Macroeconomics 113
- Congress just passed another spending bill totaling $484,000,000,000 (484B)
- Unemployment claims this morning were an additional 4,400,000 (4.4M), now totaling 26,000,000 (26M) in five weeks
- The NFL draft is happening remotely tonight
There are tradeoffs for everything. My current sections of Economics are the 16th and 17th time I have taught the one-semester course, and the better I know the material the less I understand what it is like to not know the material. I am losing the ability to imagine how I saw the world before I learned this stuff, as my thought processes smooth out and integrate multiple levels of thinking into one single step. If I don’t recognize this and adapt, this could make me a worse teacher. This is what is so brilliant about The Laffer Curve, by the way—it takes the concept of diminishing marginal returns and demonstrates in many cases, the benefits do not just decrease, but eventually turn into costs. For every teacher in every subject, there is an ideal level of expertise, and that level varies greatly depending on the students.
On a related note, I think this is why most of the best athletes in history have not made good teachers or coaches. They were so great at integrating all the different physical and mental processes required for excellence, they forget how to break down each process into teachable steps. Well, that, and their will to win and succeed is at such an intense level, they can’t relate with the mediocre players who struggle just showing up to meetings on time, etc. The good news for me, as a basketball coach, is that nothing came naturally for me. It took me multiple seasons to make a layup consistently—I know the steps.
My first lesson on this was my first year teaching Ancient History. I was supposed to spend one quarter each on Mesopotamian, Egyptian, Greek, and Roman history, working with seventh graders. I knew little about the first two subjects, and I enjoyed learning it as I went. When I got to the second half of the year, I was excited to be in more familiar territory, only to be surprised by the comprehensive test results at the end of the quarters. It’s impossible to say for sure, but it certainly looked like my students had learned LESS in the subjects I knew MORE about. After reflecting on this, my conclusion was that I had tried to teach them too much information, and their comprehension had suffered from my increased expertise. It could be any number of variables, of course, but that explanation made the most sense to me when I analyzed it at the time, and my hypothesis has been strengthened with more evidence and experience. [Partially for this reason, “expertise” is not the first quality on my list of what makes a good teacher, at least not through high school.]
There are tradeoffs for everything. No escaping it. This is a fundamental belief and perspective all economists hold, and why both sides tend to get frustrated when people ask us what the best job is, or what the best major is, or what the best investment is. The fundamental belief of the question-asker seems to be that there is one correct answer, a choice with only upsides and no downsides, and a good economist is never going to commit to a one-size-fits-all strategy. I’m either going to say “it depends” and move on, or tell them to schedule a meeting.
I’ve been thinking about this because a parent of one of my students pointed out that I skipped a pretty significant step in my last post. In theory, a subsidy is something intended to reduce the cost of doing business, but in practice, there is a difference between paying money to an industry (e.g. farmers), versus not taking money from an industry (e.g. oil). Both government actions have the same intention and outcome, but I need to spend more time explaining why I didn’t focus on the process.
One of the fundamental concepts to “the economic way of thinking” is opportunity costs. It comes up almost every day in class, and it is certainly not the default way of viewing the world. An opportunity cost is what you sacrifice when you make any one decision, more specifically, the value of your next best alternative. “Sacrifice” is a tad dramatic, so you could substitute “give up” if you want. For example, when you let Netflix speed through that “next episode” progress bar, you are making the decision to let Netflix make decisions for you. What is the “cost” of that decision? The seen cost is another chunk of time on the couch, but there are unseen costs, like your steadily increasing resting heart rate (RIP). Let’s focus on the seen cost.
I try to get my students to see “opportunity cost” and think “N.B.A”, next best alternative. What is my next best alternative? By choosing to watch another episode, you are revealing your preferences and essentially stating you believe this is the best way you can spend the next portion of your day. So what is your next best alternative? Reading? Doing homework? Calling a friend? Learning a new skill? Going for a walk? It’s likely different for everyone and, keep in mind, we are only aware of a small number of options actually available to us. Additional knowledge and education actually can change what we consider to be our next best alternatives.
On the subject of education and possibly re-evaluating the value of going for a walk, my book recommendation this week is Pilgrim at Tinker Creek.
The best way I can sell it is this: you will never look at nature the same way again after you read it. Annie Dillard is the only author who can make me feel like going for a walk in nature is literally seizing the day (apologies to Henry David Thoreau). Reading her is a calming, borderline meditative experience. She personifies wonder. If you like science, flora, fauna, or incredible prose, you should check her out. My limit is two book giveaways this week; same rules as last week.
“Nature is, above all, profligate. Don’t believe them when they tell you how economical and thrifty nature is, whose leaves return to the soil. Wouldn’t it be cheaper to leave them on the tree in the first place? This deciduous business alone is a radical scheme, the brainchild of a deranged manic-depressive with limitless capital. Extravagance! Nature will try anything once.”
Annie Dillard, Pilgrim at Tinker Creek
Pretty tantalizing quote, eh? Back to Netflix, though. It is not the clearest example to teach opportunity costs, I’ll admit; I forced the shot. I just resent how somehow a lack of self-control, bingeing, has become something to be proud of… in any other context, it’s gluttonous and/or pathetic/pitiable, but when it comes to consuming content on screens, the streaming companies have successfully flipped the narrative and glamorized indolence.
But you still get the idea, right? Because economists are trained to think in terms of opportunity costs, the line blurs between reality and what-could-have-been. As an example, let’s circle back to housing. If you live in your parent’s basement rent-free and have a job that pays you $40,000 per year, I would say not spending money on housing is, for all intense and purposes, the same as making ~$52,000 per year. Why? Because paying for housing takes up ~30% of the average Americans budget! Not paying for housing is no different than having a 30% higher income. This is the point in class where I would *politely* remind the sophomores that thinking of an exception to the general statement I just made does not mean you need to raise your hand and point it out.
[and I know it’s “for all intents and purposes”, I just randomly had the urge to trigger a few of you]
This is taken a step farther when you look at Economic Profit vs Accounting Profit. Accounting Profit is straightforward, it takes all the explicit (seen) benefits and subtracts the explicit (seen) costs. Total revenue minus total costs = Net revenue, aka Accounting Profit. To get Economic Profit, you also subtract the value of your next best alternative (unseen costs).
The textbook example (seriously, this is on page 156-157 in your textbooks, students) is Ann Trepreneur, who quits her job as a secretary to open a pizzeria. She finds that with the pizzeria her Accounting Profit is $85,000 – $45,000 = $40,000, and to find her Economic Profit, she also needs to subtract what she sacrificed to make the switch, her opportunity cost, i.e. her previous income of $38,300. Her Economic Profit is $1,700.
The thing neither Accounting nor Economic Profit attempts to measure is implicit (unseen) benefits, and that’s mainly because these are nearly impossible to measure in dollar amounts. What if her Economic Profit was negative? Should she go back to being a secretary? We don’t know, because we don’t know how much she values things like being her own boss. What we do know is this: if her Economic Profit is negative year after year compared to her previous job, let’s say -$1,700, and she sticks with the pizzeria business, then it’s safe to assume her implicit benefits of the current job are greater than $1,700. These sorts of questions often arise when we see stories like this: Why an NFL player who retired to pursue a PhD at MIT chose to live on $25,000 a year. Is he insane?! Everyone knows employment decisions are simple: compare which job gets you more money, and do that! What other factors could there possibly be..
All this is the result of me trying to unpack why I so smoothly skipped between subsidies that pay taxpayer money to an industry (e.g. farmers) and subsidies that don’t collect taxpayer money from an industry (e.g. oil). I think it was a worthwhile journey; these are topics I normally cover during the semester.
The article I linked to yesterday referred to a study which concluded the U.S. had $50,000,000,000 (50B) in forgone tax revenue from the 1995 Deep Water Royalty Relief Act alone. If you want an article that does a decent job critiquing oil subsidies, read this. If you want a much shorter, made up critique, let’s see.. a devil’s advocate could argue we could have used that forgone tax revenue to invest in renewable energy sources and be in a better position overall than we are today by playing the long game. I don’t have a strong opinion on it, honestly, besides my foundational belief that we should pay attention to our government interventions and reevaluate what is or is not working, and make changes when necessary. The universal problem with government interference is that it only goes one way; the movement is always toward more interference and closer to totalitarianism, and almost never toward reducing governmental power or eliminating subsidies.
The question I set out to answer is this: is the government not collecting $50 billion in taxes from one industry the same as the government paying $50 billion to another?
From an economic perspective, yes. If someone can push a button and have a person killed, and someone else can push a button to prevent a person from being killed, and the first person chooses to push the button and the second person chooses not to push their button—the classic crime of commission versus crime of omission—the general public, as well as our legal system, will judge the button-pusher much more harshly. The economist will look at them the same, though, because in both cases someone made a choice, and in both cases someone else died as a result.
[Side note: I don’t know if this is a controversial take, but I do think Economics is mostly separate from Ethics. I’m looking at cause-and-effect, you can figure out the values you place on actions and outcomes. In the above example, the opportunity cost is identical! This may be a good discussion topic, at some point]
The details do matter, and the best strategy depends on the situation. The only reason oil has a different system than agriculture is the specifics involved; there is no moral high ground to win. Consider this: if the government wanted to reduce vaping, would it be effective to tax everyone to raise money to then pay vapers not to vape? Or would it be better to give tax breaks to people who already don’t vape, implicitly punishing vapers? Well, as you know, the answer is neither, because vaping falls into a “tax heavily or ban entirely” subset of strategies, separate from subsidies. Again, the basic idea is that all government interference picks winners and losers, and in this example the losers are people who vape.
If tax breaks count as subsidies, that means everything in the tax code with discounts or deductions is subsidized. Does it follow that having children is a government-subsidized activity, because having a “qualifying” child gives you at least a $2,000 tax credit? Yep. So I’m inferring the government wants to incentivize having children the same way it wants to incentivize having a competitive domestic oil industry? Correct. Does this still qualify as interfering in the free market? Definitely. Could it result in overpopulation, especially if governments worldwide incentivize their populations to have more kids? It’s not a non-factor! Does it make me uncomfortable to talk about human beings like they are products in a marketplace? Welcome to macroeconomics 😀
