Pie-in-the-sky policies

Here at this blog we talk a lot about corrective regulation but rarely
stop to examine current government policy. In reality, most government
tax policy focuses either on revenue gathering or on discouraging
consumption of demerit goods. Infrequently, a corrective tax is
proposed – such as the ‘fart’ tax – and then discarded when it proves
unpalatable to the interest group generating the externality.

The fact is that corrective taxes are usually targeted at a
particular group and, the more precisely targeted they are, the more
efficient they are. These ‘discriminatory’ taxes are the ones least
likely to be implemented by a government wanting to appear fair and
even-handed: taxing specific groups is a sure way to generate
resentment at your policies.

So, if the taxes we want are equally as unlikely to eventuate as to be
magically fixed by ‘the market’, are we really any less removed from
reality than the blinkered free-marketeers that we scoff at?

Rodrik vs GMU

It’s game on between Dani Rodrik and the GMU crowd at Marginal Revolution and EconLog these days. Rodrik made a very interesting post about the different types of economists, saying that:

I think the best way to understand the source of [economists] disagreements is to recognize that there are two genres of economists. I call them “first-best economists” and “second-best economists.”…The first group’s instinct is always to apply the first-best reasoning to the case, ignoring market imperfections in related markets, while the second group almost always presumes some market imperfections in the system.

I think we at this blog fall squarely in the second camp, as economists who feel that the government has an essential role to play in correcting market imperfections.

Arnold Kling took exception to being placed in the first category, but he often seems to fall into the trap Rodrik describes of leaving the method of achieving first-best outcomes to others. Witness his post on healthcare provision, where he claims that he doesn’t have the answer but is confident that government coverage isn’t it. Can someone who criticises others’ support of government intervention but fails to provide alternatives really claim that their position is more than an ideological one?

The regulation of beer

I realise that a lot of important economic figures were released today, however, I have found an issue more important than any amount of labour market data, the regulation of beer.  Now, according to this article, most binge drinkers drink beer.  So they think we can reduce binge drinking by taxing beer, and reducing availability late at night.

I think that they have ignored that fact that their are substitutes to beer, and that if someone wants to binge drink they will drink them instead.  The reason I drink beer when I go on a bender is to minimise the damage the next day.  If they banned beer from me I would drink Vodka, and that would cause significantly greater negative social externalities, and leave me with a worse hangover.

Having a tax on alcohol is a different story.  If alcohol causes a negative social externality, tax it so that the social cost=the social benefit.   However, taxing beer alone simply gives people the incentive to find other drinks, as those other drinks are more potent regulation is likely to worsen the social externality.   Do you think the same argument holds for taxing cigarettes?  When we tax cigarettes are we really giving people the incentive to move onto harder drugs instead?

Porn and manipulation

I was reading a post on how advertising manipulates preferences, or in other words it gives us mis-information, leading us to make the wrong choices.  At the same time I was thinking about porn, and that lead me to tie the two together and discuss how porn may lead to manipulation.

Now in the advertising case, the manipulation was caused by mis-information, which made us make the wrong choice even when the ‘right’ choice was avaliable.  The manipulation of people in the porn industry is very different.  People who are manipulated into a life of making porn movies may not be mis-informed, they may well be making the best choice of their avaliable options.  However, some of these individuals may be making this choice because all other reasonable alternatives have been closed off to them.

So we have two different types of manipulation.  Type 1 manipulation is where someone has a full choice set, but some other player influences their belief structure in such a way, so that they make a sub-optimal choice.  Type 2 manipulation is where someone is unfairly constraining this persons choice set, and the persons’ choice is is constrained by action.  These two types of manipulation are completely different, the Type 1 manipulation does not seem as serious to me, as with research a person could overcome it.  Type 2 manipulation does concern me, I don’t like to see people choice sets too heavily constrained.

Government policy help solve both these types of market failure.  The government tries to prevent mis-information and provide informationk.  Furthermore, the idea of the welfare state and universal education help expand peoples choice sets, while police try to prevent one person limitting anothers choice set unfairly.  Another awesome score for our hypothetical, normative, and imaginary government.

Import substitution, good or bad?

Free exchange and Dani Rodrik have both made intelligent posts on the issue of import substitution. Free exchange sticks to the common line that import substitution is bad, Dani says that there is evidence that it is good.

I know very little about any of this, but I’m going to say something anyway. As far as I can tell, trade policy should work off the idea of comparative advantage, implying that each country should make what the good they are ‘relatively’ better at making (specializing in goods with the lowest opportunity cost). As a result, government policy should react in ways that take advantage of this concept.

This might imply to some people that government should not intervene in trade, and just let the free market choose the most efficient industries, which will in turn trade with the rest of the world. However, I’m not sure I fully agree.

It is possible that an industry that would have a comparative advantage in trade terms may not have been founded given high fixed costs and the requirement of skilled and experienced labour which will only be created when the industry exists (infant industry type argument). If the government can recognise these industries, it can subsidise their creation until they become fully efficient, by which times they will be net exporters.

Now this form of intervention isn’t the same as import substitution (although it is often placed as a subset of it). Import substitution involves creating the goods you import at home, now if this is a good where another country has a comparative advantage then all you are doing is hurting yourself and the other country. Import substitution is a bad idea (unless there are security of supply or political issues), but government policy to develop domestic industries does have some potential.

Image does make a difference

So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

However, there may be a role for government intervention yet. If McDonalds is an addictive good, and the consumer had no a priori knowledge that it was addictive, then the increase in future consumption (and the associated negative effects) of McDonalds is not taken into account when the person purchases a product. By advertising, they can increase demand and make more people fast food addicts. Now to do not know the degree with which fast food is addictive. However, government regulation, such as education or limits on advertising could be useful.

Update: Hehehe a cartoon.