Loyal UP reader Dink sends me this article that I sent him a couple days ago about a new law from the US Department of Transportation mandating rear-visibility cameras in new cars in 2018. A few things to mention, based on this article entirely:

  • This law will cost more than its benefits, according to the government’s own calculations.
  • This could give people a fall sense of security and be even more reckless in that they are now assuming they will see anything behind them. Because of this, estimates of lives saved could be overstating the benefits.
  • It’s hard to put a $ value on personal liberty when thinking about a cost-benefit analysis like this. For something like airport security, in a hypothetical world where we had perfect information, we could weigh the costs of the extra time and staffing extra security takes and weigh it against the (alleged) lives saved and see if it’s worth it. But of course the analysis shouldn’t stop there. We value personal liberty, and we can’t put a dollar value on it.
Take this hypothetical: I have this new law up my sleeve that will a) reduce our dependency on foreign oil, b) reduce greenhouse gases by making cars perform at a more fuel-efficient level and c) save possibly thousands of lives per year. Sounds good, right? Well this law is mandating a national speed limit of 40 miles an hour. When evaluating the cost-benefit of this law, we don’t stop at the benefits of a, b, and c and weigh it against the value of the extra time spent under this new speed limit. We place value on the ability to go a speed limit that might be inefficient by fuel standards, dangerous, and decrease our energy security. Similarly, if the NSA actually saved lives through its monitoring, we wouldn’t just analyze the cost of the NSA vs the lives saved.
The point is that we value personal liberty, everyone values it in different magnitudes, and not including it in an analysis like this is misleading. The explicit cost of this law might only be between $44 and $142 per car, but the mandate in itself is not an insignificant cost.

If Obamacare is going to work close to as intended, the people it aims to help need to know about its basic provisions. This includes the need to sign up and the existence of healthcare.gov. A study found found a set of the population was incredibly misinformed about the basics. Studies show the best cure is to listen to our 8th episode.

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Thomas Piketty’s Capital in the 21st Century was finally released in English last Monday. It’s been hailed by many as one of those once-in-a-decade game changing books. Needless to say, I am very excited to read it. I’ve only read through the first fifty pages but the basic arguments are clear and already fascinating.

A narrative of economic development prominent today is that inequality is efficient (to an extent) and decreasing. Simon Kuznets observed in the middle of the twentieth century that in developed countries income inequality was decreasing and incomes were converging. He made it clear that this was only a correlation and he gave no declaration that this was inevitable or sustainable. Nonetheless, incomes were converging and many took this to be the beauty of capitalism: inequality may exist for a while but in the end we’re all better off.

In fact, convergence happened a century before. As the Industrial Revolution steadily expanded in the early 19th century, the vast majority of workers saw stagnant or falling wages next to exploding incomes of capital-owning individuals. David Ricardo and Karl Marx separately predicted different doomsday scenarios of a massive scarcity of land causing an unhealthy concentration of wealth and spiraling returns to capital causing a global revolution, respectively. Of course, neither apocalypse happened. In the last third of the 19th century, low-income individuals saw their wages rise, even if it occurred with massively increasing inequality.

Inequality increased in the roaring 20s until the Great Depression and World War II. From the time of these events until the early 1970s, income inequality decreased in most developed countries. The prevailing wisdom was that high inequality was followed by converging incomes in the natural progression of economic development.

What Piketty aims to drive home is that this convergence was the exception, not the rule. The Great Depression and Second World War caused the fortunes of the capitalists to implode. In fact, the financial crisis of late initially decreased inequality mostly because the rich had more to lose. After World War II, he argues, American policy was set up to reward broadly distributed growth instead of growth aimed at rewarding capitalists. Then, Reagan and Thatcher won and it was reversed. I should note here that Piketty is French, has been a member of the Socialist Party, and by virtue of being an inequality economist comes with certain biases. His points are largely data-driven but do need to be placed in the context of his background.

The fundamental identity he proposes in the book is that when r > g capitalism will breed unsustainable inequality. r is the rate of return on capital and g is economic growth. When the return to capital is bigger than the rate of economic growth, wealth accumulates in a concentrated set of hands. When an economy is slow-growing, past accumulated wealth has growing importance. Inequality is thus bound to increase and continue to do so. Developed economies have slowed since 1973 and r is becoming greater than g, in the eyes of Piketty. Further, g includes population growth and this has been close to zero in many countries. As he promises to show in later chapters, this identity need not be necessary. Policy can help change this to prevent a revolution or massive conflicts Ricardo and Marx once predicted.

I find the premises presented so far to be interesting for a number of reasons. One is that Piketty admits this divergence is not the result of any market failures. Rather, he finds the more perfect the capital market the more inequality a country will have. Second, I have always assumed a convergence of incomes in economic progress or, at the very least, figured that increasing inequality can be forgiven as long as everyone is better off in absolute terms. If this is not the natural path of capitalism, we are all in for a surprise of hurt. And third, a few writers have posited that we are in a Second Machine Age much like the first industrial revolution, where wages may stagnate now but eventually they will rise. Whereas the first industrial revolution replaced brawn with machines, now we are replacing brains. The gains from this may be realized by the masses eventually, but there could be a very rough transition period. I hope to see how Piketty addresses this and how fatalistic he sees a spiraling inequality.

If you’re one of the few people that reads this blog, listens to our podcast, and was not aware that we released an episode on Bitcoin…here it is!

A plane in Malaysia has gone missing and everyone is presuming…you know. Aside from the obvious tragedy that goes along with the loss of any human life, I always find it interesting that news outlets frame a story like this by how many Americans may or may not have been on board. I don’t fault them for it, it genuinely is what Americans are interested in knowing. I won’t get into a discussion of what’s ethical in how we should care about different peoples. Instead, I think it’s useful to focus on how this phenomenon has broader implications.

David Hume had “Concentric Circles of Loyalty and Empathy” that basically observed this: if I was told my pinky finger was going to be cut off tomorrow, I wouldn’t be able to sleep; if I was told five people halfway around the world that I have never met and know nothing about are going to die, I probably wouldn’t lose any sleep over it. Then there’s everything in between. Generally speaking, people care about themselves the most. If you want to get annoying about it we can say the first concentric circle is one’s immediate family. After that, you go outward to tribe, village, country, and then all of humanity. Hume observed this centuries ago and I think it’s still largely true.

But there’s a new reality that changes it. Because of globalization, we are more connected to those five people halfway across the world. We might know more about their country, do business with them, or see them on the news. Even the simplest exposure can make us feel more connected and empathetic to them. Jagdish Bhagwati argued in his book In Defense of Globalization that globalization itself fuels most anti-globalization. Globalization has made people empathize more with those starving kids in Africa, so westerners now want to stop a force that allegedly causes those children to starve. If we didn’t feel connected to them, they’d be out in a concentric circle totally irrelevant to us. Today, I think the concentric circles are getting more and more mushed together.

I’ve always found the “buy American” or “buy local” movements to be steeped in a weird nationalism exposing people’s allegiance to group identities. There’s more to these than just “looking out for your people” (people might trust American goods more than Chinese ones or buy local thinking it reduces environmental harm from shipping, for example). But when people tell me they follow these mantras I’m always forced to ask “why should I care more about Americans or people in Austin/Scotland/Chicago?” After all, buying anything is local somewhere. If I buy American for the sake of buying from people whom I share a passport that signifies an arbitrary identity caused by legal borders, I’m just discriminating against people of other nationalities.

As people get richer I think we have less reason to be distrusting. I don’t assume people are going to rob me, the guy I give my credit card to is going to steal my info, or that a product online will show up at my house completely different than the description. It could be that long ago we cared most about our family then tribe then village etc because we knew them best and felt a connection. We felt we could trust them. Perhaps it was a instinctual defense mechanism.

But I don’t think it’s necessary anymore. We do business with people all around the world, we marry people from all around the world, live amongst people from all around the world, experience media from all around the world. It only makes sense that as people feel more connected the concentric circles become blurrier. Humanity is humanity, and hopefully these national borders will become more arbitrary.

If you’re one of the few people that reads this blog, listens to our podcast, and was not aware that we released an episode on the Economics of Parking…here it is!

If you’re one of the few people that reads this blog, listens to our podcast, and was not aware that we released an episode on the Economics of Festivus…here it is!

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