Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

cared when the huge oil tanker Exxon Valdez ran aground and despoiled the area. Government can make us collectively better off by protecting these kinds of resources.

Obviously not all collective endeavors require the hand of government. Wikipedia is a pretty handy resource, even for those who don’t make voluntary contributions to keep it up and running. Every school, church, and neighborhood has a group of eager beavers who do more than their fair share to provide important public benefits, to the great benefit of a much larger group of free riders. Those examples notwithstanding, there are compelling reasons to believe that society would underinvest in things that would make us better off without some kind of mechanism to force cooperation. As much as I love the spirit of Wikipedia, I’m comfortable leaving counterterrorism in the hands of the FBI—the government institution we’ve created (and pay for with taxes) to act on our behalf.

Government redistributes wealth. We collect taxes from some citizens and provide benefits to others. Contrary to popular opinion, most government benefits do not go to the poor; they go to the middle class in the form of Medicare and Social Security. Still, government has the legal authority to play Robin Hood; other governments around the world, such as the European countries, do so quite actively. What does economics have to say about this? Not much, unfortunately. The most important questions related to income distribution require philosophical or ideological answers, not economic ones. Consider the following question: Which would be a better state of the world, one in which every person in America earned $25,000—enough to cover the basic necessities—or the status quo, in which some Americans are wildly rich, some are desperately poor, and the average income is somewhere around $48,000? The latter describes a bigger economic pie; the former would be a smaller pie more evenly divided.

Economics does not provide the tools for answering philosophical questions related to income distribution. For example, economists cannot prove that taking a dollar forcibly from Steve Jobs and giving it to a starving child would improve overall social welfare. Most people intuitively believe that to be so, but it is theoretically possible that Steve Jobs would lose more utility from having the dollar taken from him than the starving child would gain. This is an extreme example of a more general problem: We measure our well-being in terms of utility, which is a theoretical concept, not a measurement tool that can be quantified, compared among individuals, or aggregated for the nation. We cannot say, for example, that Candidate A’s tax plan would generate 120 units of utility for the nation while Candidate B’s tax plan would generate only 111.

Consider the following question posed by Amartya Sen, winner of the 1998 Nobel Prize in Economics.13 Three men have come to you looking for work. You have only one job to offer; the work cannot be divided among the three of them and they are all equally qualified. One of your goals is to make the world a better place by hiring the man who needs the job the most.

The first man is the poorest of the three. If improving human welfare is your primary aim, then presumably he should get the job. Or maybe not. The second man is not the poorest, but he is the unhappiest because he has only recently become poor and he is not accustomed to the deprivation. Offering him the job will cause the greatest gain in happiness.

The third man is neither the poorest nor the unhappiest. But he has a chronic health problem, borne stoically for his whole life, that can be cured with the wages from the job. Thus, giving him the job would have the most profound effect on an individual’s quality of life.

Who should get the job? As would be expected of a Nobel Prize winner, Mr. Sen has many interesting things to say about this dilemma. But the bottom line is that there is no right answer. The same thing is true—contrary to what politicians on both sides of the political spectrum will tell you—with issues related to the redistribution of wealth in a modern economy. Will a tax increase that funds a better safety net for the poor but lowers overall economic growth make the country better off? That is a matter of opinion, not economic expertise. (Note that every presidential administration is able to find very qualified economists to support its ideological positions.) Liberals (in the American sense of the word) often ignore the fact that a growing pie, even if unequally divided, will almost always make even the small pieces larger. The developing world needs economic growth (to which international trade contributes heavily) to make the poor better off. Period. One historical reality is that government policies that ostensibly serve the poor can be ineffective or even counterproductive if they hobble the broader economy.

Meanwhile, conservatives often blithely assume that we should all rush out into the street and cheer for any policy that makes the economy grow faster, neglecting the fact that there are perfectly legitimate intellectual grounds for supporting other policies, such as protecting the environment or redistributing income, that may diminish the overall size of the pie. Indeed, some evidence suggests that our sense of well-being is determined at least as much by our relative wealth as it is by our absolute level of wealth. In other words, we derive utility not just from having a big television but from having a television that is as big as or bigger than the neighbors.’

Then there is one of the most controversial questions of all: Should government protect people from themselves? Should society expend resources to stop you from doing stupid things that don’t affect the rest of us? Or is that your business? The most important thing to realize is that the answer to this question is philosophical; the best economics can do is frame the range of defensible views. At one end of the continuum is the