Equality, Efficiency and Externalities

This is yet another train wreck of thought that I've been on. It tends to ramble, but it's just a way for me to work out some of the thoughts that go through my head at times.

Today I'm thinking about things people are ignorant of. I don't mean "ignorant" in a pejorative sense. I am ignorant of the central tenets of Hinduism, but I don't have a need to know about this and I certainly don't make decision based upon it. If, however, I were a chemist and I didn't know what happens when pure sodium is dropped in water, than my ignorance would be a Bad Thing.

In other words, if something is likely to have an impact on you and the decisions that you make, ignorance of that thing is bad. Today, I'm going to write a bit about economics and if your eyes glaze over and you choose to move on to someone else's journal entry, I won't be offended, but please don't vote (that's a joke).

In the early eighties, Ronald Reagan rambled relentlessly about the top marginal tax rates and how they were hurting our economy and whether or not that was really the cause of our economic problems, the fact remains that between 1980 and 1984, tax rates fell by around 23 percent and the economy surged forward. Unfortunately, we were also saddled with a huge debt due to the tax cuts, the recession of the early eighties and a huge surge in military spending1

For those who despise Reagan's economic policies, you're probably also unhappy with either Bush Senior or Bush Junior. However, Clinton had basically the same economic policy. The major difference was his desire to improve the quality of the workforce via training. Clinton supported tax incentives to corporations, lowering the capital gains tax, easing regulations against many companies and was instrumental in gutting much of the Kyoto Protocol in order to protect US business interests. He also oversaw the removal of millions of people from our welfare rolls (most were kicked off -- they didn't work their way out of poverty) and managed to balance the budget at the same time. I'm still hard-pressed to explain why Republicans hated the man so much.

But what does all of this mean? Since the late seventies, the US has led a world-wide trend to improve productivity by making industry more efficient via lower taxes, deregulation, privatization (mostly outside of the US) and a reduction in social benefits on the theory that starving people will work for food. And the truth is, they will. Despite a few bumps in the road, the US economy has appeared to be very healthy for the last twenty years.

But what price do we pay for this prosperity? Some will simply point to the poverty rate and state that since poverty rate has declined slightly in the past 20 years (and the number in poverty is roughly the same now as it was 20 years ago), that we are definitely better off. Unfortunately, as economics professor Don Matthews explains, poverty rate statistics are a sham. From his explanation:

How are the income thresholds determined? They are based on 1955 U.S. Department of Agriculture data on food budgets designed for families under economic stress. The thresholds were first computed in 1963?64 and have been updated for inflation (using the standard Consumer Price Index, CPI-U) each year since.

Thus, the official U.S. poverty rate, this statistic that receives so much attention from government policy makers, social scientists and the media, is based not on an assessment of living conditions but on 48 year-old USDA food budget data.

The article is worth further reading, but an executive summary might be that the poverty rate, like the unemployment rate, is a number that is constantly manipulated for political purposes and has little to do with the real world.

So if poverty can't be measured well, what can be measured?2 Despite having no definitive correlation with reduced crime rates, our prison population has skyrocketed since 1980. The US has more people in prison per capita than any other nation in the world. Additionally, amongst major industrialized nations the US:

Needless to say, this isn't what Fox News is telling us. We're seeing the poverty gap widen, our babies and their mothers are dying, we're tossing people into prison left and right and functional illiteracy is rampant. Much of this we don't notice because we don't see other countries, but the question must be asked, why is the wealthiest and most powerful nation on the plant suffering these ills?

Because we chose to.

You see, one things our politicians aren't telling us is that there is a trade-off between efficiency and equality. The more efficient we become, the less fair we are and vice versa.

A perfect example is Aid to Families with Dependant Children (AFDC). Prior to 1967, every dollar a person earned over the minimum need assessed by local welfare officials was subtracted from the person's (90% women) benefit amount. This was a simple and efficient method of calculating aid. However, any time spent earning money was more time and money that the women needed for for child care, transportation, and work-related clothing. In short, women had every reason to not work and in fact, this is exactly what was happened. The AFDC was altered by Congress to allow for this problem. Of course, this meant more paperwork and oversight, but it also meant that this loss of efficiency made the system more fair. The Republicans (note that I said "Republicans", not "conservatives") complain constantly about increasing the size of government, but there are some issues that practically mandate increased government intervention.

If I purchase something from a business, I receive a good that I desire and they receive money (or services) that they desire. If the business and I are the only two entities affected, this is fine. However, what if people external to this transaction are affected? This often happens and it's referred to as an "externality". For example, if a business dumps hot water into a stream and kills fish, fisherman might suffer. However, if the business doesn't have to bear the cost of the damage they cost, then I can purchase a good from them at a cost lower than the actual cost to society. If the business is forced to internalize the cost of the damages they cause (by compensating the farmers or being forced to cool the water before it's dumped in the stream), then the business will have to pass the cost on to me and I will be paying the true price of the good. This would be less efficient, but more fair. Of course, business seldom will voluntarily increase there costs, so this is why the government needs to step in from time to time and correct situations that the market cannot correct.

The preceding example is what is known as a negative externality. Because businesses do not internalize the full costs of their operation, products whose manufacture results in negative externalities tend to be overproduced (because their street price is cheaper and there is a higher demand). On the other extreme are positive externalities. For example, if 19 kids gets vaccinated, the 20th kid's parents might think "I don't need to pay for vaccination because no one else will get sick and pass on the illness to my child". Social services also have this problem. Even if you cheat on your taxes, police and fire fighters will still reduce crime and fires -- to your benefit, even though you didn't pay. As a result, because people can benefit from positive externalities whether they pay for them or not, goods and services that generate positive externalities tend to be underfunded. Think "teacher's salaries". Again, we have an example of a market problem that the government could correct but the market cannot.

It really doesn't matter whether you shoot for efficiency or equality. Either extreme tends to break down. The US is suffering from very high levels of heart disease and cancer, which some think is not very fair, but we err on the side of efficiency and don't generally don't force fast-food companies or polluters to foot the bill (the tobacco lawsuit was unusual, but it was still a farce). As a result, the US strives for more efficiency and we voluntarily accept that more people will die as a result. Do you doubt this? You realize that if we eliminated cars, we would eliminate automobile fatalities, but we're willing to accept that some people are going to die to fuel (pun intended) our need for transportation.

So what's to be done? If we voluntarily choose quantity of life over quality of life, so be it. However, it doesn't have to be that way. While there is no moral obligation that can force a rich person to give away his money to poor people, neither is there a moral obligation that we allow him to become rich without considering the harm that he does to others. This is a choice, not a mandate from God. Personally, I choose fairness over efficiency. I have a good income and live fairly well, but I would happily work towards a system where greed at the expense of others is not the ideal.

1. Actually, surplus Social Security funds are borrowed to artificially reduce the apparent size of the deficit -- a practice that began with the Reagan Administration. For most of the history of Social Security, incoming contributions were paid out to those receiving the benefit. As the ratio of elderly to working increased dramatically, the system broke down and Alan Greenspan headed a commission to save Social Security. Benefits were reduced, withholdings were increased and the plan was to be converted to a trust fund. Unfortunately, surplus money was once again available and the Reagan administration decided that we would spend that money to reduce the apparent size of the deficit and the money was replaced with Treasury Notes. You and I would refer to these as "IOU"s. These IOUs will have to be paid, but there is no money for them. This practice is referred to as creating an unfunded liability. If your company were to borrow your surplus retirement funds the way the government does, the officers of the company would quickly discover that this is a felony offense.

2. Unless otherwise noted, these statistics are culled from the United Nations' Human Development Reports for the USA for 2003 and all statistics about the US are in relation to the major industrialized nations in the world, which I have limited to the top 25 nations in Human Development Indicators.

3. In other words, if you have money, you can get access to adequate medical treatment. If you don't have money, you can't. This is the reason for our high infant mortality rate, the high rate of our mothers dying in childbirth and possibly has a bearing on our lower life expectancy.

  • Current Mood: thoughtful thoughtful
Wow that was great. Thank you for putting that into terms that someone like myself could understand. There is a lot to think about here. Things I agree with but have not spent much time thinking about lately. Thanks for stimulating my brain.
Very interesting...
So, wealth would be a product of not being held responsible for negative externalities, right?
It is kinda weird, I am pretty sure I disagree at some level, but at another level I totally agree. I have always thought that the prices for say, wood products should be based on the life of the trees, not on the fact that we have hills covered with 100 year old trees right now.
But on the other side of that I think that most people are responsible for their own choices. If we know fast food is vile and has the potential of killing us sooner rather than later, is it the fast food industry's responsibility to make it healthy? If the government were to get involved on the level it would take to regulate that everyone ate their daily recommended number of vegetables and fruits, I would probably hide.

OK, I'm not entirely sure I hit the point I was going for there, I'm really out of practice at such discussions... So, please forgive me if it is too silly. :)
So, wealth would be a product of not being held responsible for negative externalities, right?

No, not at all. If all manufacturers could somehow be forced to internalize all costs, they would still compete against one another and still be able to produce wealth. Wealth and negative externalities might have a loose correlation, but I am not aware of it and even if it exists, it is not a necessary one.

Just to be clear, I am not opposed to wealth. There's nothing wrong with working hard and earning rewards for that. That is what fuels capitalism. What I am opposed to is the refusal of people to admit that market forces have side-effects which, by definition, cannot be corrected by the market. Out of necessity, this is where the government must step in. Otherwise, there is no way to prevent pollution. There is no way to prevent all trees from being cut down. There is no way to even have fire or police departments.

If the government were to get involved on the level it would take to regulate that everyone ate their daily recommended number of vegetables and fruits, I would probably hide.

So would I. My point is not that government should control every aspect of our lives (or any of them, so long as we're all consenting adults). Instead, our government should have the right to tell cigarette manufacturers "look, your product is driving up the health costs in this country and we're going to make you pay those health costs because non-smokers shouldn't be forced to."

Mind you, if someone eats fast food every day and gets a heart attack and dies, that's there fault. That was probably my worst example because going there is quite voluntary: unless you're a child. Fast food companies advertise very heavily to children in an attempt to get the children to nag there parents into taking them to their restaurants. As such, parents often don't make informed choices as to what to feed their children. Instead, they sometimes cave in to childish whining and feed their children crap. As a result, I think that we should reconsider allowing advertising to children. They are not direct consumers, they cannot discern the problems with advertising and are more easily swayed by ad populum arguments (e.g., everyone else is buying that new album. You should too!).
Well, I think I understand what you are saying then. It is really amazing how thoroughly I misunderstood what you said! :)
Some health stats for you: 44 million Americans are without health insurance, not because they're all deadbeats but mostly because their workplaces do not provide health insurance and they're not below the poverty line so they recieve no state aid. Previously, I was without health insurance because my job did not provide it but I would have to make half of the poverty line income to receive state assistance($4,500), or I could pop out about 4 kids.

Clinton did horrible things to TAFN. I think after he finished the max amount of time allowed for aid is 5 years in one's lifetime.

It's interesting when people bitch about all the immigrants stealing our jobs when in doing so they're actually paying into social security and will never receive the benefits of doing so.

When talking about the deficit you might point out that the U.S. has fallen behind on dues to the U.N., World Bank, and others.

Actually, you can get access to medical care even if you are poor. Most emergency rooms have policies requiring them to treat individuals even if they have no proof of insurance. Naturally, this leads to many poor people, who lack preventative care, rushing to ERs when they are ill. Since these bills go unpaid that cost if eventually passed on to all of us. Not to mention that countries with socialized health care recieve prescription drugs at much cheaper rates then the U.S. Sometimes up to 1/2 the price we pay because the government negotiates for the entire country. Pharmacuetical companies justify astronomical prices to pay for "research and development." Roughly 8 billion a year. Can you see all their research to verify that it's actually costing what they claim? Newp. Just take their word for it. Your best interest is at their heart, really. That whole South Africa scandal a few years back regarding AIDS medication...well, just ignore that.

Why am I blurbing about all this? It's just what came to mind after reading this.

Oh, as a side note, years ago they included the cost of housing into the figures they use to determine the poverty line, recently(I can't recall what year, shoot me) they removed that cost from the calculations resulting in a significantly lower poverty line. They gave a reason for doing it, but I don't remember why. I'll ask my prof tomorrow.
Regarding health insurance: years ago I had a medical problem that was potentially life-threatening. I was married and my wife and I were poor, but Washington state legislature had passed a law allowing us access to low-cost medical care. The way it worked back then was that my wife and I would get to keep about $700 a month for three months, but anything over that would be taken for the medical expenses. Needless to say, two people living on $700 a month for three months wasn't an option for us.

I remember listening to the lady on the phone explaining this to me and I was dumbfounded. My condition (something called a cholesteatoma), if left untreated could result in deafness, a brain abscess, meningitis or death. If I were homeless or in prison, it would have been taken care of. Because I had a stable job and was married, I was in serious trouble. I asked the lady if any members of the Washington legislature had ever tried to live on $700 a month and she broke down crying and apologizing to me. Apparently, she had to deal with this problem frequently. I finally had to quit a job I had been working at for three and a half years and take a job as a car salesman just to get insurance. Because of the pre-existing condition clause in the insurance, I had to wait a year before surgery and pray my condition didn't worsen.

As a result, I am now deaf in my right ear.
That's shitty. A few weeks ago I got into an argument with a 16 year old about who has a better healthcare system, us, or Canada. She spouted off some crap about waiting a year for a mamogram. But, when you think about it, you get mamograms yearly, and they arn't even recommended until after age 45. She told me she could get into see a physician the next day if she needed it. I informed her that Canada does in fact have ERs. Then, she claimed our system is better because you have to "put into" society to get care, implying that people without care are simply lazy asses. If she knew what the hell she was talking about, instead of giving me some conservative crap, she would know that the poorest people get care. It's the hardworking people in the middle that fall down the cracks.

Also, I asked her what she was "putting into" society by being born to upper middle class parents who's health insurance covered her. She didn't reply.