To me, the most interesting part of economics is talking about policies and their outcomes. I can talk theory all day but students only relate to it when you can use good examples and show that these boring policy decisions have real impacts. I talk about the fact that there is no market for kidneys and most students probably think I’m crazy, that if we had a private market for kidneys they might wake up in a bathtub full of ice with a 12-inch gas in their side. Then I tell them that 4,000 people in the U.S. die every year because they can’t get a kidney transplant. More people than died in 9/11, and it happens every single year. Then they start to actually think about the pros and cons of different policies. In the past, I would talk about different government polices (price controls, taxes, etc.) and try to go through it as systematically as possible, but I never had a formula that I followed. This semester I was finally able to crystallize everything together.
In this process, there are 4 main steps to thinking through the economic impacts of any government or market-based policy. You can get more detailed than this, of course, but I think this does the job just fine.
- What is the goal of the policy? What specifically is it trying to accomplish?
- What are the effects on the market in question, and what secondary effects might we expect in other markets?
- Who benefits and who loses as a result of the policy?
- Is the policy successful in accomplishing its stated goals? If not, how can we alter the policy to improve the outcome and how does this affect questions #2 and 3? (Note to Washington: this does not mean always throwing more money at the program.)
The goal in my introductory economics classes is to teach positive economics: what are the facts? Normative judgments about a policy can be made at any of these four levels.
For example, the goal of taxes is either to raise revenues or to discourage behavior. If demand is elastic, you’ll change people’s behavior when you raise prices. If demand is inelastic, you won’t discourage much behavior but you’ve got a great revenue source. Sen. Daniel Patrick Moynihan’s proposed 10,000% tax on hollow-point bullets was not designed to raise money, but cigarette taxes are – if they really wanted people to quit smoking, they could make the tax bigger and really get people to quit.
For example, let’s examine the health care reform debate in this context.
- What is the goal? It was supposed to be to provide universal health care for everyone and reduce costs.
- The CBO and other entities have determined that the Senate bill would increase overall costs (the deficit goes down because taxes go up by more than spending), shift some people from private plans to public plans, and leave many millions of people still without health care.
- Depending on the bill, either the rich pay more taxes or people with good health care packages pay more. Some people will see their doctor stop carrying their insurance provider and may have to switch doctors. The effects are myriad and complicated.
- It doesn’t seem to accomplish either the goal of reducing costs or covering everyone. Somehow the Democrats switched the first goal to “reducing the deficit” instead of reducing costs, but that wasn’t the stated goal initially.
Now, you can debate the health care reform bill on any of these four levels and come to a normative judgment that you don’t like teh bill.
- You may think that there isn’t a fundamental problem in health care. True, some people don’t have it, but many of those that don’t actually qualify for government programs but are just not signed up, and others could afford it but would rather spend their money on other things.
- You may think that the effects on the market do not justify taking this action. As some have said: why change the health care system for the 90% of Americans who have it just to give it to the other 10%. Isn’t there a better way?
- You may already have a great health care plan and expect to lose. Unions have sometimes given up pay increases to get nicer health care packages and now they might lose those plans.
- You may feel that there actually is a problem with health care but that this bill just doesn’t fix the problem. Some on the left don’t like it because it doesn’t cover everybody, while some on the right think the fact that it doesn’t lower costs means we should start over.
So I’ve been using this 4-step approach in my principles classes this semester and I think it’s a great way to think about an issue. It helps to figure out exactly what you believe and specify you disagree with people.
Let’s take the stimulus bill. Last week it turned 1 year old and the Obama administration touted it as one of the most effective government programs ever, while some Republicans say it hasn’t created a single job. Both of those are major hyperboles, so let’s look at the stimulus using this 4-step approach.
- What was the goal of the stimulus? To prevent a depression and to keep unemployment from rising above 8%. Now, I have to clarify the difference between a prediction and a goal. The goal was to stimulate the economy, while the prediction of how effective it would be (keeping unemployment below 8% instead of the dreaded 9% predicted without the stimulus) depends not just on the policy itself, but also onthe changing economy it was put into. It was predicted to “create or save” 3.5-4 million jobs, most of those in the private sector.
- What effects on the market would this have? The goal was to boost aggregate demand for output and keep output high. Our economy has started to recover, with 6% GDP growth in the last quarter. Is this because of the stimulus or because every economy at some time recovers anyway? Those who passed the bill will take credit for an increase in GDP whenever it occurs. Joe Biden said the effects would be seen immediately. Then the administration backtracked: it was supposed to happen in summer, then fall, and now when it finally happens in winter they claim success. When they don’t get what they predicted when they predicted it, they push back the prediction – but they’ll never say the program didn’t work, just that it didn’t work as fast as they had hoped. It’s like Paul Krugram predicting a recession almost every year during the Bush administration. He finally got his recession in the last year and claimed he had been right all along. But what about every year his prediction was wrong? If he’s going to take credit for being right one year, he has to take blame for being wrong 5 other years. But I digress – the goal was to keep unemployment below 8% and that clearly didn’t happen. 9% was supposed to be a depression and this stimulus was supposed to save us from that. Now we’re at 9.7% so that must be even worse than a depression, right? No, apparently the stimulus saved us from a depression. (I’m just as confused as you are about how 9% is a depression if we do nothing, but when it hits 9.7% after we act we’re supposed to give them credit for saving us from a depression.)
- Who benefits and who loses? If your job was saved, you benefit. Much of the benefit has been to state employees, a group to which I admittedly belong. Some businesses have been helped by the green initiatives. Most people got a tax cut – granted, it was only $30/month so you might not have really noticed it, especially when the increase in gas prices since last year has eaten up that entire $30. (Gas prices have increased by $.60 since the stimulus was passed; if you drive at least 10 miles a week, your stimulus rebate is going to gas.) Our children lose because we’re borrowing most of this money and will have to pay it back. Previous generations have been able to pass debt onto their kids and they’d pass it onto their kids, but now the debt/GDP ratio is starting to fall into very dangerous territory. Future generations, perhaps even this current generation, won’t have that option and will have to make cuts.
- Did the program accomplish its goals? If the goal was to reduce the severity of the recession, I think it’s done that. I think the people who say the stimulus hasn’t created a single job because we’ve lost 4 million jobs are either stupid or deceitful. We would have lost more jobs without the stimulus.
So when a Republican goes on a Sunday talk show saying he opposed the stimulus but was found at a ribbon-cutting ceremony for a project funded by stimulus money, he’s in a bit of a pickle. They ask him if things would have been better without the stimulus. He wavers and stammers and can’t answer the question. But there’s an easy answer to that question: tell the truth. No, things would not have been better without the stimulus.
But as an economist and not a politician, I don’t think that’s the relevant question. The question is: was the specific stimulus policy passed the best thing to do? I don’t think it was. The Republicans had a plan too. According to the econometric model used by Dr. Christina Romer, the Chair of the President’s Council of Economic Advisors, it would have created even more jobs at almost half the cost.
Yesterday, Governor Ed Rendell (D-PA) was on This Week touting the stimulus bill. To rebut all those people who say the stimulus hasn’t created a single job, he cited his own state’s statistics. He said that $3 billion of his state’s budget was coming from the stimulus, and if he didn’t get that money he would have to lay off 37,000 people. So yes, the stimulus saved some jobs. Without that money, either those people lose their jobs or taxes go up and other people lose jobs because consumers don’t have as much disposable income.
But when I heard that, I got my calculator. Each job Gov. Rendell is saving costs an average of $81,000 – twice the average private-sector job. The average private-sector job pays $40K.
Much of the angst and protest by Tea Party members is about the size of government. They feel it is too bloated and too big, intruding on our lives too much, especially if the health care bill passes. They look at the difference between the cost of government jobs and private jobs as a sign of bloated government. If you favor bigger government, do you really favor spending twice what you would in a private sector job? I’m all for saving jobs; I’m just for doing it as efficiently as possible.
Did the stimulus work? Is the economy better off in the short run than it was before? Yeah, it is. It didn’t keep unemployment below 9%, and it hasn’t created even half of the private-sector jobs that it was supposed to. For it to reach its private-sector employment job, virtually every job created from this point forward must be a private-sector job, and that’s simply not going to happen. Whether that’s because the bill was flawed, the economy was worse than expected, or people reacted to the stimulus by changing their behavior (saving more, for example, in anticipation of future tax increases to pay for all this additional debt), is a question that keep econometricians busy for the next few decades.