Archive for the ‘Thomas Sowell’ Category

What’s the difference between politics and economics?

January 20, 2011

According to conservative economist Thomas Sowell is short-term thinking that ignores second-order consequences:

  • A fundamental difference between political decisions and economic decisions: political decisions tend to be categorical, while economic decisions tend to be incremental.
  • That is, when the public votes in a candidate, that decision lingers and is broadly applicable. Whereas, economic decisions are more transactional.
  • As a result, the public can end up paying as taxpayers for increments of spending that they would not have chosen to make as individual consumers.

 * * * * *

  • Politicians have a clear bias towards policies that will produce good results before the next election — even if they can be expected to produce bad results afterwards. That is, second stage — or second order — consequences are routinely ignored.
  • For example, price controls may provide apparent short-term benefits, but have repeatedly shown that they ultimately constrained supply and create shortages.
  • Another example: a second order effect of the Americans with Disabilities Act — which mandated reasonable accommodations to those with disabilities — was a decline in the employment of people with disabilities.
  • Infrastructure spending — repairing bridges, roadways, dams, or government buildings — doesn’t provide an immediate, visible payoff. So, politicians defer spending on infrastructure unless there is some obvious defect that is both immediately visible and important to a large segment of the voting public.
  • Political thinking tends to conceive of policies, institutions, or programs in terms of their hoped for results, not the realistically likely results.

Source: Chapter 1, Applied Economics, Thomas Sowell, Basic Books, 2010

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The perils of moral hazard …

January 19, 2011

According to conservative economist Thomas Sowell …

“Moral hazard” is an insurance term.

People behave differently when they are insured from the way they behave when they are not insured.

For example, people whose cars are insured may not be as cautious as other people are about what kinds of neighborhoods they park their car in.

Similarly, when taxpayer-subsidized government insurance policies protect people against flood damage, more people are willing to live in places where there are greater dangers of flooding.

Often these are luxury beach front homes with great views of the ocean.

So what if they suffer flood damage once every decade or so, if Uncle Sam is picking up the tab for restoring everything?

More than 25,000 properties have received government flood insurance payments more than four times.

Over a period of 28 years, more than 4,000 properties received government insurance payments exceeding the total value of the property.

If a property is located in a dangerous place, repeated damage can easily add up to more than the property is worth, especially if the property is damaged and then later wiped out completely.

Excerpted from RCP: “Moral Hazard” in Politics, August 27, 2010
http://www.realclearpolitics.com/articles/2010/08/27/moral_hazard_in_politics_106909.html

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Crime … it’s simple economics.

January 18, 2011

According to conservative economist Thomas Sowell, for some, a life of crime may be a series of rational economic choices:

  • Given the Low Educational and IQ levels of many who become career criminals, crime may well be their best paying option.
  • Crime is one of those occupations, like sports and entertainment, in which a relatively few at the top achieve very high incomes, while most of those who enter the occupation received very low incomes.
  • For example, many ordinary young sellers of drugs on the street live at home with their mothers, often in public housing projects — clearly not an indication of affluence — but the lavish lifestyles of drug kingpins attract many young people into the occupation, in hopes of rising to the lofty level.
  • Changes in crime rates reflect rational reactions to the cost of criminals expect to pay both in punishment inflicted by law enforcement system and the risk of being harmed by their intended victims.
  • Burglary rates tend to be affected by the proportion of homeowners who have guns in their homes. For example the burglary rate in Britain is much higher than it is in the United States. And, when the Atlanta suburb of Kennesaw passed an ordinance requiring households to keep a firearm in their homes, residential burglaries dropped by 89%
  • Another example of the Rationality of Criminals Is the Response to the unusual American Institution of the private bail bondsman a system used by only one other country, the Philippines. Criminals who use bail bondsman, usually show up for their court dates because they know the consequences can be severe.
  • When the criminals in a given area belong to a crime syndicate, their activities are restrained by the organized crime leaders who have to take a wider repercussions into account. A syndicate may restrict the amount of crime to keep law enforcement from ratcheting up their efforts.
  • Ironically both law enforcement and organized crime tend to reduce the total amount of crime in a specific area

 

Applied Economics, Thomas Sowall, Basic Books, 2010  Chapter 2

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When is insurance not insurance ?

January 17, 2011

According to conservative economist Thomas Sowell:

Insurance is, at it’s core, a pooling of risk.

“But, political Incentives make it rational to mandate insurance coverage on things they would not be covered by insurance on purely economic grounds, since those things are not a matter of risk.

For example, the cost of an annual medical checkup is not a risk, since is known in advance that these checkups occur once a year.

To have health insurance covers annual checkups is like having automobile insurance cover annual state inspection checks or routine oil changes.

But, because of the stronger emotions involved in medical issues, annual health checkups are more readily depicted as a good thing — and therefore justified as part of a government mandate.”

Source:Applied Economics, Basic Books, 2009

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Why is economics called the dismal science?

August 9, 2010

According to conservative economist Thomas Sowell:

Economics was christened the dismal science because it deals the allocation of scarce resources with inescapable constraints and painful trade-offs, instead of more pleasant, unbounded visions and their accompanying inspiring rhetoric, which many find so attractive in politics and in the media.

Moreover, economics follows the unfolding consequences of decisions over time, not just what happens in the very short run. That is, economics deals as well with second and third-order effects and unintended consequences.

And, economics focuses analytical comparisons against next best alternatives, not idealistic scenarios of perfection.

Source:Applied Economics, Basic Books, 2009

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