A friend sent me this blog entry from Createquity, a blog about arts in society that occasionally dabbles in critiquing the field of economics.   The entry makes the case that economics is flawed in how it values welfare, and that economists don’t care about poor people.  

I generally agree that economics does not value welfare perfectly—as, I would guess, many economists would as well.  A basic tenant of economics is that we can’t directly measure utility (I covered this in my intro to econ class, anyway).  We know there are some rules that define the relationship between utility and the price we are willing to pay for things.  For example, if a person is willing to pay more for an apple than an orange, we assume the apple had greater utility to that person than the orange.  So we use the amount that people are willing to pay for things as an imperfect proxy for utility.

As this relates to poverty,  economists do know there are declining returns to income/consumption.  Imagine you give a child $1, and she buys a doll.  You give her another $1, and she buys candy.  Since she chose to buy the doll first, she must value the doll more than the candy, so the first $1 was of greater value to her than the second $1.  The difference in those values will be starker when comparing the first $1 of income that a person spends on food or shelter to the millionth $1 of income that the person spends on a designer purse.

While we can recognize these things in individual situations, it is very hard to account for them more broadly.  The author compares a poor consumer to a rich consumer who are both competing for an auction item.   While the author’s example contains some problematic details (for example, the rich consumer thinks the item is something else, which is an example of a widely recognized market failure: imperfect information), the main problem with the example is that while the author can assert the poor consumer values the item more, in real life, this can be difficult to ascertain.   In some cases it is clear—a starving poor person must value a sandwich more than a person who just ate a seven course meal.  But how do you know who values a flat screen TV more?  Just because that guy who lives in his parents’ basement says there is no way a millionaire could value a TV more than he does doesn’t mean it’s true. 

Attempting to assign more utility to the same dollar value creates problems.  Measuring welfare differently for each consumer ignores the supplier.  While selling a flat screen TV to the basement boy for $50 instead of to the millionaire for $5000 might result in more welfare for the consumer, what about the supplier who just lost $4950?  To the supplier, $1 is $1, whether it comes from basement boy or the millionaire.  Even if the welfare gain to the consumer is enough to outweigh what the supplier lost, there are also incentives to consider.   Economics often has to make trade-offs between what is immediately welfare maximizing and incentives.  Using dollars to measure welfare gives people incentive to produce things that are valuable to other members of society.  Society doesn’t value basement boy’s couch-warming service.  It does value whatever good or service the millionaire (or his grandfather) provided.   When we use dollars to measure values, we are measuring in units of value to society as a whole, not to individuals.

In some cases, trying to take some of these effects into account may make sense.  Imagine trying to measure GDP, taking declining returns to income.  One could argue that that would be a useful measurement, as it might capture welfare gains from using what we produce more equitably.  Instead of just estimating the market price of every good and service produced in the economy (quite a task in itself), we’d have to track who consumed each good and service, then try to figure out where that spending ranked on that consumer’s priority list.  Have fun doing this for exports!!

None of these points are intended to refute the argument that welfare is imperfectly accounted for in economics.  They are merely intended to explain why economics measures welfare in a way that can seem callous: it’s the best we’ve come up with so far.

In addition to the fact that economics cannot perfectly capture welfare, there are things that economics cannot capture at all: morals.  Economists can tell us the cost of providing food stamps, subsidized housing, or free education; we as a society must decide if we think that cost is enough to justify allowing some of our population to have inadequate food, shelter,  or education.  Economists can tell us the costs of measures to protect endangered species; we must decide if those costs outweigh the costs of losing one of earth’s creations forever.  Economists can tell you the economic benefits of legal abortion; we must decide if aborting an embryo is wrong.  Economists believe that we should make informed decisions, and try to provide as much information as possible about the economic costs and benefits of each alternative.   It may or may not be true that economists value helping poor people less than the average citizen (however, I would note that economists who vote Democratic outnumber those who vote Republican by 2.5 to 1, suggesting that economists support social safety net programs as a rate higher than the general population).  But if society decides that helping poor people is not worth the costs estimated by economists, then perhaps society needs to look critically not only at economics, but its own values. 

In this clip, Oscar the Grouch's GNN (Grouchy News Network) just isn't grouchy enough, prompting viewers to switch to a "trashier" news show: Pox News. 

Obviously the Obama administration is leaning on PBS. You can do your part to show PBS that this is unacceptable: don't buy any products from companies that advertise on their channel.  


Clearly I need to watch more Sesame Street. Happy 40th!

Treasury Secretary Geithner testified at the House Financial Services Committee again today, underscoring the need for financial regulation reform. Nothing new was proposed, but Secretary Geithner reiterated the Administration's proposals and urged quick action on reform.

Chief among the proposals are:
1. The formation of a consumer protection agency that would regulate all financial services; including credit cards and mortgage brokers     
2. Merging the Office of Thrift Supervision and the Comptroller of the Currency into one national bank supervisor;
3. Increasing the Federal Reserve's powers to regulate bank holding companies like Goldman Sachs
4. Creating a board with representatives from all the regulators to look for systemic risks and coordinate financial oversight policies
5. Increasing capital requirments and other regulations on large, "too big to fail" financial institutions, and using ex posts taxes on large financial firms to recoup the costs of any future bailouts

The strategy for finacial regulation reform is to try to pass individual pieces of legislation addressing each issue.  Some of these items will be easier to achieve than others.  House Financial Services Republicans agree on the need for increased consumer protections and an over-arching body to look at systemic risks and coordinate regulatory policy among agencies.  They differ on the future role of the Federal Reserve and on dealing with insolvent firms.  Republicans propose stripping the Federal Reserve of all of its regulatory powers, and giving them to the national bank supervisor.  The also propose a policy of no bailouts, even for systemically important firms.  Both of these proposals seem rather radical (and very unlikely to be implemented with a Democratic House, Senate and Administration), and it is likely they are designed to pander to anti-Fed and anti-bailout sentiment in voters.

Most of the Democratic proposals seem like reasonable responses to some of the problems that contributed to the financial crisis.  However, I wonder about the plausibility of the plan to recoup bailout costs ex post.  In a wide-spread financial crisis, where many or most large financial firms take large losses, an ex post tax could be a significant burden on the remaining (and as evidenced by their continued existence, the most prudent) financial firms as they attempt to recover. A thought that occurs to me-- which I am sure will be unpopular-- : in a situation where the risk was as widespread and systemic as it was in this crisis, not all of the blame rides on large financial firms.  Many individuals benefitted from cheaper credit prior to the crisis; credit that was, in retrospect, too cheap.  No regulations can foresee all future crises, and it is in part the responsibility of the government to adapt to evolving financial markets and address new systemic risks that arise.  Perhaps when the government fails at this, it should bear part of the cost of fixing it.

My impression of the people participating in the Tea Party protests is that they represent a group of people who are broadly disgruntled for a large variety of reasons.  Some are concerned about abortion, others about health care or bailouts, and still others about the budget or national security.  While some may be very knowledgeable, many seem to know very little about the issues they are fixated on, suggesting to me that they are just generally unhappy and scared. 

The 9/12 focus of the Tea Parties is very interesting to me.  I have been told that the idea is that the protesters would like to return to a time when the country was largely united, patriotism was celebrated, and we had a popular Republican President. While I understand why they would appreciate those values, I find it more than slightly morbid. It seems to suggest it would be better to live in a world where 3,000 people died yesterday and things are black and white than live in a world where problems are complex, there are shades of gray, and we must find ways to compromise when we disagree.

Will a general sentiment of unhappiness among this faction be a problem for the Democrats in mid-term elections? It could be; midterm elections are often rough on the President's party anyways. Democrats will need to get healthcare reform passed and get implementation started without disaster if they want to do well. However, I doubt this contigent will put Obama in much danger in 2012, unless the Republicans can find a compelling candidate who doesn't scare moderates.  There was similar strong dislike of President Bush before 2004, but without a great Democratic candidate, there wasn't enough force to push President Bush out of office.  At this point, it looks like the Republicans could be in a very similar situation in 3 years.