently. It takes a lot of training and skill to use a gun effectively. Accidents will happen. In the case of guns, failure often leads to death. I would prefer to live in a society where guns are scarce rather than one where everyone carries a weapon like the old wild west.

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9 thoughts on “Failure at all scales

  1. I heard about some town where some people refused to pay taxes—that of course is government interfering with freedom—and, so, when their houses caught on fire, the fire department didn’t show up—also a government intrusion.
    I think maybe Cochrane should get his choice to not pay for medical regulations; but he should be ready to drive himself to the hospital (preferably on his own system of privately built roads)

    As for guns, i feel the same thing about trash—if you look around at what is on the ground or in the streams, you can blame whoever threw it there. But, whoever sold it to them in my view also is responsible. (I remember the shop owners who would complain about the people sleeping drunk in front of their stores from the alcohol the shop owner sold them). People who traffic in guns should be required to put into a social fund to repair the damage caused by their product. (and, same goes for oil companies or anyone else who does business). (Conceivably Universities also might be liable for the damage caused by people who have been certified to practice but are actually flawed and dangerous products).

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  2. A wealth tax is probably a terrible idea. My family is in the bottom percentile of wealth nationally, and also the bottom percentile in the world. This is because most households worldwide are fairly close to wealth = 0, whereas my family has student loan debt well into 6 figures.

    Nonetheless our income stream and consumption pattern give us a top 10% (nationally) and top 1% (globally) standard of living, with enough left over to eventually pay off our debt. With no change in lifestyle, some year a decade from now we will go from being in the bottom 1% globally to the top 1% globally as we pass through a net worth of zero.

    The command we have over the real economy is measured by our consumption, and our future consumption, so if we are going to tax wealth it should be via consumption. “Our economy is based on consumer spending” is not a real economic argument, as NGDP growth will be determine by the Fed, not tax incidence.

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  3. The highest marginal tax rates in the US (with tax defined loosely as net transfers to/from the state) occur somewhere around a family income of 25K, where additional income disqualifies one from a number of programs whose equivalent cash value can be quite high. Marginal tax rates in this low income bracket can exceed 100% by some calculations. So the current state of affairs has major incentives problems.

    Providing a minimum and letting someone keep cash earned above the minimum is better, but still one can easily imagine that the equilibrium would consist of a sizable portion of the population unemployed. It is unclear what the social impact of mass unemployment is, even when everyone is fed and clothed.

    I think we can engineer better systems, e.g. http://www.morganwarstler.com/post/44789487956/guaranteed-income-auction-the-unemployed

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  4. While we’re sunsetting laws and regulations (a great idea!), we should also be randomizing them when possible. Randomizing the minimum income payments over people and time would have two virtues: (1) permitting the effects of the payments themselves to be studied and (2) making the payments themselves less of a disincentive to work, and providing incentives to save, build community ties, etc.

    I am sympathetic to the argument that not having to work frees people to do more interesting and in some cases useful things. However, I’m not sure how many people are really capable of and driven to do those things. At some point those who are not will probably be zero marginal product workers anyway, so from a macro-economic perspective it won’t really matter if they work or not. The social implications of mass idleness are another issue.

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  5. Hi Rick,

    I think we’re heading for a world where over half of the population will be unemployable independent of what our policies are. I was going to post on this sometime but I think some of them could spend their days playing video games that (in the background) optimize NP-hard problems. Basically, we could turn the unemployable into a giant Mechanical Turk by having them just play. I don’t think people should not work because they could pursue more interesting things. I think people should have the right not to work because they are forced to participate in our system.

    As for a consumption tax, are there any studies on how this would affect the velocity of money? I think we want to make that as high as possible rather than simply increasing NGDP. I was thinking a George’s tax on land would be a good thing to implement but I’m open to any suggestion that normalizes wealth inequality. In your situation, I want you to erase your debt as soon as possible. I’m fine with not taxing you until you attain wealth independent of your relatively high income.

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  6. That’s a really cool idea. But at some point even the combined efforts of so many humans in optimizing such problems might become trivial next to the efforts of computational intelligence working on the same problems. Maybe comparative advantage is in play then, and the computational intelligences would be better off always working on polynomial-time problems, leaving the NP-hard problems for humans.

    I don’t think we need to worry about the velocity of money. M*V = P*Q = NGDP, so the monetary authority increases M to offset decreases in V. Or in a future cashless society the interest on checking accounts can be driven negative to increase V.

    I think the Georgist land value tax is the best of all the tax options, and can fund the guaranteed minimum income. And not only can it do so, but there is a good argument that this the moral thing to do. In your terms, people can’t avoid the requirement that they occupy some land, and all land exists independently of the effort of the landowner, and largely accrues site value independently of the value of the landowner, so that site value is rightfully a part of the commons.

    There are surely additional rents obtained without the accompanying creation of value, but I think it is best to identify them specifically, and reform policy so that they dissipate or are returned to the commons, than to tax wealth independently of its origin and risk destroying incentives.

    There’s also the issue of tax incidence. Warren Buffett consumes less than a million dollars a year of real goods and services. If you increase his taxes, he will consume the same amount as before. So unless you can find a more productive way to more mobilize idle resources via investment than he can, spending the additional tax revenue just crowds out someone else’s consumption of good and services. No free lunches and such.

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  7. I think we agree that taxing all economic rents is necessary and the biggest one is probably land. I also am not wedded to a wealth tax per se but merely suggested that if we did want to tackle wealth inequality then we should at least tax that more directly rather than income.

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  8. i’m into the guaranteed income (van parijis of belgium, thomas paine, milton frideman) the tobin tax, and even herbert spencer –zero inheritance. the ‘fair tax’ and consumption taxes unfortunately dont deal wwith the land issue (henry george). wack

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  9. Cochrane suggested that instead of seeing a doctor first, he should just be allowed to buy antibiotics for his children whenever they had an earache. why didnt try natural remedy ?

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