Wednesday, August 04, 2010

Atrios noted something:

A big problem with economists is that they do a bit of sleight of hand with policy analysis. First they'll come up with some policy change which, IN THEORY GIVEN APPROPRIATE REDISTRIBUTION OF BENEFITS, can be Pareto Improving, that is make everyone as well or better off without making things worse for anyone. That is, because the policy change increases the size of the pie - makes per capita gdp higher - there's more to go around. But the next step, the actual redistribution, of course does not happen so GDP enhancing policies might give Bill Gates an extra billion bucks while leaving the rest of us with $500 million less.

It's worse than that actually. On the one hand, an economist will argue that a policy (say free trade) is beneficial because it increases overall wealth. When people point out that the benefits aren't uniform and that some people will be hurt, they will say that such problems are best addressed through other mechanisms, such as transfer payments. That's nice in theory, but if the proposed policy (in this case transfer payments) is a dead letter, it's irrelevant.

What takes the argument from inane to pernicious is the fact that the same argument used to promote the policy in question is used to oppose addressing the problems it causes. Free trade is good because it's pareto improving. Transfer payments are not (at least not as long as your utility function is constant with income). Economists or politicians or policy wonks who believe in pareto improvement will end up opposing the remedies they originally put forward. To them, the remedies are useful arguments, but they aren't good ideas and shouldn't really be carried out.

It only takes a few players like that to secure majorities for the policy change and against addressing its flaws.

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