Friday, March 27, 2009

This Recession is a Result of Irrationality

My last post was a brief summary of how I think rational actors (politicians, businesses, consumers) have all contributed to this financial panic. However, if you've been reading my blog for any amount of time, you know that I blame government for most the problem. After all greed has always existed, so that can't be blamed for this specific problem. Unless of course government created incentives that manipulated that greed. But that begs the question, if people are rational, why do we would elect politicians who push for bad policy? Economist and blogger at EconLog, Bryan Caplan argues in his book, The Myth of the Rational Voter, that bad policy comes from four irrational biases that voters have. Here's a brief summary of each:

Anti-foreign Bias: People assume that the destruction of jobs is a bad thing. Even though large numbers of farmers have been put out of work for the last 200 years, we are better off. Creating jobs isn't the solution, increasing the productivity of those jobs is.

Make-work Bias: People assume their nation is in zero sum competition with the rest of the world. This is why job exportation and trade are always under attack. Not only does free trade ALWAYS makes nations richer and usually makes them safer.

Pessimistic Bias: People overemphasize current problems and underestimate past growth. Especially now we constant hear how things used to be better, despite the fact that if you're reading this you're rich.

Anti-Market Bias: People regularly see themselves as victims of the free market instead of the beneficiaries. The few instances of scams are reported, yet the billions of beneficial transactions a day are ignored.

26 comments:

  1. Interesting. I had heard about this book and the idea frustrated me. Did you get a copy of it?

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  2. No, but it's pretty cheap online. What frustrated you about it? The only problem I had is the assumption that you can quantify voter biases into 4 categories.

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  3. "Even though large numbers of farmers have been put out of work for the last 200 years, we are better off."
    This requires explanation, especially to someone from North Carolina. I spoke with the CEO of WCI (Western Carolina Industries) about this and he said the exact opposite. Specifically, he said the outsourcing of North Carolina's textile and agricultural jobs were going to cause a huge shortage of jobs and high unemployment in the state.
    "When did he say this?" you might ask. The answer:

    2003.

    Current NC unemployment? Just under 14%.

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  4. There is no doubt that people in 2003 were better off than people in 1903. Life expectancy is up, disease control is up, and average education is up, and yet most of farmers have "lost their jobs". Every time we technologize/trade our way out of a job, we allow that person to move into a another job. Jobs aren't the answer to healthy economies. If fact, the ideal economy would no scarcity and hence have no jobs.

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  5. Wake up libertarian. No jobs = not real life. So what you're arguing is that we need to move toward a state of unreality by not caring about lost jobs. I agree, that is the end of libertarianism: idealized nonsense.

    :)

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  6. I'm not saying lost jobs don't matter. What I'm saying is jobs don't equal wealth. There were plenty of jobs 2000 years ago, but they weren't rich. Why? Because their jobs weren't as productive. They used to have 95% farm to feed the 100%. Now we have 5% farm to feed the 100%. That extra 90% are now pilots, doctors, and computer programers. Jobs don't make a nation rich, productivity of jobs does. That's why "saving" inefficient jobs (farming, autoworking, textiles) hurts America.

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  7. I was referring to this:
    "If fact, the ideal economy would [have] no scarcity and hence have no jobs."

    How about a solution that provides Americans/North Carolinians with a more productive version of their job instead of forcing them to rely on welfare due to unavailability of alternate jobs?

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  8. Despite my poor grammar, I was trying to point out that there is no shortage of jobs. In fact there are billions of extra jobs, the only problem is people don't want them. In fact, I've got 100 jobs you can do around my house for $0.05 an hour. The shortage isn't jobs, the shortage is high paying jobs. How do we get high paying jobs? Let the market do what it's been doing for 200 years, increasing productivity through trade, organization and technology. Every time we "save" jobs, we keep the market from doing its magic.

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  9. http://www.amazon.com/Below-Breadline-Living-Minimum-Wage/dp/186197471X

    I feel like all your answers work really well theoretically but are complete crap in reality. I know that specific examples make for more difficult economic discussions, but I also feel like 35 million people (11% of the US pop) are going to violently disagree with the real application of your theories. You can't feed kids with graphs my granddad used to always say.

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  10. Well let's pick an issue and talk about how "theory" (which is just an evaluation of the facts) doesn't work. How about minimum wage since you linked to it.

    Minimum wage is supposed to help the poor by increasing the minimum amount they can be paid for their labor. However in theory (and practice) this idea doesn't work. By increasing minimum wage you actually decrease the available jobs for people of low skills. Actually encouraging employers to create machines that do the work the poor would do. It helps the few that get work, but for the thousands not hired at the government rate, they are unemployed. Even worse, by decreasing the demand for low skilled labor (but supply remains the same) you actually allow employers to chose their worker based on other criteria (usually race). This actually hurts poor minorities, the very people that were supposed to be helped.

    If 35 million people disagree with me, it's only because they are irrational (see post).

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  11. So now you are arguing that we should:
    1) Get rid of unproductive jobs and let the workers who lose these jobs get more productive jobs such as "pilots, doctors, and computer programers" (which by the way you can't get with a high school degree).

    AND

    2) Lower the minimum wage to increase the number of jobs for people with "low skills."

    Think about it.

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  12. I'm not arguing that we (as in the voters) should get rid of any jobs. What I am saying is that we (as in the collective wisdom of all people AKA the market) should decide what jobs are worthwhile and which ones are not. By subsidizing jobs (like farming or manufacturing) and forcing a wage floor you distort that market. What I am saying is let employers and employees decide what to produce, at what wage, and at what price.

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  13. Anthony12:15 AM

    Let's say Mr. Jones the NC farmer has $100 dollars an hour to pay his employees. He is willing to pay $4 an hour to plow a field and hires 25 people to do this labor.

    Then the government says he is underpaying these workers and must pay them at least $5 an hour. Since Mr. Jones only has $100 to pay, he must lay-off 20% percent of his workforce (5 people).

    Who is at fault? Mr Jones the NC farmer with limited funds, or the minimum wage?

    By raising the minimum wage, the government increased unemployment. That is one of Mr. Brookie's points.

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  14. Well said Anthony. But I understand minimum wage, supply and demand. Now let's take Mr. Jones back through Harrison's arguments:
    1) Harrison says it's good that Mr. Jones lost his job.
    2) Harrison says that allows Mr. Jones to get a more productive job (actually Jones has no degree and is on welfare).
    3) Mr. Jones gets to watch the rich people with the "productive jobs" make money while he's still on welfare.
    4) (Implied): Don't raise minimum wage because we wouldn't want to decrease demand and thereby increase unemployment (Mr. Jones stays on welfare).
    5) Employers and employees don't need to hire Mr. Jones because of the cheap labor they can get.
    Conclusion: Mr. Jones wants his first job back. Oh and by the way, the only thing that did anything for him this whole time is welfare (which I don't even like).

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  15. 3) Yes, Mr. Jones may be hurt in the short run (and maybe in the long run if he is completely unable to learn any new skill, which is kind of a stretch). But if Jonesie is hurt by say $500,000 over a lifetime, America is helped by that amount exponentially for generations (because food is now cheaper). So should we save Jones' job at the expense of any who buys food for the next 100 years? No.

    5) The cheap labor you mention I assume is foreign labor. But the only reason foreign labor is cheaper is because of our minimum wage laws (and because Americans don't want to/have to work for such low wages).

    Conclusion: Welfare, just like "saving jobs" is bad because it encourages inefficiency. Welfare taxes work (which is productive). Protecting jobs taxes innovation (which is productive).

    Admit defeat McClain!

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  16. I want to shoot myself in the face. I was not making any point about welfare as you should know. I was merely stating fact. Mr. Jones cannot learn a new skill. He lives on a farm in rural NC. His only option is to sell it and live somewhere crappy on his welfare check with healthcare that doesn't cover him for 2 months of the year.

    And it's not Mr. Jones' job we are saving. That's the point that you've missed the whole time. We are saving ALL the Mr. Jones' jobs. This is my last post on this because I find your arguments ridiculous. Come to the hospital, talk to all the Mr. Jones that I see, and tell them that in the long run you are lowering people's food costs.

    I'm sure they'll thank you.

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  17. Well since this is your last response, I guess I get the last word.

    I'm not asking him to thank me, I'm saying he has no right to ask us to pay higher food prices just so he doesn't have to learn a new skill. I'm sure farming can translate into a lot of other manual labor jobs. His life won't be easy, but it will be much easier than the lives of most people during good economic times 500 years ago. And most importantly, he doesn't have to keep living in rural NC!

    We'll finish the rest of this convo via phone. Thanks for your input Paul, even if it is wrong (smile).

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  18. It's really nice having you around, Paul.

    "If 35 million people disagree with me, it's only because they are irrational."

    That statement is one of the primary reasons, if not the primary reason, people hate arguing with Libertarians.

    I agree with most of this post, but like Paul I have a hard time being convinced that it's pragmatically ok for us to lose jobs. Have you considered that increasing productivity might not be everything everyone always wanted? Americans might prefer for us to have slower growth if it means less people unemployed. Sure the market can move us toward more productive jobs, but like Paul pointed out, not everyone can do them. Remember that some of the economic theories you hate (socialism, communism) are based in a desire not to maximize profit and output and make everyone richer, but to help the poor and put food on the table of the 35 million Paul has been talking about.

    "So should we save Jones' job at the expense of any who buys food for the next 100 years? No."

    Haha, and you think him learning a new skill is a stretch? I think again I'm with Paul - I don't think it's as easy as you think it is for Jones to relocate and learn a new skill.

    I would HIGHLY recommend you read that book Paul linked to. It's amazing, and I think it would give you a new perspective on the poor which would help inform your arguments.

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  19. "That statement is one of the primary reasons, if not the primary reason, people hate arguing with Libertarians."

    Well, I said that to tie it all back in with the original post. And I agree, arguing with arrogant people isn't fun. But I don't think that's why people don't like arguing with libertarians. I think it's because they are less informed and less correct (arrogant sounding I know):

    http://harrisonbrookie.weebly.com/1/post/2008/08/some-political-vindication.html

    "Americans might prefer for us to have slower growth if it means less people unemployed."

    If that's true then maybe voters aren't uninformed and the increase in government size is actually displaying our preferences. But I don't think it is. History has proven that the best way to "put food on the table" is capitalism. It doesn't make everyone equal, but it does make EVERYONE richer (just compare our poorest to Zimbabwe's poorest):

    http://harrisonbrookie.weebly.com/1/post/2008/07/tradeoff-of-socialism-and-capitalism.html

    "I don't think it's as easy as you think it is for Jones to relocate and learn a new skill."

    I never said it was easy. And if I was cavalier with the pain they probably go through then I'm sorry. I admit a generation of unskilled workers may be worse off if they cannot/will not relocate or learn a new skill. But without a doubt, future generations are better off because of the change.

    I'll read the book when you guys give me a factual (not emotional) reason to consider I might be wrong (arrogant sounding again, sorry).

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  20. If you know these things sound arrogant then why are you saying them, brother? Isn't it possible you could argue these things without name-calling ("emotional," "irrational")? If you want to talk facts, here's one - people don't listen to people who sound arrogant. This blog is about communicating to us, right?

    It is possible for people to be just as informed as you are and come to different conclusions about the rules which govern our society. I would easily give up economic growth to get more people off the street. You can call this "emotion" if you want, but I call it virtue.

    And COME ON, you know I'm a capitalist. I'm not advocating socialism, I'm trying to convince you that its basic desire is to create a society where those in need are cared for. Where there are jobs for those who need them. And I think that's a common desire, even among Americans.

    I also find it surprising that even though I read a constant stream of things I don't agree with from your blog and your shared feed, and take the time to talk with you about them and consider your opinions with as much fairness as I can, you need a "factual" reason which measures up to your criteria of correctness to consider reading a book that two close friends recommended to you.

    Just for the record, I would really like to hear what you have to say about Paul's second-to-last post, which doesn't involve welfare criticism. I think he made some solid points.

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  21. I'm starting to realize I could have been a lot kinder in that last post. I got a little too excited, I'm sorry. Plus, it's not like your arguments here weren't called "ridiculous" and "nonsense" during this exchange. I wasn't being very fair either.

    I really enjoy reading what you write and debating you as always, friend. Keep up the good work.

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  22. Anthony12:17 AM

    I would like to field Paul's 5 points:

    1) It can be beneficial to society if Mr. Jones lost his job. Farmers receive Billions in subsidies from the Federal Gov't because there is too much competition - so the gov't props it up with our tax dollars. So yes, the less farmers then the better it is for our society - use that saved tax money (50 billion i believe?) on something else.

    2) He can get a better (for society) job. If his job is supported by our tax money - not earned business - then how is he a productive member of society? Having a need-based job is far more productive

    3) Productive doesn't = makes more money. Example: teachers vs. doctors

    4) The desperation of the few shouldn't the derail the well-being of society. Same reason the police don't give into a hostage situation. They would save the few but endanger the many. Yes, its sad the few must suffer but not at the expense of the entire population.

    5)Maybe Mr. Jones is only worth cheaper labor? Maybe his self-observed price is too high after being propped up by the gov't too long?
    Too subjective of a question/statement to make an arguement one way or another.

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  23. Thanks for the wise evaluation Justin. It can be all too easy to get mean and we can all agree there is too much of that on the internet.

    Thanks to Anthony as well, its nice to feel some support.

    Let me see if I can close out my thoughts:

    "If you know these things sound arrogant then why are you saying them"

    Please show me how! I want to be more humble in these types of conversations, but I'm honestly not sure how. How do you challenge the status quo, essentially saying 95% of the public is wrong, without sounding arrogant? Also I didn't want to imply that emotion was bad. But it's dangerous when it is used to displace facts.

    "I would easily give up economic growth to get more people off the street."

    What history has shown us is that economic growth is the best way to get people off the streets (permanently). And bad policy, no matter how good intentioned is not virtue (I think of rent controlled housing as a good example). Yes that is my desire too, but I'm very confident government intervention will only hinder that goal.

    "you need a 'factual' reason which measures up to your criteria of correctness to consider reading a book that two close friends recommended to you."

    I didn't mean to be flippant, I just don't really have time to read many books and so far your arguments on this issue haven't convinced me to read farther into them. I agree the lives of the poor are hard, but without a doubt, the poor are leaps and bounds better off than they used to be and that is all thanks to capitalism.

    "Just for the record, I would really like to hear what you have to say about Paul's second-to-last post

    Anthony did a pretty good job so I'll just add a little extra. The point I apparently didn't get across about the "creative destruction" of capitalism was that net, society is much better off. What that doesn't mean is that all people are better off. It is of course very possible that Mr. Jones cannot get a more productive job, because he doesn't have the skill to do so. But that doesn't mean the government should manipulate the market to keep his job in place. Surely you don't suggest that 150 years ago the United States should have outlawed new farming inventions that eventually led to the decreasing need for farmers. Mr. Jones may be worse off, but his grandchildren will surely benefit.

    I'm not saying there aren't losers in capitalism, what I am saying is that there are many more losers in any other system.

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  24. It seems to me if you know which statements sound arrogant, then you know how to keep from sounding arrogant.

    Just state your argument, man. Don't call people who disagree with you irrational. Or uninformed. Or emotional. How do you think this makes us feel debating you?

    I feel like I'm having a lot of words put in my mouth. I don't advocate socialism, bad policy, government intervention, or anti-capitalism. I actually agree with you that economic growth helps the poor. Did I say I think the government should manipulate the market to keep jobs in place? I don't think I did. I'm trying to help you understand why job loss is negative to a lot of people - that it
    might be harder than you admit for Jones to relocate, find that new job, and learn those new skills. But I think it's getting lost in translation.

    So you don't have time to read people who disagree with you, eh? That's your business. But the truth is the book isn't even about theory or argument. It's the story of a well-to-do woman who tried to
    see if she could live in America on the minimum wage and work her way up. Her experiences are fascinating. I don't necessarily think it would change your mind about anything - but if you're interested in
    treating these topics with more humility and understanding (which I believe would help you communicate your message better), I think it would be a great step to take.

    Oh and also, "I'll read your book when your arguments get better" also falls a little in the "arrogant-sounding" category, in my opinion. That's why I didn't say it about "The Myth of the Rational Voter" :)

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  25. "Oh and also, 'I'll read your book when your arguments get better" also falls a little in the "arrogant-sounding" category, in my opinion. That's why I didn't say it about "The Myth of the Rational Voter'"

    Touche

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You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.