Accounting vs. Economics

I've never been a big Scott Sumner follower, but I read something he wrote earlier this month and I haven't been able to get it out of my head.

Here's a common theme I see. Most liberals prefer to think like accountants, not economists. The dismal science focuses too much on the "no free lunch" concept. The idea that there are trade-offs, that incentives affect behavior. The idea that making failure less costly, also makes it more likely to occur.

That was a huge eureka moment for me. A few days after I read that I attended a left-wing anti poverty conference for work. I wasn't impressed with the framing most of the issues received, and I felt like Scott Sumner was yelling in my ear the whole time. The policies they advocated assumed a static world, where people will keep doing what they're doing now ever after new policies are introduced that will change their incentives.

For example, the minimum wage was introduced as a way to help the impoverished. It came up over and over again as a basic transfer of wealth from the business owners to workers. There was zero pushback, such as concerns about jobs being cut, people with more impressive resumes taking the jobs away from unskilled poor workers or price increases that will harm poor consumers. They simply assumed a static world, except with money moving from one pile to another.

Frédéric Bastiat famously wrote:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Sumner did not call liberal economists bad economists. In fact, he praised them for coming around in the 1990s and championing market-based policies - something left wing economists still embrace. Instead, he was talking about the left in general.

It's normal for non-economists to have terrible, warped view on economic matters. It is the default, sadly. But what's troubling here is the way progressives attempt to mettle with economic matters by treating it as a series of accounting issues. They don't seem to realize that their attempts at moving money around changes the way people behave, and it explains why so many of their policies don't work as planned.

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Focus on the consumer, not the merchant

This week I stumbled across two mournful articles about trends that benefit the consumer. The first was about how Amazon.com is gearing up to offer faster deliveries for free, including same-day deliveries, and the second was on how the country is suffering from a "glut" of lobsters that is pinching lobstermens' bottom line

"Glut" being a negative way to describe an abundance.

The Amazon article reveals an interesting twist. Brick and mortar retailers have (falsely) claimed that Amazon's low prices come from online purchases being free of sales taxes, not the massive economies of scale. Now that multiple states have started forcing the company to collect that tax, Amazon isn't restricting its warehouses to tax haven states and will have less distance to cover when it ships from these new locations. The slight price increase for Amazon goods will be offset with faster deliveries.

In all fairness, the lobster story did manage to give a decent amount of focus on a customer who benefits from these lower prices.

While lobstermen wring their hands, consumers are making the most of the low prices. At a busy intersection in South Portland, Maine native Barbara McFarlane parks her car and heads for an early lunch at Docks Seafood restaurant and market.

 "We just love lobster. We're Mainers, and usually we can't afford it," she says. "It's grand to be able to afford it this year." 

I can sympathize with the reporter here. I've had to write multiple stories for different newspapers about how a warm winter didn't allow specific merchants to profit off of customers. I made sure to include some examples of those who benefited from the weather, such as a motorcycle shop and a public works department that saved a lot of taxpayer money in road salt.

Despite some good efforts from the reporters, the headlines their editors gave the pieces were unreasonably negative for two stories about consumer benefits. They were "Lobster Glut, Low Prices Leave Boats High And Dry" and "I Want It Today: How Amazon’s ambitious new push for same-day delivery will destroy local retail."

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More mandated coverage for health insurance

I like my headline better: "Obama administration raises health insurance costs."

This week the New York Times wrote about the president forcing all health insurance plans to provide contraceptive services to women. But that's not all.

In addition to contraceptive services for women, the government will require health plans to cover screening to detect domestic violence; screening for H.I.V., the virus that causes AIDS; and counseling and equipment to promote breast-feeding, including breast pumps.

Other preventive services that must be covered, without co-payments, include screening for gestational diabetes in pregnant women; DNA testing for the human papillomavirus as part of cervical cancer screening; and annual preventive-care visits.

The recommendations come from the National Academy of Sciences, which apparently does not include any experts in economic science:

The National Academy of Sciences said the Obama administration had told its experts not to consider “the cost-effectiveness of screenings or services” in deciding which ones to recommend. Insurers expressed concern that coverage for some of the newly required preventive services could be costly.

What an absolutely beastly thing to say.

How could the National Academy of Sciences agree to go along with such a perverse order? What they are focusing on is what actions will have any improvements on health. They are not considering what the costs of those actions will be, including any side effects.

When you make an insurance company pay for more things, they will always respond with raising rates. Those increases in rates will impoverish some people, and will push insurance just out of the price range of others. Those people will be harmed, but they will not know what drove the prices up. Those people are invisible.

But the people helped by the policy will be easy to spot. They will end up in campaign ads. They are visible, and the visible always have the upper hand in politics.

There are two results that will absolutely happen as a result of this increased coverage mandate:

1: Health insurance rates will increase.

2: Those increases will be blamed on the insurance companies who have no choice but to follow the law. The administration will not be blamed or accept any responsibility.
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My greatest intellectual influences

Not too long ago Kevin "Angus" Grier and Tyler Cowen wrote about the books that influenced them the most and I feel inspired to do the same. The catch is that my generation also learns a lot from videos, podcasts and essays, so I've included them as well.

• Politics and the English Language by George Orwell. This brilliant essay introduced me to six of the seven rules of writing I live by (the extra one was provided by a high school English teacher - put the focus of the sentence at the beginning, and not the end). In addition, Orwell mocked the blocky, obtuse writing of eggheads - something I have never stopped doing. A companion influence is The Elements of Style by William Strunk and EB White.
  
• Guns, Germs and Steel by Jared Diamond. A research trip to Papua New Guinea for bird physiology lead to Diamond's provocative explanation for international inequality and provides powerful examples of how innovation, trade and specialization all create wealth. I confess to never reading the book and only watching the National Geographic documentary.
• Economics in One Lesson by Henry Hazlitt. This taught me the Broken Window fallacy, and it's countless forms. Fallacies have an eternal nature and its important to recognize all their mutations. Companion influences are essays by Frédéric Bastiat; both That Which is Seen, and That Which is Unseen and the satirical Candlemakers' Petition.
• Milton Friedman. His entire body of work is so important to me that it's hard to find a single lecture, essay, book or video to link. Hopefully this 1978 exchange does the trick. There has never been a greater champion for the rights of the individual than Friedman. He taught me that trying to save a society directly will destroy it, while empowering the common man will save the society at large.
• Economics for Dummies by Sean Masaki Flynn. I was concerned I was learning too much of economics from libertarian sources, so I went out of my way to learn the basics from a neutral source. Flynn was the right man for the job - a Keynesian who wasn't shy to call Karl Marx discredited. Flynn reminded me that reasonable people can disagree.
  
• Pop Internationalism by Paul Krugman. I'm a Krugman hipster - I like his old stuff better. David Henderson called this the best book on trade around. Krugman outlined the case for free trade and dismantled a number of economic fallacies in a short, accessible format. This is a lively book and I still enjoy thumbing through it. A companion influence is Krugman's 1997 article In Praise of Cheap Labor which nailed the moral argument in support of sweatshop labor.
• Cornucopia: The Pace of Economic Growth in the Twentieth Century by J. Bradford DeLong. Originally, I started referencing Krugman and Delong because their status as loud left wingers made my economic points appear stronger and universal. Today I link them because they have produced some amazing work. This essay on how much wealthier we are today, and how hard it is to measure that wealth, is nothing short of astounding. It's easy enough for anyone to read, and absolutely everyone should read it.
• The Demon-Haunted World by Carl Sagan. The best introductory book to scientific skepticism around. Chapter 18, The Wind Makes Dust, taught me to appreciate Yankee ingenuity for what it is: people learning science the moment it becomes practical to their lives. A companion influence is the Skeptics' Guide to the Universe podcast.
• Seanbaby. My favorite internet comedy writer. He shaped my sense of humor and steered me towards appreciating the hokey, the kitschy and the unintentional.
• The Road to Serfdom by Friedrich August von Hayek. This book solidly trounced the concept of central planning. However, it suffers from the strained writing style of Austrian-born Hayek. George Orwell reviewed this book, which tells us he read it. Unfortunately, Hayek couldn't read Politics and the English Language before he wrote this important book; this book predates that essay by two years.
• The Myth of Violence by Steven Pinker. This 20 minute lecture is the ultimate answer to anyone who argues that modern society have brought about an epidemic of violence. Pinker demolishes that idea, shows its quite the opposite and makes a strong case for the peaceful effects of international trade.
• EconTalk hosted by Russ Roberts. I found this podcast when I wanted to find out what economists think of "buy local" campaigns - and boy did I get an answer. Roberts has a constant stream of fascinating and counter-intuitive guests. When I was a kid I always saw intellectual programs as stuffy and dull. I've learned this is seldom the case, and when Roberts invites Mike Munger onto the show I know I'm in for some solid humor as well as economics.

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