Wednesday, January 23, 2008

More on the Election

One of my wife's friends asked her about my views on the economy and the election. I've already talked about the specific candidates, but I thought it might be worthwhile to give a general overview of the election from an economist's perspective.

I suspect that most economists find political campaigns frustrating. After all, a politician's goal is to get elected. Politicians that do things that don't get them elected disappear; it's like natural selection. The problem is the that the things that get them elected might not be honest or desirable. Politicians have an incentive to do and say whatever will get them into office--after all, voters are likely to forget most of what was said during the campaign anyway. Most economists that I know don't enjoy listening to political debates, because they tend to turn into a list of bad ideas.

Big Spending
For example, it always behooves a politician to promise large benefits while underplaying or ignoring costs. Remember Bush's Medicare Prescription Drug Benefit? It is outrageously expensive--an aspect that Bush did not play up while campaigning. Or consider all the candidates' promises to "invest in alternative energy". Given the government's disastrous corn ethanol policy, you can bet that additional government "investment" in alternative energy will be expensive and won't get us much, but there's very little cost in talking big. Consider, on the other hand, a candidate who said something like "I don't think government programs of this sort will tend to work out well, so I'd rather not spend the money and resources on it." Nobody wants to hear that, and such a candidate would lose out to a candidate who made big, expensive promises.

Ignorance of Economics
A related problem is that politicians and voters don't really know economics, so politicians propose policies that sound good to the untrained, but these policies are probably not actually good ideas. Most of the health reform proposals have this problem--they don't deal with the fact that people who get free health care will use it profligately, driving up costs (and if there is some form of rationing to keep costs under control, then health care isn't really free or unlimited). There is no free lunch in health care or any other area. There are certainly gains to be had from reforming health care sensibly (look at a previous post on Singapore's system), but we're not likely to get anything sensible out of our political process.

As another example, consider the proposals going around for fiscal stimulus packages. Many economists are rightfully skeptical of these, for three reasons. First, the Federal Reserve is probably better equipped to make timely and effective changes in monetary policy to direct the course of the economy. Congress, by comparison, takes months too get anything done, and doesn't really know enough about fiscal policy to get it right. Second, congressmen have strong incentives to create a bill that directs billions of dollars of pork to their home districts and campaign contributors, rather than a simple stimulus bill that gets money directly into the hands of people who will spend it. Third, it's not even clear that such a stimulus package would do anything, even if well-designed. People might simply put the money in savings, in anticipation of the future taxes that we will inevitably have to pay to finance our borrowing.

A third example: We often hear politicians propose stricter CAFE standards, rather than a higher gasoline tax, even though a higher gasoline tax makes a lot of sense, and CAFE standards make very little sense, economically speaking. Or consider the War on Drugs; economists tend to take a skeptical view of it, but politicians can't get enough of it. Is supply reduction--attacking sellers and distributors--really the best way to deal with drug addiction? There is pretty strong evidence that it is not.

A fourth example: People like agricultural subsidies. They tend to believe that without them, there would be no farmers, and no food. This is, of course, ridiculous--there are no chair subsidies, or computer subsidies, or towel subsidies, but we have plenty of chairs, computers, and towels. Since voters and farmers like agricultural subsidies, politicians provide them.

Meanwhile, many genuine problems--overfishing, for example--get ignored, because they're not sexy.

Politicians at the national level quite naturally try to make everything a national issue. Have a problem with a local landfill? Federal regulation must be the answer. Want to have your local neighborhood signage replaced? Apply for a federal grant. Are your local schools of insufficient quality? A few hundred pages of federal regulation should fix that.

Rarely will a politician say "That sounds like something that should be dealt with by your local government, not the federal government." The problem with this is that, to some extent, local governments are competing with each other. Local governments that provide combinations laws and services that people like will attract voters (and tax revenue) to them. Local governments that are poorly run will lose residents. This provides a constraint on how badly a local government can be run. Moving policies from the local level to the federal level reduces this competition, and reduces diversity (in the sense that local differences in law and policy tend to disappear, replaced by federal law and policy). Instead we get "one-size-fits-all" policy as dictated by the federal government, and it's more difficult to "vote with our feet" at the national level than at the local level (changing countries is something most of us will not consider).

Foreign Trade and Immigration
Illegal immigrants and foreign competition are hot-button topics this year. Politicians are eager to sound tough on illegal immigration, when in fact the evidence suggests that, for the most part, illegal immigrants don't have much affect on us at all--their impact on wages is negligible, their impact on prices of good and services is beneficial to us, and the costs that they impose on us in the form of net government services consumed is very small. Combine this with the fact that, as a fraction of the population, immigration (legal and otherwise) is not even all that high, and it's a lot of fuss over nothing.

People are also upset about loss of jobs foreign workers. An in-depth discussion of this topic would take a while (you might listen to the recent Econtalk with Don Boudreaux if you're really curious; it is in part about trade and trade deficits, and it is aimed at a layman audience). I will, however, ask a few questions that you should ponder. Suppose that the source of job loss was not "China" but rather a new piece of technology. Would you be just as upset? Or would you recognize that the new technology frees workers up to do something more valuable? Suppose that jobs were lost not to China but rather to a neighboring state in the U.S. Would you be just as upset, and therefore propose that trade between your states be prohibited? Or would you recognize that if a good can be produced more efficiently in, say, Georgia, your state actually is actually better off as a result of being able to get these goods cheaply, and produce something else instead (for the exact same reason that you quite wisely do not try to produce all goods and services for yourself--you'd be poorer if you tried)?

Trade is an area in which people's natural xenophobia and paranoia seem to override their senses.

We Have Met the Enemy and He Is Us
I'm being too hard on politicians. They're being rationally self-interested, just as we are in so much of our lives. It's unfair to expect politicians to be selfless angels. They're just responding to the incentives that face them. In a sense, the voters are the real problem--the politicians are just telling us what we want to hear. The truth is, we want to be told that health care can be free and unlimited, that foreigners are to blame for our problems, that corporations can be forced to clean up with no cost or behavior change required from us, and that the federal government will solve all our problems. I've mentioned Bryan Caplan's Myth of the Rational Voter too many times in past blog entries, but it really has changed the way that I see politics. We're going to be stuck with bad politicians and bad policies so long as we've got biased, economically illiterate voters--that is, we're likely to be stuck with them forever.

1 comment:

Stobber said...

Please know that I'm hopelessly addicted to your blog; these critiques are only friendly:

1. The last link (to Caplan's work) is a duplication of the prior one.

2. You omitted the word "to" at the beginning of the second paragraph in the "Foreign Trade..." section.