“Planet Money” and Planet Earth

NPR’s “Planet Money” built an episode on the interesting if unoriginal premise that economists, across the political spectrum, agree on a bunch of policies politicians wouldn’t touch with a barge pole. To prove that they talked to Dean Baker of the Center for Economic and Policy Research, Kate Baicker of the Harvard School of Public Health, Robert Frank of Cornell, and two other players unknown to me (one a libertarian from GMU) and got them to more or less agree on a bunch of politically toxic ideas.

The implicit assumption is that the economists are right – the headline proclaims a “No-Brainer Economic Policy” – and that the political non-starter-ness of their ideas reflects the ignorance, folly, or selfishness of the voters and the cowardice of politicians who seek applause rather than practical solutions. It doesn’t seem to occur to any of the people involved that in some cases the voters and their representatives may know something the economists don’t, or that some actual problems involve phenomena and causal relationships different from those assumed and taught in Intro to Microeconomics.

[Update  Not so. Dean Baker has thought about much of this, and posted a protest on the NPR website about some of the oversimplifications. I'm  glad to know that in this case most of the arrogant carelessness came from journalists, for whom it's a professional qualification, rather than from academics.]

When it comes to drug policy, for example, the five economists are just waving their invisible hands at a problem they don’t have a clue about.

Nonetheless, most of the proposals are probably right in principle: replace income and payroll taxes with a progressive consumption tax; if you keep the income tax, disallow home mortgage interest as a deduction and treat employer-paid health insurance as taxable compensation and eliminate the corporate income tax (presumably flowing through corporate earnings to shareholders’ tax returns); tax greenhouse gas emissions and other forms of pollution (and, I would add, congestion) to raise revenue while also discouraging socially harmful behavior, thus allowing both lower taxes on non-harmful behavior and looser regulations, since the Pigouvian tax can substitute incentives for commands.

I say “probably right in principle” because the devil is in the details. In particular, it’s easy to show, using comparative-statics methods, that all of this stuff outperforms the current system. I.e., if you were starting a fresh planet, you’d want to do it.

But that ignores both dynamics and political economy. Those lower housing-asset prices resulting from disallowing home mortgage interest as a tax deduction are good news in principle, but they’re very bad news to the people who get stuck with windfall losses because they just bought houses based on the old asset valuations. Progressive consumption taxes sound great until you consider how much someone “consumes” in health care when he gets an expensive disease, or try to figure out how to treat educational expenditures. In principle, a progressive consumption tax ought to include the imputed rental value of owner-occupied housing; but who’s going to run the national housing-assessment system that would require, and how are we going to treat the car elevator in Mitt Romney’s new mansion, which cost a ton to build but which an arm’s-length renter might not pay much for?

In steady state, it’s not hard to tax consumption; you just do the same calculation you’d do to tax income, and subtract savings while adding dissaving. But in the first generation, how are you going to measure Mitt Romney’s kids’ spending of all the money Daddy gave them?

As to polluter charges, I love them: for easy-to-measure point-source pollution. Now go ahead and try them on agricultural run-off, for example. The very same lawyers and lobbyists who do their best to screw up regulation will do every bit as much to screw up the effluent-fee system, as when companies were allowed to “offset” deadly micro-particulate emissions by paving dirt roads, which eliminates nasty-looking but fairly harmless-to-health macro-particulate (aka dust).

Of course, if you’re an academic or think-tank economist you can wave all this stuff away as administrative details below your pay-grade, and keep laughing at the voters and policymakers too stupid to appreciate the awesomeness of your magic blackboard. But if you’re on the Ways and Means Committee or at the EPA you need to find practicable answers to these questions.

I’ll happily concede that all the economists’ ideas are right in principle, if they’ll concede that their rightness in practice depends on details of program design not yet determined and is vulnerable to political-economic forces the proponents haven’t actually modeled. (I’m sure some of it is right, even after all the caveats; I’m just saying that the supply-and-demand curve-drawing is the sketch of an argument, not the argument in full.)

The only item not involving taxation is drug policy, which makes it a strange outlier. The five economists seem to agree on legalization, though exactly what they agree on isn’t quite clear. The NPR website talks about legalization of marijuana, but the actual conversation ranges from legalizing everything to merely decriminalizing pot. No concrete policy is proposed, and no one asks the “compared-to-what” question.

If consumers were perfectly self-controlled and perfectly rational decision-makers (which includes full foresight about the future consequences of current actions) with fixed preferences, and if the only external harms of drug use were things such as second-hand smoke, and if you take Mill’s Harm Principle as a moral axiom, then the Gang of Five is right that most current drug laws can’t be justified.

But of course the rational-actor assumption is a bad fit for the actual behavior of addicts with respect to drug-taking and of intoxicated people with respect to many forms of behavior, and the external costs of the abuse of the one addictive intoxicant we decided to legalize include auto accidents, rapes, and homicides.

Phil Cook of Duke – whom any of the five would recognize as a senor member of their guild – has written a book called Paying the Tab which argues that current alcohol policy is grossly too loose when it comes to drinking by problem drinkers. Cook’s argument for higher alcohol taxation is a lay-down, but since the Pigovian tax on the average drink would be greater than the cost of the drink it’s clear that taxation alone can’t really do the job: we need some heavy-duty regulation as well.

Does that mean I regret the repeal of Prohibition? No. But it does mean that I’m wary about the nitty-gritty of legalization.

Some form of marijuana legalization is very likely a good idea. (Not certainly a good idea, because there’s some risk that legal pot would substantially increase heavy drinking, and that the resulting losses would outweigh the gains from eliminating the illicit pot market and increasing the liberty and material satisfaction of tens of millions of non-abusing pot-smokers.) But reaching that conclusion requires much more fact-gathering and analysis than the NPR crew has even thought about doing. They simply give no evidence of having asked any of the interesting conceptual or empirical questions, let alone thought about the details of the post-legalization tax and regulatory regime. Those details matter.

It’s also possible that legalizing everything, including heroin and cocaine, would also turn out to be better than current policy. I’m skeptical, but you can certainly come up with non-outrageous predictions and scoring rules that make it look good. But that’s a much larger-scale social change, with much higher risks of going badly wrong. No sane person would just leap into it without some very careful planning and figuring, and maybe some experimentation.

I don’t want to pick on these five economists specifically: Dean Baker and Kate Baicker both – in the view of people better qualified than I am to judge – do first-rate work, and Robert Frank is among my intellectual heroes. Their views aren’t unusual: I’d bet nine out of ten members of the American Economic Association share their prejudices. But that’s all they are: prejudices. They’re not the conclusions of careful analysis.

I wish it were true that policymakers took the results of economic reasoning and research more seriously in making public decisions. But I also wish that economists were more careful than they sometimes are about distinguishing assumptions from facts and clever ideas from well-considered and practicable policy proposals.

Comments

  1. Keith Humphreys says

    I wish I could remember who it was who said on one of the news programs “Every leading economist has endorsed this proposal, and despite that, I still think its a good idea”.

  2. says

    Here’s my nutshell summary of the Planet Money suggestions: Let’s cut taxes on the rich, raise taxes on the poor, screw the middle class and crater the housing market. Then we’ll let people smoke all the pot they want so they don’t worry about it too much.

    • Warren Terra says

      I haven’t listened to the program – probably won’t – but that doesn’t sound like Dean Baker at all.

    • Anomalous says

      “Dope will get you through times of no money better than money will get you through times of no dope.” *

      *Fabulous Furry Freak Brothers

  3. Jeff says

    Mark,

    I agree, economists almost never think about actual implementation of policy.

    On another note that has little to do with your current post. You casually mentioned that you support congestion pricing and you have mentioned this before. I am not sure you should support such a policy.

    The conventional wisdom is that congestion is a negative externality and congestion pricing could produce a more efficient outcome because people would choose to drive less, switch modes, or pay a tax, which can be used for other public needs. In addition, maybe we could get environmental benefits from congestion pricing.

    Unfortunately, I believe this is a partial equilibrium analysis of a situation where a general equilibrium analysis makes more sense. Advocates of congestion pricing falsely assume that places of work will remain in the same location after implementation of the policy. However, in general equilibrium, firms may move to less dense areas, so that their employees will not have to pay congestion taxes. Congestion pricing spreads out cities.

    In other words, this policy may not reduce driving and may actually increase sprawl, and make public transit less viable, thus reducing efficiency and directly going against the intended goals of the policy. Not to mention that clustering of businesses provides for significant positive production externalities which would be reduced if businesses were forced to disperse due to congestion pricing.

    My suggested policy is to simply encourage more provision of public transit.

    Just something I have thought a little bit about, and I thought I mention it.

    • Byomtov says

      My suggested policy is to simply encourage more provision of public transit.

      What are you, a Communist?

    • John G says

      Congestion pricing got a high profile when used in London, England, where the public transit is pretty good (extremely good, compared to most places in North America). I had thought that the fees charged for coming into the designated zone were also supposed to be dedicated to improving public transit, though that may be wishful thinking on my part. In any event I agree that one has to consider how else one can get into the ‘congestion’ zone, without causing the same congestion.

  4. JMG says

    “Some form of marijuana legalization is very likely a good idea. (Not certainly a good idea, because there’s some risk that legal pot would substantially increase heavy drinking, and that the resulting losses would outweigh the gains from eliminating the illicit pot market and increasing the liberty and material satisfaction of tens of millions of non-abusing pot-smokers.) But reaching that conclusion requires much more fact-gathering and analysis than the NPR crew has even thought about doing. They simply give no evidence of having asked any of the interesting conceptual or empirical questions, let alone thought about the details of the post-legalization tax and regulatory regime. Those details matter”

    Shorter Bob MacNamara: I know that Vietnam is a loser and that we’re wasting tens of thousands of young Americans’ lives (and who gives a fig how many gooks) but I can’t simply tell LBJ that I’ve been wrong wrong wrong all these years. So we spend a few years arguing about the shape of the table, while other people’s kids … Those not in college … Get blown up and crippled and killed, because stopping an insane and unjustified policy that was begun with ZERO analysis should always require many careful and rigorous studies. Otherwise we’ll all just look like we pull policy out of our asses.

        • Freeman says

          Excellent link, JMG. I find it curious how little credence academics seem to give to organizations like LEAP and individuals like Jack Cole. Theoretical exercises are great, but there’s a lot to be said for practical, real world experience. It seems to count for so little to those who make their living theorizing. Theories have little value until they’re applied in the real world, analyzed for effectiveness, and refined based on real-world feedback. Some theories sound good, yet are completely wrong, but we’ll never detect that when we don’t apply them and honestly analyze the results. Instead, what we get is a lot of “we can’t do that, or the price will drop to nothing and abuse will skyrocket”, without any of the try-it-in-the-real-world-analyze-and-refine process in between (and without any interest, it seems, in analyzing how things went before it was all illegal).

          Cole made some excellent points, based on a lifetime of real-world experience, worth repeating:

          Most drugs are just weeds, he told me. “I don’t care whether you’re talking about marijuana from a cannabis plant or cocaine from a coca bush or heroin from an opium poppy, these are basically just weeds. They will grow anywhere in the world. And they are such hardy plants — those of us who were charged with destroying them [know] — they just pop right back up. So, because they are so prolific, until you say they’re illegal, they have no value at all.”

          “Nothing worked,” says Cole. “When I was a young trooper, in 1970, at the start of the war, we considered an ounce of cocaine or maybe 7 grams of heroin a large drug seizure. What do we get today? We get individual seizures of 10 tons of heroin? Twenty tons of cocaine? One seizure each. And nothing changes on the street, except drugs keep getting cheaper, more potent, and far easier for our children to access. Now that’s a failed policy, any way you look at it.”

          Yep, we’ve done plenty of try-it-in-the-real-world-analyze-and-refine with regards to prohibition, and none of it has worked effectively. A sane scientist would realize by this point that the theory of prohibition doesn’t work at all, and would be actively working to develop and test new theories about how to mitigate drug abuse.

          P.S. from the linked article: Over the last few weeks, this column has explored various drug policies in Europe and the United States. “War” still summarizes the American approach, in spite of changing rhetoric from the Obama administration.

          Put that in your pipe and smoke it, Beau Kilmer!

        • Freeman says

          P.P.S. I thought about it for a minute and realized I had gotten my drug warriors mixed up.
          The previous P.S. should have read “… put that in your pipe and smoke it, Kevin Sabat.

  5. says

    Re: cocaine and heroin legalization, you say No sane person would just leap into it without some very careful planning and figuring, and maybe some experimentation.

    What sort of experimentation do you have in mind and where can it take place?

    • Freeman says

      Mark’s got it backwards again. Given our decades-upon-decades of experience with the effects (both intended and unintended) of prohibition, the statement should read “No sane person would just leap into [prohibition] without some very careful planning and figuring, and maybe some experimentation.” Too bad we didn’t take these precautions before deciding that drug prohibition was the best way forward, especially with all available evidence at the time saying otherwise (see: alcohol prohibition).

  6. says

    Not certainly a good idea, because there’s some risk that legal pot would substantially increase heavy drinking, and that the resulting losses would outweigh the gains from eliminating the illicit pot market and increasing the liberty and material satisfaction of tens of millions of non-abusing pot-smokers.

    Is individual liberty just something to be traded off against costs and benefits?

    It seems to me that it’s one thing to trade individual liberty off against the direct costs of that liberty to other people– my liberty to move my fist in a forward motion certainly ends before it hits your face. But it’s another thing to trade individual liberty off against the costs of liberty to onesself– should the government really have the power to stop a person from doing things simply because they are risky? Should the government prohibit skydiving, or tightrope walking, for instance?

    Individual freedom is supposed to be something more than just a part of the balancing calculus.

    Having said all that, I do think in this particular discussion, it is likely that these economists are NOT considering that point and are simply weighing costs and benefits. And Professor Kleiman is right that they could be wrong in how they come out.

  7. Ebenezer Scrooge says

    IIRC, when Krugman started his Times column in the late ’90s, he had pretty much the same idea. I still remember a piece he did on rent control, as an example of economists’ consensus.

    Of course, he soon discovered political economy.

  8. Barry says

    Mark, this leads to an old question (for this comment, I’ll stipulate that you are correct on drug policy):

    You see a bunch of economists talking about stuff, and when they get to stuff you know about you realize that they are *at best* in the ‘assume a spherical cow of uniform density’ world.

    What should you think about everything else they’re saying?
    What should you think about their judgement in general?
    What should you think about their honesty?

  9. says

    I am not fighting the general thrust of this piece, but I think the details of say, eliminating the corporate income tax and moving to a consumption tax are better thought out than you suggest. It’s actually quite easy to deal with the problem of the Romney kids spending the money Dad gave them: you eliminate the estate tax, and also treat the inheritance as a tax: bank accounts get taxed at income tax rates, capital gains basis gets set to zero. If combined with the elimination of the corporate income tax and the taxation of capital income at ordinary rates, you’ve now got a system in which any attempt to access the money triggers a taxable event, aka income that they have to pay taxes on.

    • says

      You realize, of course, that treating inheritance as a taxable event would be way worse for most people than the former estate tax, until you get up to the multimillion-dollar level where paying the top income rate is less painful than paying the top estate-tax rate. People *would* have to sell the family homestead to cover their bills.

      • says

        You can set up exemptions, even fairly generous ones, to cover homes and businesses. But in principle, taxing it as income seems fairer and more progressive to me than taxing the estate. Why should 30 beneficiaries who each get $200,000 pay the same rate as 1 beneficiary who gets $6 million?

        • Ken Rhodes says

          Megan, I thought I understood your idea, but then Paul’s objection is non-relevant under my understanding. OTOH, your response using the phrase “a taxable income event” doesn’t fit, either.

          You wrote “…moving to a consumption tax.” In such a regimen, the receipt of the income is not a taxable event; rather, it’s the spending of the money that’s taxable. If Daddy Warbucks has a billion in the bank, he would be taxed on the expenditures as he spends them. Using a progressive scheme, he would pay a higher rate on his new yacht than he would on a ham sandwich. If he dies and his bank account goes to Little Orphan Annie, the same money would be in the same bank account, still waiting to be spent, and the tax would still come due if and when Little Orphan Annie spends her new-found wealth on a yacht of her own.

          Am I misunderstanding?

          • Anonymous says

            If you read Dean Baker’s objection, it appears that the consumption tax is progressive not just by amount of consumption but also by wealth. A consumption tax that’s progressive by amount would be really horrific to administer unless you can completely eliminate barter and gifts. (Otherwise, I just give all my less-rich friends $50K, or even the expectation of $50K in my will, and they take turns taking me out to dinner and buying me little bits of marine equipment to show their appreciation.)

        • Byomtov says

          So you set an exemption of, say $1 million, and distribute it pro rata among the heirs. Someone who gets 30% of the estate gets a $300K exemption, for example. After that it’s all income to the heirs. Is that the plan? I’d include a provision also making the first $50,000, say, left to any individual tax-exempt. Put the million on top of that and then apply a fairly high rate to the rest.

          • says

            But hold it, I thought inthe Brave New World stuff only got taxed on consumption, in which case the heirs would only have a taxable event on the part they didn’t pass on to their heirs in turn. So essentially you would have a world in which remittance men (the old version of trust-fund babies) were treated precisely the same as wage-earners, even though one class was backed by arbitrarily large assets and the other was living paycheck to paycheck. (Which I guess is slightly better than the current situation)