The ramblings of a wandering mind

Thursday, September 14, 2017

Thoughts regarding India's demonetization

A friend asks me regarding my thoughts on India's experiment in demonetization:

My response: I am not going to comment extensively on demonetization. When I comment on economic issues, I hold myself to a higher standard and hope that I am summarizing the literature, rather than sharing my own viewpoints on the matter. As an example, within this last week when two journalists reached out to me requesting comments on things I have worked on in the past, it still took me longer than an hour to read articles and think through my response. And those were things that I have researched on. I haven’t researched on demonetization and am not a macro economist so therefore it would take me even longer – at least several hours – to read the evidence that has come out/ is coming out and share my thoughts on it. So I am going to pass on that.

I will however comment about what is perhaps the most important aspect of demonetization and one I think is critical to whether this program is a success or not. And this has to do with the theme of tax evasion and compliance, a topic that I do know something about (e.g. http://tinyurl.com/y8jpvl25). To my mind, unless the revenue agencies are able to develop processes and systems which let them compare the amounts being deposited by individuals relative to what they had declared on their tax returns and then investigate discrepancies, then demonetization would be a failure. I mean if the powers-that-be were hoping that the “black money” wouldn’t get deposited in banks and that would be a one-time negative shock to the stock of wealth held by corrupt individuals, then that was a pipe-dream. So we truly will have to wait and see what happens to the tax base over a span of 3-5 years, how many people are brought into the tax net, does compliance go up, and so on and so forth before we are able to comment on whether demonetization was a success or not. (Reading through this article on Rediff doesn’t indicate to me that the negative shock I talked about was the goal of Mr. Arun Jaitley. He may however now be speaking with the benefit of hindsight and one might have to discount his statements accordingly. But Mr. Jaitley does note – “With the return of the money, the owners have been identified, he said, adding that the tax department is scrutinizing 18 lakh bank accounts with unusual deposits post note ban that do not match with previous income profile.” Reference: http://www.rediff.com/business/report/have-all-rs-1000-notes-come-back-to-rbi-post-demo-well-no/20170830.htm)

Now in best-of-class execution, one would define those goals ahead of time in order to precisely quantify what success looks like (say, a 30% increase in real tax receipts within 5 years) but I doubt this scheme falls in that category of best-in-class execution so unfortunately we do not have those objective yardsticks defined ahead of time. And so in the end I think I will have to wait for an enterprising PhD student somewhere with interests in Monetary and Development Economics to write an evaluation of the demonetization program. The state of knowledge generation is such that it will likely require more than one thesis to flesh all of this out. And that will be in the end what I base my own assessment of the program on. It would be foolish for anyone to trust folks who have always been critical of the government (and Dr. Amartya Sen undoubtedly heads that list but Dr. Kaushik Basu isn’t far behind) but that's not all. One should also exclude people who are currently employed by the government or have hopes of being so in the near future. With the National Rural Employment Guarantee Program for example, a huge initiative by the Congress government under Manmohan Singh, it is the work of one of my friends at Michigan that I trust more than anything else on the matter. It was her thesis work (http://tinyurl.com/yakzurjj) and as someone who is not ethnically an Indian, also likely to have been objective in its assessment.

Follow-up: Here is a piece from the Wall Street Journal describing some of the issues with detecting and monitoring tax evasion following large deposits. I think it is fair and balanced (https://www.wsj.com/articles/flood-of-cash-swamps-indias-tax-hounds-1486463407) and while it emphasizes that demonetization works only if evasion is detected, it is not shy to point out the many issues with it.

Tuesday, April 4, 2017

The decision to filibsuter Judge Neil Gorsuch is the wrong one...for Democrats

I say this as a Republican but would have said the same if I were a Democrat: Democrats filibustering Gorsuch is the stupidest thing they can possibly do - even when viewed exclusively in light of their own self-interest. Neil Gorsuch was picked in the hope of getting 60+ votes in the Senate and by all accounts, he should have. For context, when he was nominated on the 10th Circuit court of appeals in 2006 where he now sits, his nomination was approved by a voice vote and only 1 person showed up at his hearing - Senator Lindsey Graham of South Carolina. The issue is that notwithstanding the Democratic filibuster, Judge Gorsuch will be confirmed (perhaps as early as this week) and the Senate's rules/ norms will be changed. That now seems to be a done deal. The real issue is what comes next? 

No one knows when the next vacancy will come about on the Court but based on age, the ones likeliest to step down (either through death/ ill health) would be Justices Ginsburg (aged 84), Kennedy (80), or Breyer (78). Justice Ginsburg literally is at one end of the spectrum when it comes to being a liberal justice, Justice Breyer isn't significantly better, and Justice Kennedy - well he is the true swing judge on this present court. Now with the rules for confirming SC justices changed, the President will have no incentive to appoint a "mainstream" conservative like Judge Gorsuch. Instead he could appoint Judge Pryor who was reputed to be on the shortlist and is on record as having said that Roe v. Wade (1973) was the “worst abomination in the history of constitutional law”. (http://www.salon.com/2017/01/18/trump-meets-with-supreme-court-candidate/) In that case, even if an extreme nominee loses the support of a few Republicans (as happened with the Betsy DeVos nomination), DJT can get that nominee through. (Democrats, pls. check what the 2018 calendar for Senate races looks like before you comment). And therefore, while it is by no means certain that one of the justices will die/ retire in the next 3 years, it could happen. And while, a second term for DJT looks unlikely, stranger things have happened and esp. if DJT stays on until 2024, he will assuredly have 1 and perhaps even 2 or 3 vacancies to fill and the court will be packed with solid conservatives for a generation, maybe more. :)

Those are the key arguments. How about the other arguments such as - this will energize the Democratic base? Well - it doesn't look like the Democratic base is up in arms against Judge Gorsuch - e.g. there was not a single protester (Code Pink or otherwise) during three days of hearings and that needs to be compared with the protests against Sessions or DeVos during their hearings. 

What about the arguments that Democrats don't want to hand DJT an easy victory or this is retribution for Merrick Garland? Well - when in 3 or 5 years, the Court decides on another case as massive as Sebelius vs. NFIB (the original Obamacare case), and it goes down as a 5-4 because of conservative justices appointed under DJT, then the question of having handed DJT a victory in spring of 2017 will seem very quaint and would have faded from public memory. 

Finally, Merrick Garland - what about him? Yes - what happened to him wasn't good but we played politics.... and won. You cannot take politics out of politics, let's just say that. Frankly, President Obama could have appointed him for either of his first two vacancies but he chose not to - in order to pick a more ideological justice like SS and so Judge Garland was the sacrificial lamb in the end. The real question is not whether what happened to Merrick Garland was fair or not (it wasn't) but 1) whether Democrats would have believed any differently if RBG had died in President Bush's last term in office and there was a Democratic-controlled Senate and 2) would filibustering Judge Garland achieve their goals of preventing him from being seated (no) and whether it would give them sizable political benefits? (no, again) In contrast, Republicans were able to prevent Merrick Garland from coming on the Court and the thought of picking the next SC justice let a lot of Republican voters to hold their nose and vote for DJT. Neither are true here.


Now how about Republicans - couldn't abolishing the filibuster come to bite them in the butt? Well, not really. If and when the stars align again to give the Democrats, the Presidency and the Senate, they will get to appoint someone of their choice. But that's OK - the justices appointed by Democratic Presidents have never been viewed as swing from what I can tell; no one waited in bated breath for how Justice Sotomayor was going to vote on Sebelius vs. NFIB - (repeal of Obamacare for others); in that very important case, the swing justices (based on oral arguments) were Justices Roberts and Kennedy and in the end, Chief Justice Roberts proved to be the swing vote. In fact, it says something about both the parties and the judges, that the only ones who have been viewed as swing justices on the court in its last 15-20 years have been Republican appointees - earlier, Justice Sandra Day O'Connor, most recently, Justice Kennedy, and now, in a few rare instances, Chief Justice John Roberts. (I am not even including Justices David Souter and John Paul Stevens - both Republican appointees - who let's just say, surprised the Presidents who appointed them, and not necessarily in a very nice manner). So it is not as though, the views of any Democratic appointee on the Court will be a surprise; we know very well from history what we will be getting.


So all in all - as a Democrat, I would have been very concerned and disappointed that the filibuster to Supreme Court nominations would fall by the wayside, whereas as a Republican, I would be quite pleased and elated at future prospects, even if I were somewhat disappointed in the Senate becoming a body devoid of bipartisanship.

Monday, December 26, 2016

Should we do away with the Electoral College?

In recent weeks following the election of Mr. Donald Trump to the Presidency, accompanied by his loss in the popular vote, many commentators have called for the abolition of the Electoral College and moving to a national popular vote. Here is one column from E.J. Dionne of the Washington Post advocating just such a position. (http://tinyurl.com/hlwg9y7) I have often been tempted to write about this issue but there was something in the op-ed which irritated me enough that I decided to respond with a letter to Mr. Dionne. 

Before getting into the letter itself, let me finally note one other thing: we never talk of changing the rules of the game after the game has been played and a winner has been chosen. The participants in a game take the rules of the game as a given and then decide how to play the game. In the case of this 2016 presidential election cycle, if we had decided that the winner of the national vote would be elected President, it is clear that electoral strategies would have been different. Democratic volunteers from the state of Massachusetts would have less time on their hands to go campaign in neighboring battleground New Hampshire and parties and PACs would have run ads and focused their ground games very differently. One could also make the case that Mr. Trump's persona and strategy of addressing big crowds in large rallies would have been more useful rather than the nuts-and-bolts strategy of Mrs. Clinton's campaign which, in my view, rested on trying to reassemble the Obama coalition of 2012 block by block. The point is I don't know who would have won the popular vote if we had agreed that the winner of the popular vote would be elected President but what I do know is that the outcome may have been different than the current outcome. What I also know is that criticizing the outcome of a game when evaluated under a hypothetical set of rules different from the rules that the game was played under is hypocritical and shows the person holding such views in very poor light. With that being said, here is my letter to Mr. Dionne.

Hello Mr. Dionne,

I would like to share three of my observations re: your article in the Washington Post on the Electoral College:

1. Would you have written this op-ed if the winner of the Electoral College and the popular vote had been flipped? I can’t answer this question convincingly for you but as of now if you told me that you would have written that op-ed regardless, I am afraid I could only doubt your credibility and honesty. J

2.  If the Electoral College goes today, shouldn’t the Senate follow simply based on consistency of logic? After all, California with its 39 million+ people (http://www.census.gov/quickfacts/table/PST045215/06) still gets the same two Senate seats as Wyoming does with ~600,000 people (http://www.census.gov/quickfacts/table/PST045215/56)?  Either you believe in doing away with equal representation of the States in the Senate (which is consistent with your views on the Electoral College but inconsistent with the history of this country) or you believe in retaining the equal representation of States in the Senate (which is inconsistent with your views on the Electoral College); which one is it? If you advocate doing away with the equal representation of the States in the Senate, something that is plausible if after the 2018 cycle New York and California end up being represented by Democrats, who nevertheless find themselves in a hopeless minority, then you are asking us to violate the most basic tenet under which States agreed to become a part of this federation. Would you agree?

3. Finally, in case you do think that abolishing the Electoral College as we know it is a good idea, it is unclear how you plan on accomplishing that. This is not something that could be passed through an executive order (thank Heavens for small mercies), the only way to enact this would be through a Constitutional Amendment and one knows how hard that is. But that is a feature of the system – not a bug. Moreover, think about this for a moment – Republicans will hold the levers of power from Jan. 20 onwards in both the executive and legislative branches of federal government and they would hold unified control in about half of all states (http://www.governing.com/topics/elections/gov-republicans-add-dominance-state-legislatures.html)! I don’t need to remind you of what’s necessary for a constitutional amendment to pass but boy, are things looking precarious for the Democrats! In that environment (and in an environment of hyper-partisanship), I hope you would recognize  that passing constitutional amendments should be hard – really really really hard but that would also mean that your ideas of doing away with the Electoral College has exactly a zero chance of passage. Which is exactly how I would like it – because I respect the Constitution more than I care about the  vagaries of any political party or the outcome from one electoral cycle and because I also believe that Constitutional Amendments should pass only where there is an overwhelming national consensus on a topic and we are very far from such a consensus on what to do with the Electoral college. I for one (and I speak as a registered Republican) would be opposed tooth and nail to doing away with the Electoral College.

Responses are always appreciated but what’s even more appreciated is to see some of what I have said be reflected in your subsequent writings – maybe with the implicit or explicit acknowledgment that other reasonable people may hold points of view that differ from your own.

Sincerely,
Sutirtha Bagchi

Saturday, August 1, 2015

On hunting and whether hunting for trophies is morally equivalent to hunting animals for their meat

This reflects discussion I had with friends on the topic of hunting following the killing of a lion, Cecil in Zimbabwe by an American. This article from the Washington Post gives you some background on the case and the following video from Jimmy Kimmel highlights the comedian's views on the matter:

http://www.washingtonpost.com/national/health-science/cecil-the-lions-killer-may-have-trouble-avoiding-extradition-experts-say/2015/07/31/6100c7cc-37be-11e5-9739-170df8af8eb9_story.html

https://www.youtube.com/watch?v=_LzXpE1mjqA

Here are my reactions:

I have never hunted and doubt ever will. As is, I would be happy if I could get by without eating any meat if I could. Maybe some day. But given that I eat meat, the idea of hunting an animal and eating its meat makes some sense to me. But what doesn't is the idea of killing an animal only to put up its head on a mantle as a showpiece. It isn't a show of one's physical prowess for sure because one party has a gun, the other doesn't. If it has to be a show of physical prowess or virility then one should fight the animal with one's bare hands and see if one emerges victorious or not. At the end of the day, animals are also nature's creation and if there is an Almighty, I doubt that He would look favorably at the senseless killing of one of His creations.

This led to a question from one of my friends: Should lions never be hunted? Bears? Mountain lions?

My subsequent response:
My position is this - if animals are hunted, then my conscience would be more or less clean if it is for one of these two reasons: a) the animal threatened me and I risked physical harm if I did not kill the animal; b) I wanted to eat the animal's meat and therefore I killed it. Other than those two reasons, no in my view, animals should never be hunted. One of the things that strikes me as odd is that the very same people who are troubled by abortion and would likely outlaw it if they could, have no problem hunting animals/ birds for the sake of sport. I, on the other hand, am deeply troubled by abortion AND by the killing of animals for sport because fundamentally, I believe that aborted babies and animals that are killed in a wanton manner are also God's children and we need to respect the sanctity of life in all its forms whenever and wherever possible. So to directly answer your question, if the lion/ bear/ mountain lion is not threatening me or my companions and I am not killing it to eat its meat, I would never want these animals to be hunted.

Liberal bias in the media

I as a conservative am rankled by what I perceive as a liberal bias in the media. Is this a figment of my imagination? Probably not. An independent search by the reader of this blog would help him judge the facts for himself/ herself. But in case s/he is short of time, let me quote some statistics which might be telling in that regard: "A new survey confirms that liberals and Democrats dominate the major media. The website of the Project for Excellence in Journalism (PEJ) reports the findings from a new book, "The American Journalist in the 21st Century: US News People at the Dawn of a New Millennium." It finds that 40 percent of journalists described themselves as being on the left side of the political spectrum and conservatives were only 25 percent. Moderates made up 33 percent. In terms of political party affiliation, 36 percent of journalists said they were Democrats, but only 18 percent said they were Republicans. (My add: The current national split for registered voters is much more even in contrast to the lopsided numbers for journalists.) Viewed in context, citing Gallup poll data on the ideological make-up of the public, the article on the PEJ website says that 40 percent of the journalists are liberal but only 17 percent of the public is. While 41 percent of the public is conservative, only 25 percent of the journalists are. That means there is a tremendous gulf in terms of the political views of journalists and the public. "1

Why do I raise the points above of this liberal bias? Because as we lap up election coverage this election cycle and then discuss it in our living rooms, it is worthwhile to ponder over where all of our news is coming from and whether the folks discussing the news have any ulterior motives or not. Let's say you have a situation in which 4 journalists on CNN are chatting about the upcoming Presidential elections. You listen to the news coverage and at some level, would hope that what you are getting is a balanced and even coverage of the issues and where the candidates stand on them. But had it turned out that all 4 of them had voted Democratic in the last Presidential cycle, would this make you think twice of the nature of the information that you are receiving? Hopefully yes. Because at the end of the day, not all journalists can be expected to meet up to the lofty standards that were set by one of my professors who when asked his opinion on a matter replied, "The class is not a forum for me to express my opinions. It is my role to help you connect with the repository of literature that exists and hope that what I am able to present you with is a balanced coverage of the topics at hand representing the different strands of research which has looked at this topic." Wow!

Given all of this, I have a suggestion which is inspired from the manner in which business news is typically covered. Let's say we have a stock analyst from Morgan Stanley talking about the prospects of General Electric. At the end of his coverage, the analyst must disclose whether he or any of his family members currently holds any stock in that company. In addition, he has to also disclose if his firm, Morgan Stanley had any business dealings with General Electric over the last 12 months, whether it be in the form of investment banking business or in any other form. Now how about having a similar disclosure norm for the political journalists who cover the political news segments. At the end of a 1 hour segment run by CNN on the upcoming presidential elections, we might have a disclosure on the lines of : "Campbell Brown: Democratic; Wolf Blitzer: Democratic; Anderson Cooper: Democratic; Rolland Martin: Democratic". And then, the audience, people like yourself who expect the media to be unbiased, could make up their minds about what they listened to was balanced media coverage or not. If this sounds like too drastic a plan that curtails individual privacy, we could at least move to a system where at the end of each segment, we have a statement on the lines of: "Of the 56 (I am making a number up, for illustrative purposes) journalists who were a part of the crew, 39 of them were registered Democrats, 6 were registered Republicans and the remaining were unaffiliated with either party." I am certain that the audience would be enlightened by such information.

While there are some who try to point out that the media does not have a liberal bias, I think this suggestion of mine would make the debate moot and settle the issue for once and all on the basis of facts. Let's stop this liberal hogwash. Today! Thoughts or comments?

1 Source: http://www.aim.org/aim-report/aim-report-new-evidence-of-liberal-media-bias-november-a/, accessed 12th June 2008

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Sunday, November 17, 2013

In Washington D.C. for a movie showing, John McCain talks about global shaking

By: Sutirtha Bagchi
Published: August 23, 2012
Washington D.C.: John McCain may have lost his last chance to occupy the White House with his defeat to Barack Obama in the 2008 Presidential elections, having lost the Electoral College narrowly while having won the popular vote to his Democratic rival. However that did not stop him from making a recent stop at the White House recently for a private showing of his recently-made movie “An Awkward, Problematic and Irksome Extension of the Logically Possible” to President Barack Obama, his most recent wife, Madeline Obama and their two children. (Barack had a nasty divorce with Michelle Obama shortly after the elections of 2008 when he refused to make her the Secretary of State citing national security concerns. His subsequent marriage with Madeline has however proved very stable as Madeline has been content to simply being a trophy wife for Barack and attending the numerous state dinners in the Capitol.)

Explaining the theme of the movie, John McCain explained, “Global shaking has come to become the foremost problem impacting human civilization. It is now an established fact that the trampling of the earth by 7.1 billion people and innumerable more animals is shaking the very foundations of the earth and if not addressed immediately, will prove to be a threat to our children and grand children.” When asked about how he got interested in the topic, the former senator explained that this topic had always fascinated him since his days in the military when he would feel guilty of flying an A-4 Skyhawk because of the feeling that he was contributing “more than his fair share” to the earth’s vibration and disturbing her natural cycles and patterns. However he finally got the time to work on this topic that had been so near and dear to his heart, after having lost the 2008 elections to his Democratic rival and his Senate seat in Arizona. The former senator mentioned that his recent work on global shaking had taken him around the globe and had gained wide acceptance in scientific circles all across the world. He is convinced that that there is broad consensus for a pact to address global shaking, with the only hold-outs to such a global regime being India, Eritrea and Burkina Faso, all of whom have cited concerns regarding free practice of their native dance forms as stumbling blocks before they can accept any such treaty.

Critics of the senator have criticized that his attempts to bring up this topic of global shaking are little more than a thinly veiled attempt to prevent African Americans from engaging in their hip hop dance styles, an allegation that the former senator refuses to deny. Other prominent critics from the left such as Noam Chomsky and Gore Vidal have argued that the reactionary forces on the right are spreading the canard of global shaking in an attempt to limit the size of assembly in any corner of the world at any given point of time to less than 1,000 persons, a charge which the senator thoroughly denies. Finally in his response to others who have suggested that the senator has chosen to engage in the issue at this late stage in his career to bag the Noble Prize in Physics before he hits the bucket, a charge the senator thoroughly denies, the senator remarked “After having won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, (popularly known as the Noble Prize in Economics) in 2009, I have no desire of going to Stockholm yet again at this ripe age. All that I desire that when I am laid to rest, the earth below me should not be shaking.”

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Sunday, May 30, 2010

Economics: a positive science & a social science

The genesis of this blog post lies in my attempts to explain to my family members, most notably my brother, currently a professor in engineering at a research university, of the kinds of research I engage in. And often when I am done describing what is that I have just read or what is that I have been working on, I am met with a genuine and sincere question on the other end of the line, “So what?” To whom my response is nearly always identical – “So nothing, other than that this paper helps us understand why we observe X” (X being the phenomena the paper is focusing on). And if that is met with a stony, uncomfortable silence, as if my previous response were somehow inadequate, I continue by saying that, I am sorry to disappoint him in that the paper that I just finished reading does not have any direct policy recommendations for what policy makers should do or how businesses should be run. Indeed, the vast majority of economics, as I see it, understand it and see it as being practiced in academia, is bereft of direct recommendations for policy makers, firms or individuals of what they should or should not do; indeed, in that sense, modern economics is largely value – free, as I strongly believe that it ought to be. And while some economists may feel that they need to be defensive about this lack of prescriptive-ness or the lack of being directly tied to policy, I, for one, see it as a strength of the discipline and find it a key reason why I am drawn to it.

At this stage, I think it is relevant to point out the distinction between a positive science and a normative science since it is key to what follows in this post. A positive science simply looks at the world as is whereas a normative science, on the other hand, rather than simply rest content with “merely” describing the world, also talks about the world as it ought to be in the opinion of the author.

To distinguish between the two approaches, the positive and the normative, let’s take an example from the world of taxes: A positive statement regarding the marginal tax rate (i.e. the tax rate paid on the last dollar earned) by individuals in the top tax bracket (which kicks in at a mere $373,650 of income for an individual) might be something on the lines of: “If we were to increase the marginal tax rate from 35% (where it currently is) to 39.6% (what the Obama administration proposes it ought to be) then we would depress the incentives to earn by individuals. Individuals affected directly by the tax hike are expected to work 2 hours per week fewer than what they would otherwise have.” A normative statement, on the other hand, might be on the lines of: “We ought to increase the marginal tax rate on individuals in the top income tax bracket to 39.6% from the existing 35% because doing so will help the government fund the wars in Iraq and Afghanistan.” Or to take a different use of funds, “We ought to increase the marginal tax rate on individuals in the top income tax bracket to 39.6% from the existing 35% because doing so will help the government invest more in clean energy.” Notice the difference between the three statements – in the very first statement (which comments about the decrease in hours worked), there is no value judgment associated with whether the increase in tax rates is good or bad or whether high income individuals working fewer hours is beneficial or harmful; it is simply a prediction of what might happen based on economists’ state-of-the-art understanding of the elasticity of taxable income and individual responsiveness to incentives. One can quibble about the assumptions used in arriving at that number, question the rigor or methodology of the studies on which the key parameters are estimated, but then once one agrees on those, one has to also accept the fact that an increase in the tax rates will reduce the number of hours worked by the high income individuals by approximately 2 hours / week, without necessarily agreeing on whether that is “good” or “bad”, however we want to define “good” and “bad”.

Contrast the first statement with the two subsequent statements which talk about the potential uses of the increased tax revenue (assuming that there is an increase after all behavioral responses are factored in) – one may be violently opposed to the war in Iraq and Afghanistan (note the irony) or one may be philosophically opposed to the government intervening in energy markets and deciding which technologies to tax or which to subsidize. However, irrespective of one’s position on either of those issues, there is no way of resolving an agreement between two individuals holding differing views on say, the wars in Iraq and Afghanistan. The best we can hope to get out of a discussion between two such individuals (and that is if we are lucky and they can resist the urge to call each other names) – “We can agree to disagree on whether the wars in Iraq and Afghanistan are justifiable or not.”

In my conception, economics is a positive science, not a normative one. Economists should (and here I am introducing my judgments about what economics ought to be, rather than simply describing economics as it exists) not be in the business of saying what society should do; they should be in the business of simply laying out a set of actions and the pros and cons of each of those sets of actions, based on the most state-of-the-art understanding within the economics profession of those different actions. Kind of like a menu on a restaurant card – you offer a menu card to your clients which might have the following items: “Lobster Ravioli - $15.95; Thai Chicken Skewers - $ 10.95; Smoked Salmon Roulade - $12.95” and so on and so forth and let the diner make the decision of what she wants to order (or doesn’t want to order).

This brings me to another related but distinctly different facet about what the discipline is about – in particular, about what the subject matter of economics is and what is distinctive about economics, when compared to other social sciences such as sociology or anthropology (disciplines about which I know precious little, by the way!) In this regard, a popular misconception in the minds of many, especially those who have never been to graduate school in economics, is that economics is somehow related with “money” or “material goods”. Or it is related to what the average citizen hears being reported as “Economic news” on the nightly news hour on TV, or in the “Business section” of the (virtual) newspaper she reads. Well, it is true that economics does include all of the topics included in those sections, but then it includes much more. In fact, I would go so far as to say that economics includes essentially all interactions between an individual and the environment around her and all interactions between individuals. (After all, economics is a social science, as opposed to being a natural science.) But then this definition which I offered is so expansive, that it can be rightfully perceived as being bereft of any content. Indeed, economics cannot be defined in terms of the subject matters it looks at but – by the lenses, it uses to look at the world. Paraphrasing Gary S. Becker[1], winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1992 and currently a University Professor at The University of Chicago: Economists use the “economic approach” to analyze issues that range beyond those usually considered by economists. The economic approach, Becker refers to, does not assume that individuals are motivated solely by selfishness or gain. In that sense, the economic approach is a method of analysis, not an assumption about particular motivations. “Behavior is driven by a much richer set of values and preferences. The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic.”

Now saying that an individual chooses action A over and above action B, because action A makes her happier than action B is tautological and again void of content. However, the utility of the economic approach is evident when we think of the impact of what changing the relative costs and benefits of actions A and B might do for the likelihood of the individual to choose among the different actions available to her. So, if the government in its infinite wisdom, decides that it wants to subsidize action B (say, buying a Prius) over action A (say, buying a Hummer), then we should expect some individuals to switch from buying a Hummer to buying a Prius. But what is more – the incentives need not be material incentives for this above discussion to hold; they can be (and often are) non-monetary in nature. Continuing with the same example, it is certainly the case that in some communities across America, it would be terribly “un-cool” to be seen driving the Hummer, and if an individual moves to such a community, then the likelihood she buys a Hummer over a Prius, when she is buying a new car, goes down, not because she is responding to material incentives, but because she is responding to opinions of her that would be drawn by her neighbors if she were seen driving the Hummer. That, to me, is the core and essence of the economic approach; it is not constrained by the questions one looks at and does not impose any a priori assumptions of textbook, seamless rationality, or perfect foresight, but that it surmises that individuals respond to incentives and altering the set of those incentives, leads to predictable changes in behavior, a claim which can be subjected to verification using the widely accepted tools and techniques of statistical hypothesis testing.

This is where the two main themes I have tried to cover in this post come together. The economic approach of looking at whether individuals buy a Hummer over a Prius doesn’t tell us about whether government should encourage one over the other – doing so would be a normative statement, whereas my claim is that economics is (a positive statement) and should be (a normative statement) in the business of describing the world as it exists, and also describing how we would expect the choices made by individuals to change with a change in the environment in which such individuals make these decisions.

I close with a reference that goes back to the debate over health care reform. Without taking a position on my views about whether the bill that was signed by President Obama into law earlier in 2010 is going to harm or hurt the country, let me just reproduce a brief excerpt from what I thought, was the most sensible synthesis of the debate that I had seen during this entire period. It comes from David Brooks, among my favorite commentators of today and I quote [2]: “It’s easy to get lost in the weeds when talking about health care reform. But, like all great public issues, the health care debate is fundamentally a debate about values. It’s a debate about what kind of country we want America to be. … We can debate this or that provision, but where we come down will depend on that moral preference. Don’t get stupefied by technical details. This debate is about values.” Brilliant and well said; economists should be laying out the costs and benefits of the various options proposed by their political masters using the state-of-the-art tools and techniques. However beyond that, the choice over which bill to have (or not to have) is not a decision which can be taken by economists alone, but by the political procedures of a democracy. Economists have a role to play in that discussion as well, but we engage in that discussion, not as professional economists, but as ordinary citizens, who also have a voice and a vote and who don’t forfeit their rights to being citizens by becoming professional economists. Comments and thoughts are always appreciated.

Cites:
1) http://nobelprize.org/nobel_prizes/economics/laureates/1992/becker-lecture.pdf
2) http://www.nytimes.com/2009/11/24/opinion/24brooks.html?em

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