Where’s Mine?

In my Econ 385 class on Tuesday (International Economic Policy), an excellent discussion on student loan debt came up.  One of my students asked the probing question: “Student debt is approaching $1.8 trillion.  Everyone seems to recognize this is a bubble.  Why is there so much resistance to student debt forgiveness?” 

I opened the discussion up to the class.  Lots of excellent, well-reasoned opinions were expressed.  Some argued that the schools have no incentives to keep their expenditures in check since the government is subsidizing the loans.  Some argued that the politicians do not bear the full costs of these loans, nor a default, so they have little incentive to address the issue.  Others noted that the banks would keep giving loans so long as they are backed by the government.  All of these are excellent points, which I’ll not rehash here (I wish I could take credit for teaching these students, but they were already smart before they came to my class).  

There is a larger issue I wanted to discuss, one which was not discussed in class (we were acting under the assumption, for the sake of the discussion, that forgiveness was the best option).  This issue is: who gets forgiven?

What is it about student loan debt that makes it worthy of being forgiven, but other forms of debt are not?  There’s credit card debt, housing debt, business debt, auto debt, etc.  All this debt can have the same effect as student loan debt.  True, student loan debt is larger than these other sources, but if that’s the case, that’s just an argument either for partial forgiveness, or for people to mount up other forms of debt.

If student loan debt is forgiven, the holders of the other forms of debt will wonder “why not me?  Where is mine?”  Indeed, recently a friend used exactly this line of reasoning when justifying tariffs for his own industry: “My competitors and suppliers get protection.  Why not me?”

This is the problem with most government handout programs.  Those that are designed to help a certain and arbitrary group can compel members of the out-group to seek their own rents.  If student loan debt is forgiven, business owners might lobby to have their debt forgiven (“I’m creating jobs!  if my debt is forgiven, then I can create more jobs!”).  Or automobile owners (“My car lets me get to my job!”).  Anyone could come up with various excuses.  

This rent seeking, of course, then results in wasted resources.  Resources that could have gone to productive uses are now trying to capture rents.  And there are other issues as well that I’ll not touch on here: the sanctity of contracts (will it become harder for people to get loans since the value of a loan contract will be reduced?), moral hazard problems (will former debtors seek even more debt since their previous amount was forgiven?).  These are all important issues to consider.

Expert Failure to Communicate

On Friday, Roger Koppl of Syracuse University presented his book Expert Failure at the Invisible Hand Seminar co-sponsored by George Mason University and the Institute for Humane Studies.  

The thrust of Dr. Koppl’s book is that, similar to market and government failure, experts can fail in their task as well.  Experts can give poor advice, he influenced by known or unknown biases, and react to incentives just like the rest of us.  An expert, for the purposes of this discussion, is anyone paid for their opinion (this is how Koppl defines expert in his book).

There is another aspect of expert failure which plays into the problem and that is a failure to communicate.*  Even if an expert does everything perfectly, if s/he cannot adequately communicate their message to the decision-maker, then expert failure can still result.  

This expert failure to communicate is a major issue in law & economics.  Economists are trained in statistics and empirical methods.  Lawyers and judges may not and juries almost certainly are not. In his 2009 textbook, Basic Concepts of Probability and Statistics in the Law, Columbia law professor Michael Finkelstein gives two examples were ambiguous wording by experts and misinterpretation of probabilities by juries led to false convictions (see pages 3-5).  These failures can lead to pro-prosecution bias in juries (or, alternatively, pro-defendant bias if other statistical fallacies are made).  In the two legal cases above, the convictions were overturned on appeal, but one has to worry about the error rate given the already confusing nature of statistical wording and hypothesis testing. 

In Expert Failure, Koppl discusses increased competition among experts as a means for solving expert failure.  A good expert can explain his argument in common-language and not necessarily hide behind jargon.  Competition between experts may indeed reduce this expert failure to communicate, but it ultimately rests on the head of the decision maker.  And indeed the more complicated a topic is, the more the reliance on expert opinion is needed, which increases the likelihood of expert failure to communicate.  

Ultimately, I think this all adds up to a rather strong presumption of liberty.  The more control experts have over our lives, the more likely it is for expert failure to occur.  Indeed, some of these highly complex functions, like contract issues or tort issues, may be best left to arbitrators rather than judges.  The more complex an issue is, the less one would want to centralize it.  

*Full disclosure: this point may come up in the book.  I have not read it, having ordered it shortly after the seminar

Division of Labor Allows High-Productivity People to be Highly Productive

Commenting on this post at Cafe Hayek, Marisol Regalado Aguilar writes:

I’ve never understood why some many pundits think the government should admit only high-skilled immigrants. We need fruit pickers and floor cleaners, too.

Marisol makes an important point.  There are always jobs that need to be done.  By dividing labor, it allows people to specialize in what they are comparatively best at.  For every janitor or fruit picker imported (that is, low-skilled immigration), it allows doctors and factory workers to focus on their jobs.  In other words, highly productive people are only highly productive because low productivity people do low productivity jobs.

Despite the fears, the division of labor does not reduce wages but rather increase them.  It allows people to focus, become more productive, and thus increase their marginal output and increase their wages.  Low skilled immigration serves precisely this function.

Consider the following: a doctor’s office has basic janitorial needs: trash emptied, rooms sanitized, basic upkeep, etc.  If the doctor cannot hire someone to do that, either because they are not available or he’d have to pay higher wages to lure them away from other jobs and he cannot afford to do so, then he’d have to do the work himself.  That’d necessarily mean he has less time to see patients, do research, or whatever he does to be highly productive.  The doctor would have to become lowly productive.

Restricting immigration to just high skilled workers will not result in increased productivity in the nation.  If anything, it’ll result in lower productivity, and thus lower wages.

Obsolescence: Economic and Technical

The language of economists is often fraught with confusion for a simple reason: we use common words and use them in a precise manner that is different from what many people think.  We inherited a language and our words don’t quite fit into others mouths easily.

One such word is “obsolescence.”  People tend to think of “obsolescence” in a technical sense, that is as something that is old and thus no longer needed.  The horse and buggy was made obsolete by the automobile.

Economists think of the term in a different manner, that is to describe a method of acting that is no longer economically practical given the change in costs/benefits.  This may include adopting a new technology, but it may not.  By way of example, consider the following: why do some people still take the train when we can fly everywhere?  In a technical sense, the airplane has made the passenger train obsolete.  But people still ride the train because the costs of riding are lower than the benefits of riding versus the same calculus of flying.  For some people, the act of flying is obsolete.

Ian Fletcher makes this very mistake in responding to Pierre Lemieux’s new monograph What’s Wrong with Protectionism?  Fletcher writes:

You [Lemieux] attack a protectionist straw man. For example, contrary to what you [Lemieux] say on page 48, reasonable opponents of unilateral free trade do not advocate protecting “obsolete manufacturing.”

Fletcher is confusing technical and economic obsolescence.  Protectionists do indeed advocate protecting obsolete manufacturing; they are obsolete in that they are no longer serving people’s needs since people are now choosing imported products.  If this were not the case, then protectionism would not be needed.  These firms might be at the top of the tech world, but that does not mean they are successfully serving a need.  To protect them is indeed to protect an obsolete industry.

Imperfect Competition: Liquor Edition

Over the weekend, I had the great opportunity to meet a local distiller, Alex Laufer of One Eight Distilling, a company in Washington DC.  Alex’s operation was fascinating to learn about from the perspective of an economist.  He also provided some excellent insight into the nature of competition.

Being a distilling company that makes gin, bourbon, rye, and vodka, One Eight is competing against big companies like Jim Beam, Jack Daniels, Stolichnaya, Beefeaters, and the like.  His prices, like other craft distillers, tend to be higher than these big brands.  Alex knows he cannot compete solely on price; his scale and operation do not allow for that.  Instead, he competes on uniqueness and quality.  His gin uses more peppery ingredients than the competition.  His bourbon and rye are similarly peppery.  He produces a unique product.  One Eight is able to (ably) carve out a niche in the liquor market and successfully compete against the Big Boys.

What’s interesting is, from a purely theoretical perspective, One Eight’s behavior is not, strictly speaking, competitive.  In a “perfectly competitive” market, all firms compete on price and price alone.  Only by lowering marginal cost can they compete.  In a sense, the theory of perfect competition is not one of competition at all.

One Eight’s form of competitive behavior, that of product differentiation, is deemed “imperfect competition.”  It’s considered “monopolistically competitive” and, in straight theory, may be frowned upon as being economically inefficient compared to the perfectly competitive model.  But, in a “perfectly competitive” world, One Eight would not exist.  It would not be able to price low enough.  We, as consumers, would be denied uniquely flavored gin, bourbon, rye, and vodka.  In short, there’d be less diversity in the market, leading to fewer people being able to satisfy their preferences.  I like Jim Beam, but I like One Eight even better.  In a perfectly competitive world, I’d still be better off consuming Jim Beam than nothing, but I’d not be as well-off as I am in the “imperfectly competitive” world of One Eight.

The perfectly competitive market is often touted as some golden standard of competition; regulation is used to try to move the market to this idea (eg, antitrust regulation).  But, ironically, such regulation tends to reduce real competition.