Wednesday, July 6, 2016

More Light Shed On The Populist Uprising: - Excessive Economic Efficiency!

The populist political movements of Bernie Sanders and Donald Trump in the U.S. and the Brexit movement in the UK, have garnered much media attention. However, most of it is misplaced and omits the fundamental reasons for the outcry and rage. Why then have so many in both nations been prepared to throw the "Neoliberal order" (not liberal order as Joe Klein claims in his recent TIME column) under the bus?

The closest the mainstream media has come appeared in the Sunday Review (June 3, p. 7) article by Neil Irwin, 'A More Efficient World That People May Not Want'.  Irwin provides an "overarching theory" of what happened and pins it on a factor I have belabored before, excess devotion to Pareto efficiency or optimality - but which Irwin just refers to as "efficiency".  As he puts it:

"Economic efficiency isn't all it's cracked up to be. Efficiency sounds great in theory. What kind of monster doesn't want to optimize possibilities, minimize waste and make the most of finite resources? But the economic and policy elite may like efficiency a lot more than normal humans do."

Irwin basically ties the populist rage and antagonism to a matter of priorities.  As he cleverly puts it:

"Maybe the people who run the world, in other words, have spent decades pushing goals that don't scratch the itches of large swaths of humanity"


"What if those gaps between the economic elite and the general  public are created not by differences in expertise but in priorities?"

This is a spot on perception, and as I observed in my first post on Pareto economics, the whole basis of it is that the dollars spent by the richest are more "efficient" than those spent by the middle class or poor. This, for example, was the reason why former Fed chairman Alan Greenspan recommended (back in 2003) cutting Social Security in order to provide an economic basis to further cut taxes on the rich so they would invest more. The basic argument being that when seniors receive money just for breathing every day, it's not efficient and isn't driving the GDP forward and upward.

Irwin in his essay cites an interesting experiment that confirms this and was actually published last year in the journal Science.  Basically, 4 economist tested people in a computer simulation in which they could make an economic choice that either conferred more general benefits (with less to them) or opted to grab more and reduce general population benefits. Specifically, they could choose to be greedy and keep tokens that had real cash value our share them with others. The catch was that if they did the latter, the total number of tokens (and hence) cash declined.

To sum it up: "The more evenly the pie was divided, the less pie there was to go around. There was a trade off between equality and maximizing income, a version of economic efficiency."

Irwin observes (ibid.):

"Among the general American public, half of those who played the game favored equality over efficiency"

The game was then brought to the Ivy enclave of Yale Law School, a bastion for the putative elites,  "filled with people who become Supreme Court clerks, White House aides, and richly compensated lawyers."

In this entitled and elite group the results were fairly predictable: "80 percent preferred efficiency to equality. They were more worried about the size of the pie than making sure everyone got a slice".

A pertinent observation made by a Boston University economist, Raymond Fishman, was:

"If the system has been kind to you, and you find yourself at Yale Law School, you know you're going to make out O.K. in the end so you don't worry about widening the distribution of outcomes."

Which conforms with Pareto optimality. I.e. in one post I explained why Pareto economists favored paying people $1900 each to avoid getting colonoscopies than to tie up medical resources at significantly higher cost.

In a similar vein, Pareto economists - as Irwin also notes - bitch about rent control laws which they deem as "terrible" despite the fact these are popular, especially among young people and those of modest means. For these groups, grappling with soaring rents (like in Denver at $1600 a month) they are popular.

In like manner, the efficient elitist has no problem with a trade deal sacrificing 53,000 jobs a year so long as its general benefit (especially to the elites) is appreciable. But as Irwin points out:

"To the people who are among those 53,000 the pain may be enough to drive someone to vote for an anti-trade candidate".

Clearly, economic and political stability will not exist so long as the multitudes believe they are screwed out of the benefits, which the elites reap.  As Mr. Irwin puts it:

"Dynamism and efficiency sound a lot better to people who are confident they'll always end up being winners."


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