Friday, November 07, 2008

Big Picture Economics

Politicians love to talk about how they're going to make us better off. They'll give the middle class a tax cut, or declare War on Poverty, or stimulate the economy or spend money and create jobs.

But most of what they do is just a shell game, moving money around. It's either Robin Hood (taking from the rich to give to the poor), Robber Baron (taking from the disenfranchised and giving to the powerful), or just plain robber (taking hard-earned money from people who earned it and giving it to lazy people who don't deserve it), depending on your point of view and whether or not you belong to the party that won the last election.

In the grand scheme of things, it's all about productivity. We are wealthier than our ancestors because our parents and grandparents figured out how to be more productive-- how to produce more with less. We produce more food on an acre of land, more cameras with less raw materials, and drive further using a gallon of gasoline than before.

Our environment is cleaner and healthier than it used to be, too, because they figured out cleaner, safer, more efficient ways of producing goods and energy and entertainment.

Whenever I think about what the government should be doing in the current financial and economic crisis, I try to see things through the "productivity lens"-- what policies will make us more productive?

Does increasing the minimum wage make us more productive? (no, it looks like it just raises teenage unemployment, and unemployment is bad for productivity.)

Does lengthening unemployment benefits increase productivity? (these researchers say yes, although these ones find that it is mostly wealthier people who take advantage of extended unemployment insurance-- and since everybody pays into the unemployment insurance system lengthening benefits might just end up being Yet Another Regressive Tax.)

Does spending money on public works projects make us more productive? (yes, if they're fulfilling an actual need and aren't just make-work projects or pork-barrel projects designed to make politically connected contractors rich.)

Is it better for productivity to tax when money is spent or earned, or does it not matter? (I don't know. I do know that a simpler tax system would make us all more productive, because we'd spend less time and money on the unproductive task of filling out forms to make the IRS happy.)

The economy is a huge, complex, chaotic system that nobody fully understands. I think the best the government can do is create policies that will encourage and reward productive behavior, and then stand back and get out of the way.


Larry Kelley said...

When products or services compete they get better; but only when the playing field is level.

Government--even in little old Amherst--only need enforce actual safety issues (across the board)...otherwise, get the Hell out of the way.

Gavin Andresen said...

I think there's a (small) role for government beyond safety; true "public goods" like street lights or streets are almost certainly best provided by government.

It's amazing, though, how many things people throw into the "public goods" category. When I lived in California city taxes paid for trash collection, and people couldn't conceive of it being any other way. "Without public trash pickup you'll have trash piled up in the streets!"

I'd bet $100 that Amherst's competing private trash companies haul more trash for a lot less money than the City of Palo Alto.

Larry Kelley said...

When I was growing up in Amherst (a long time ago) trash pickup was the job of the DPW. Not any more of course.

And Brian Morton first came to notice a dozen years ago after he did a presentation on the floor of Town Meeting about how inefficient the DPW was at leaf pickup (speaking against a capital item for a leaf loader).

Of course at the time he was running a private landscape company, so he would know all about that.

Anonymous said...

Good point about the differing defintions of "public good!" Where I came from and additionally from a public health perspective, trash removal is considered an essential part of government service.