Glass Breaking Fun

This past week economist Greg Mankiw’s blog posted a couple of cartoons relating to the broken glass fallacy. I summarized the fallacy last July this way:

A vandal comes and breaks a baker’s window. The baker then employs a glazier to replace the window, so the glazier has more income, which he spends to by a suit. And so on, implying that the economy is better off because of the broken window. But this looks only at what is seen, not what is unseen. The baker was building up capital to buy a larger oven and hire more workers. But he had to use the capital on the window, which he wouldn’t have had to do without the breakage. So there was a loss in the economy to the baker, to his possible employees that didn’t get hired, and to the manufacturer of the new oven that didn’t get purchased. Those losses are unseen. The economy is actually worse off because of the unnecessary glass breakage.

First there was this cartoon:

From Greg Mankiw's blog

 Then there was this follow-up:

My son Political Sphere was visiting for spring break this past weekend, and we were laughing about these cartoons (I know, our forms of entertainment are admittedly a little arcane), and he asked if I’d heard about the real life example. This happened in Arizona while he was living there, so he was familiar with it; I had to look it up. Here’s a portion of the story from January 2009:

A Maricopa County grand jury returned the Jan. 22 indictment against Troy Jason Vollberg, 34, who was arrested Friday by Scottsdale police.

The indictment contains 12 felony counts including fraudulent schemes, aggravated criminal damage and burglary in the first degree….

Those documents accuse Vollberg, owner of Tri-State Glass, of being the mastermind behind an effort nearly two years ago to bilk the Scottsdale Unified School District out of hundreds of thousands of dollars to replace broken bus windshields.

Investigators claim Vollberg paid Scott Sloan $5,000 to find a person to knock out the glass, and then paid Mike Olivares $15,000 in April 2007 to break out the front windshields of 70 school buses in a Scottsdale bus yard.

Vollberg, whose company was a subcontractor for the school district, charged the district $134,000 to repair the windshields.

Police documents say Vollberg pocketed the money and used it for a "trip to Las Vegas and new tires for his truck."

This is a real-life example of literally broken glass. Clearly the prosecution shows there is a belief by society that Vollberg’s “contribution” to the economy was not a net positive. Yes his glass repair company (or mainly himself) got a temporary net increase of $134,000, pretty significant business. He “invested” $20,000 to a couple of thugs to do the actual glass breakage, so subtract that amount from his profit, but include it as being spent elsewhere in the economy. And then he spent a chunk of the profits on a trip to Las Vegas, contributing to the tourism industry, and also purchasing new truck tires, with some trickle-down economic benefit there. All positives so far, right? Then why the prosecution?

Because he caused the school district to spend $134,000 of its budget on bus window repairs. Now, I’m often critical of the way public schools prioritize their spending, but I can’t imagine any district preferring to spend their budget on vandalism repair, for the sake of the economy, at the expense of educating children.

Later on, Vollberg “invested” $8,000 to hire a thug to break windows at a trucking company, where he got a return of $45,000 for repairs, and additionally spent a mere $10,000 for smashed bus windows—again—this time charging $270,000. It was the inflated price for repairs this time that set off the investigation that finally uncovered his window-breaking scheme. So, this one man has given us plenty of real life case studies.

If it’s not clear to you that damaging other people’s property in order to profit yourself is (and should be) against the law, you may be a Keynesian. If you believe in respect for private property, and believe the use of capital for positive ends is better than for unnecessary damage repair, you may be a free marketer (AKA classical economist).

More pertinent (and more in accord with the cartoons), Keynesians believe government ought to "stimulate the economy" by spending money somewhere, even if it means "breaking some glass" to spend it on, while free marketers believe government interference is much more likely to harm than help the economy.

Fun with Economics

I considered talking about Paul Ryan’s economic reforms, in the news yesterday. It has been a while since we talked here about economic issues. (It’s harder to get commentary here at home right now, since my son Economic Sphere left for the Army, although Political Sphere can fill in pretty adequately; he's just having more fun doing the math on delegate counts.) But that seemed kind of serious for the beginning of spring, when bluebonnets are decorating the highways here in Texas.

It was my experience as a college freshman that economists are funny. In a good way. I laughed a lot in that class, as the teacher intended. He seemed energized by our laughter. But it does take some thinking to get the humor.

I often check in with Greg Mankiw’s blog; he’s a Harvard economics professor (author of the most popular basic economics textbook used in the country) and an economic advisor to presidential candidate Mitt Romney. And sometimes his sense of humor is evident in the blog. Today he references a summary of his 10 Principles of Economics, in a video, translated by yet another funny economist.

Here are the 10 principles:

1.      People face tradeoffs.

2.      The cost of something is what you give up to get it.

3.      Rational people think at the margin.

4.      People respond to incentives.

5.      Trade can make everyone better off.

6.      Markets are usually a good way to organize economic activity.

7.      Governments can sometimes improve market outcomes.

8.      A country’s standard of living depends on its ability to produce goods and services.

9.      Prices rise when the government prints too much money.

10.  Society faces a short-run tradeoff between inflation and unemployment.

So, sensible, but not funny—yet. But when Yoram Bauman, the Standup Economist, translates these principles for the lay person (anyone without a PhD in economics, he suggests), you start to see the humor. And it’s important to laugh when times are as serious as they are today. Plus, there's evidence that when the learning environment is positive (and funny is positive), learning sticks better than when the environment is negative (boring or scary).

The video is a little more than five minutes well spent.

Unprecedented

I wrote on the president’s mandate that Catholic entities pay for birth-control and abortifacients both last Friday and the week before that. But as I wrote on Friday, the president came out with his “compromise”:  instead of having the Catholic Church pay for these services that go against its conscience, he would simply have them pay for the insurance plan without those services, and then the insurance companies involved would go ahead and provide the services for free.

On Saturday, economist Greg Mankiew posted a very clear summary of the “compromise.” It’s brief, so I’m including the whole thing.

Semantics at the Highest Level

Consider these two policies:

A.     An employer is required to provide its employees health insurance that covers birth control.

B.     An employer is required to provide its employees health insurance. The health insurance company is required to cover birth control.

I can understand someone endorsing both A and B, and I can understand someone rejecting both A and B. But I cannot understand someone rejecting A and embracing B, because they are effectively the same policy. Ultimately, all insurance costs are passed on to the purchaser, so I cannot see how policy B is different in any way from policy A, other than using slightly different words to describe it.

Yet it seems that the White House yesterday switched from A to B, and that change is being viewed by some as a significant accommodation to those who objected to policy A. The whole thing leaves me scratching my head.

In other words, it is not a compromise; it is simply word play.

A couple of days earlier Mankiw had linked to a Wall Street Journal piece written by John H. Cochrane, “The Real Trouble withthe Birth-Control Mandate,” with some additional basic insurance information it is helpful to understand. Cochrane says,

Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill.

Insurance is a bad idea for small, regular and predictable expenses. There are good reasons that your car insurance company doesn’t add $100 per year to your premium and then cover oil changes, and that your health insurance doesn’t charge $50 more per year and cover toothpaste. You’d have to fill out mountains of paperwork, the oil-change and toothpaste markets would become much less competitive, and you’d end up spending more.

He goes on to point out that the government’s interference with individual decisions about purchasing birth-control and related things is bound to raise the cost of those things, making it even more difficult for poor people to choose to pay for them—except that the government will “make it free.” But since they aren’t actually free, government is in fact causing society as a whole to pay more.

There’s a larger point than the religious exemption. Cochrane ends his piece with this:

The critics fell for a trap. By focusing on an exemption for church-related institutions, critics effectively admit that it is right for the rest of us to be subjected to this sort of mandate. They accept the horribly misnamed Patient Protection and Affordable Care Act, and they resign themselves to chipping away at its edges. No, we should throw it out, and fix the terrible distortions in the health-insurance and health-care markets.

Sure, churches should be exempt. We should all be exempt.

With Obamacare, we have a series of unprecedented and progressively onerous mandates:

·         Never before has the federal government required individuals to enter the marketplace and make a purchase simply because they breathe American air.

·         Never before has the federal government required individuals to enter the marketplace and make a purchase that violates their conscience, which they would never purchase of their own free will.

·         Never before has business (nor a person, since slavery was outlawed) been required to provide products/services for which it will receive no remuneration.

All, in my opinion, are considerably more tyrannical than the grievances listed in the Declaration of Independence that led the founders to break free from Britain. All are clearly unconstitutional. If we cannot get the president impeached for these (and other) violations of our law, then we must, absolutely must, remove him from office through this year’s election.

Fun with Economics

I think I’ve mentioned before (several times) that I think economics is fun. I don’t do the heavy-math predict-the-market kind of economics, just basic common sense stuff about how markets work and what the terms mean. 

Greg Mankiw, blog photo

So this week I was amused by some incidents at Harvard. It seems some Ec 10 (Basic Economics) students protested Greg Mankiw’s class by walking out during his lecture and joining the Occupy crowd in Boston for a day.  

“I urge all students to walk out of Ec 10, [because it] represents the ideology that brought about our current economic situation,” shouted organizer Gabriel H. Bayard ’15 (quote from The Harvard Crimson on Wednesday).  

Greg Mankiw's blog on Wednesday points out what the protesters would miss: “Ironically, the topic for today’s lecture is the distribution of income, including the growing gap between the top 1 percent and the bottom 99 percent. I am sorry the protesters will miss it.”

The whole sequence of events was in his Wednesday blog, so I’m just giving you the highlights from some of the links here. First off, the Ec 10 protesters published an open letter to Prof. Mankiw, accusing him of right-wing bias.

Then former student Jeremy Patashnik, a self-proclaimed liberal, published a very supportive piece identifying what is actually taught in the course, and challenging anyone to find something biased in it. The article is long, but thorough and well done. There’s a philosophical explanation in the middle that is particularly informative: 

One lesson from the first day of Ec 10 that will stick with me for the rest of my life is learning to separate positive questions from normative ones. Most of the economics that we read about in the news involves normative questions (eg. Should Congress raise the marginal tax rate on the highest income bracket?) whereas most of what economists actually study involves positive questions (eg. What would happen if the marginal tax rate on the highest income bracket were raised?). Ec 10 is an introduction to the academic discipline of economics, and the vast majority of the course focuses on teaching students how to answer positive economics questions. 

Economics is not philosophy, and the primary goal of Ec 10 is not to teach students how to make the world a fair place. If protesters feel that the course spends too much time discussing how to make the economic pie as big as possible and not enough time discussing how to slice the pie equitably, I would point out that it is Professor Mankiw’s desire to avoid bias that drives this. After all, asking how to make the pie bigger generally entails positive questions; asking how to slice the pie fairly almost exclusively involves normative questions….  

Another criticism that some protesters have raised against Ec 10 is that its models are oversimplified and it is difficult to extrapolate real-life conclusions on important normative questions from the course. Again, I disagree here. You can’t hold informed positions on these normative questions without being able to answer the positive ones, and you can’t answer the positive questions without a fundamental understanding of the principles of economics. But building this foundations takes time. Premeds don’t grumble that Life Science 1a does not qualify them to practice medicine; Ec 10 students should understand that the class will not equip them to fully understand the vast complexities of economic policy. Ec 10 builds a foundation to begin to answer these questios intelligently, but as in all academic disciplines, if you want to be an expert, you’ll have to invest more than one year of study.

Mankiw describes walk-out day: “About 5 to 10 percent of the class participated in the walk-out. At the same time, some previous Ec 10 students came in to sit in the lecture as counter-protesters. The lecture then proceeded as planned.” 

The Harvard Crimson followed up with an editorial pointing out the lack of intellectual integrity of the protesters:  

Even if Ec 10 were as biased as the protesters claim it is, students walking out to protest its ideology set a dangerous precedent in an academic institution that prides itself on open discourse. This type of protest ignores opposition rather than engages with it. Instead of challenging a professor to back up his claims, it tries to remove him from the dialogue.

It was my experience in college that basic economics teachers had a great sense of humor and entertainment. That seems to hold true for Greg Mankiw. 

Now, if only our current president had taken enough basic economics to gain a fundamental understanding. More on that another day.

The Rich Are Getting Poorer

The other evening my son Political Sphere was sharing with me Greg Mankiw's latest blog post. Mankiw is a professor of economics at Harvard; a textbook he authored is probably the most widely used for college freshman economics. He’s a free market guy, former advisor to Pres. Bush and advisor to Mitt Romney. And he has the skill of posting skillfully short blogs, with links to all the harder stuff.

Here’s the main paragraph:

 

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

 

Clearly the wealthy had a greater fall in income than the median (median means as many individuals earning more as earning less). But, then, the wealthy have so much more to lose, maybe they can afford it. So I asked what the percentage losses were. Political Sphere crunched the numbers and made me some charts.

 

This first one shows the simple amounts of loss for the different groups.

 

A median income earner loses the ability to make a car payment or two, or to buy a new computer, or to pay a dentist bill. It will be felt, but as long as this doesn’t continue year after year, it will probably be recoverable, and it looks like only the median earner and immediate family are affected. The overall economy might be more sluggish, but no jobs will be directly lost.

The top percentile earner loses enough to need to downsize by a couple of median employees, or sell a high end automobile. Or a mortgage payment would have to be $5500 lower per month, so a high end home would have to be sold, or would not be built at all. Even for one year, that amount has a significant impact on the top percentile, and on some lower earners as well.

 

As for the really high earner, the top 10^th of a percentile (best earner out of a thousand), the loss is almost three quarters of a million in income per year. That means that a business will not get startup capital, or an existing business will not expand. It means 22 employees that will get laid off and not rehired until the income returns with certainty. It means a high end home will not be built, or maybe three median homes that could have been rental property. The loss to the top earner is significant, and a sizable number of lower and median earners will be affected.

This second chart shows the percentage of loss to each of the groups.

 

So that means that for every $100 a median earner used to make, he/she has $99 to spend. Someone in the top percentile gets only $84 to spend out of every $100 he/she used to make. And the top 10^th percentile gets only $66 to spend out of every $100 he/she used to make. Mankiw’s point is that “high-income households have riskier-than-average incomes.” The more you make, the more you are likely to lose during economic downturns.

If you’re into class warfare, maybe seeing the rich get poorer makes you smile. But if you’re into a healthy economy, you’ll see that this isn’t about leveling the playing field; it’s about lowering the standard of living overall. More wealth created by those who know how to create wealth means more wealth in the economy as a whole, which affects everyone. Less wealth means less capital, less spending, less spreading it around. Maybe there’s wisdom in the commandment, “Thou shalt not covet.”