The following information comes from a report by the Committee for a Responsible Federal Budget  (CRFB).   The CRFB is hardly a liberal organization and is mostly considered a ‘centrist’ one that warns of impending doom if America doesn’t get it’s fiscal house in order–more along the Simpson Bowles channel in other words.  We disagree entirely, of course, because the ‘centrist’ theme takes aim at all the social programs installed beginning with social security during the Great Depression 80 years ago.  Our real problem is the crony capitalism we’ve developed the past 40 years where the wealthy are given all the tax breaks because of their money influence on Congress.  The result has been increasing deficits and debt due to lack of government funding.  It’s not a coincidence that the only administration to produce surpluses was a Democrat one, that of President Bill Clinton.

Gingrich’s tax and spending policies would add $7 trillion to the debt over the intermediate term.  Romney’s policies would add $250 billion.  Santorum’s policies would add $4.5 trillion.  Only Ron Paul, who would essentially entirely do away with Social Security, Medicare and Medicaid, the Environmental Protection Agency, the Food and Drug Administration–in short all discretionary spending other than that for defense, which he would also cut drastically by simply installing a non-involvement policy with the rest of the globe–actually cuts the debt by $2.2 trillion.

There are some interesting figures in the article.  One is that eliminating the health care reform law adds $80 billion to the debt.   Like most policy organizations, CRFB realizes health care needs structural reform in that the system needs to move away from a fee based business model to a health outcomes model.   All the GOP candidates ignore this truth and just shift the cost to families while doing nothing to control cost inflation created by the fee based model.

The big negatives for reducing debt in all the proposals comes from giving more tax cuts to businesses and the wealthy.

The take away?  The GOP is not now nor has it ever been interested in reducing deficits or debt.  The current crop (except for Ron Paul who’s policies would never be enacted for good reason) are all dissimulators, manipulators of data who know the mass media will never get around to actually studying the proposals so the public will be kept ignorant of the truth, if not completely mis-informed.

Beezer here.  From crony capitalism to journalistic malfeasance the country’s economic health is being systematically dismembered.  It’s a sad sight to witness.  Our only hope is that somehow the public will see through the circus and demand fairness in the tax system, and a restoration of social welfare as one of the nation’s top priorities.  Once again hat tip to economist’s view which linked to a Baseline Scenario article, which in turn linked to the CFRB research.

Not that this comes as a surprise here, but some people might be surprised to learn the two top GOP contenders for President both have tax proposals that increase our deficits and debt.  From James Kwak, co-author of the blogsite Baseline Scenario.

The Times has a story out today: Surprise, all the Republican candidates’ tax plans increase the national deficit! The numbers (reduction in 2015 tax revenues, from the Tax Policy Center):

• Romney: $600 billion
• Gingrich: $1.3 trillion
• (Late lamented) Perry: $1.0 trillion
• Santorum: $1.3 trillion

I guess that makes Romney the “fiscally responsible” choice, at least among the Republicans. But President Obama’s tax proposals would only reduce 2015 tax revenues by $222 billion. (That’s $385 billion in Table S-4 less $163 billion in Table S-3.)

Second surprise: The big winners in all of these tax plans are the rich! (That’s not just in dollars, but in percentage increase in after-tax income.)

I don’t mean to be hard on the Times reporters. This is exactly the kind of story they should be writing. Someone has to point out that the same people who are complaining about deficits are proposing to vastly increase those deficits. Especially when their fantastic claims are essentially going unchallenged on the campaign trail.

Beezer here.  We’ve known all along that Republicans are anything but fiscally responsible.  They’re the ones who did away with paygo in 2002, a built in brake on runaway spending implemented under President Clinton (and House Speaker Newt Gingrich, for full disclosure).  They’re the ones who went into two wars without raising taxes to cover the increased spending.  And they’re the ones refusing even now to let those unwise tax breaks lapse.  In fact both Romney and Gingrich want to further lower taxes on income mostly enjoyed only by the wealthy.   To pay for all this they want to defund Social Security and Medicare, benefits that labor and much of the middle class depend upon in their retirement years.  And all the while they complain about deficits and debt.  One can only be amazed that no one calls them on this obvious and continuing fraud.

James Kwak, associate professor of law at the University of Connecticut and co-author of the book 13 Bankers, skewers those who claim we can’t afford Medicare– by simply reciting the facts.  The truth is paying for Medicare is well within our reach and if we decide we don’t want to pay for it, that’s a choice we can make.  The point being it’s a choice, not an inevitability.  This article appeared in The Atlantic magazine.  Kwak is also co-author of the popular blogsite, Baseline Scenario.

Medicare needs a structural overhaul in order to avoid bankrupting the federal government–or so Republicans and many Democrats would have you believe. The latest evidence of this consensus is the Paul Ryan-Ron Wyden proposal to change Medicare into a voucher system where traditional Medicare is one of the options, but there are artificial caps on the value of the vouchers.

There’s only one problem with this consensus. It’s wrong.

The push for Medicare reform comes from understandable concerns about health care. Rising medical costs are a serious problem. We spend more than people in other countries, we get less, our gains in life expectancy  are mediocre, employers are struggling with increasing health care costs, and of course, 50 million people are uninsured.

Washington says we can’t afford Medicare. What does the math say?

Second, rising health care costs are the most important factor in the federal government’s long-term deficit. The CBO projects that spending on Medicare, Medicaid, CHIP, and subsidies for insurance purchased through exchanges will grow from 5.4 percent of GDP this year to 10.3 percent in 2035, and that’s assuming a slight slowdown in the growth rate of health care spending. (But there’s a major caveat to that well-known talking point, discussed below.)

Third, policies that actually reduce the overall, economy-wide price level for health care–for example, by shifting toward payment methods that focus on outcomes and promote accountability–are good. We should do all of that that we can.

But policies that simply shift costs from the federal government onto families–like arbitrary caps on the growth rate of “Medicare” vouchers–are worse than pointless. Substituting out-of-pocket spending for government spending doesn’t save the American people any money. In fact, it is likely to only increase costs, since Medicare has more purchasing power than private health care plans. Policies like Ryan-Wyden only make sense if they can reduce the overall price level–but there’s no evidence that competition in the private insurance market can reduce health care costs. There is, however, evidence that it will only increase costs. (For example, charging people more at the point of service doesn’t even reduce overall health care costs, as attested to by Atul Gawande.)

THE GREAT MEDICARE SCARE

When people say we have to drastically overhaul Medicare, they generally don’t provide the numbers to back up that claim. That’s because they can’t. Let’s take a look.

First of all we have to know how much money Medicare loses today. It’s important to realize that Medicare was never designed to be self-funding. Part A (hospital insurance) was supposed to be self-funding through payroll taxes, but Parts B and C were always meant to draw on general government revenues in addition to beneficiary premiums. In 2010, Part A’s deficit was $48 billion, or 0.3% of GDP. (That’s from the 2011 Medicare Trustees’ Report, Table III.B4.) Parts B and C together ran a deficit of $205 billion (funding from general revenue, which by construction fills the gap between expenses and other income, in Table III.C1), or 1.4% of GDP, for a total deficit of 1.7% of GDP.

Then we have to know how much worse that deficit is going to get. (Remember, Medicare was always supposed to run a deficit.) By 2040, Part A’s deficit will double as a percentage of taxable payroll (Table III.B7), so it should be about 0.7% of GDP. The Part B/C deficit will be 2.3% of GDP, for a total of 3.0% of GDP.*

In other words, over the next three decades, Medicare’s additional contribution to annual deficits will only be 1.3% of GDP.

YES, WE CAN AFFORD IT

That’s not peanuts, but there are plenty of ways to pay for it. For one thing, we could eliminate the tax exclusion for employer health plans, which currently costs the Treasury Department 1.9% of GDP (see “Tax Expenditures Spreadsheet”), including lost income taxes and lost payroll taxes. Forty percent of the value of this exclusion currently goes to households in the top income quintile. If we eliminate the tax exclusion and use half of the proceeds to fund rebates to low-income households, we save 0.9% of GDP right there. Increase the Medicare payroll tax by 1 percentage point (from a level that hasn’t changed since 1986, despite twenty-five years of rising health care costs) and you get another 0.5% of GDP. In other words, those two policy changes alone — one of which eliminates a distorting subsidy that largely goes to the well-off — could buy us 30 years of Medicare.

You may say that this is only sticking fingers in the dike, since health care costs will continue to grow. But this ignores another important fact: Revenues are growing, too, not only in real terms but as a share of the economy. A major reason for this is what’s called “real bracket creep.” Even though the tax brackets are indexed, they are only indexed to inflation. Over time, as real incomes rise, more and more income slides into the higher tax brackets. Most people think that people who make more money can and should pay higher taxes; by that logic, it’s perfectly fair that people pay higher taxes as they make more money over time.

So, for example, the CBO says that most government health care spending will grow from 6.9% of GDP in 2020 to 11.4% in 2040  (see “Data Underlying Scenarios and Figures”), which looks scary. But it also says that, under current law, tax revenues will grow from 20.6% of GDP to 24.2% over the same time period–which means that four-fifths of the growth in health care spending is covered by growth in tax revenues.** (If the Bush tax cuts are extended, the 2020 starting point for revenues will be lower, but the growth rate of tax revenues will be similar.)

In summary, if you look closely, the deterioration of Medicare’s finances (1.3 percentage points over three decades) is not as big as most people would have you believe. And if someone tells you about rising long-term health care spending under current law, he should also tell you that tax revenues are rising in the long term under current law.

The people who say Medicare has to be radically transformed, though, just don’t know the numbers. Or they do, but they ignore them either because they hate social insurance or because they want to raid Medicare spending to fund tax cuts for the rich.

You may think traditional Medicare is a bad program. It does have its problems. Most notably, it’s based on the fee-for-service model that produces high costs and poor care. But if you want to get rid of it, you should argue that it’s a flawed program instead of hiding behind the myth that we can’t afford it.

______________________

* Table III.C4 says that government funding in 2040 will be 22.1% of total individual and corporate income taxes, assuming that those taxes remain at their fifty-year average level as a share of the economy; the fifty-year average for those two taxes is 10.5% of GDP  (Table 2.3).

** Growth in Medicare payroll tax revenues is included in those numbers–but growth in Medicare premiums paid by beneficiaries is not included, which also helps the situation slightly. I used the health care costs from the supposedly more realistic “alternative fiscal scenario” but the tax revenues from the “extended-baseline scenario.” The CBO’s alternative fiscal scenario assumes that tax revenues are magically kept constant at 18.4% of GDP; I think it’s excessively pessimistic to assume that current law regarding spending is not changed but current law regarding taxes is changed.

Beezer here.  Like so many other issues, when it comes to Medicare the American public is being fed an unending amount of misinformation.  Most of this misleading information comes via the mass media, where poorly  trained but pretty journalists make their living.  The truth is that buying and selling the public is a full-time job.  Weaving all the lies together to make the construct believable takes a lot of effort.  Nonetheless, the truth survives despite all attempts to stamp it out.

The reform of health care systems aimed at reducing costs, instead of just shifting the costs from government to the elderly as is done by the proposed Republican Party budget, provide the only defensible methods of saving Medicare for future generations.

But first you have to understand what Medicare is and why it’s important to maintain.  The following is a wonderful explanation of Medicare provided by James Kwak, co-author of the popular blogsite, Baseline Scenario.  It’s entitled Medicare for Beginners.

“This isn’t a post explaining how Medicare works in detail. It’s a post about why Medicare matters to you.

The basic “problem” with Medicare is that its liabilities are projected to grow faster than its revenues indefinitely because health care costs are growing faster than GDP (and Medicare’s revenues are a function of wages).* The “solution” proposed by Paul Ryan is to convert Medicare from an insurance program, which pays most of your health care expenses, to a voucher program, which gives you a certain amount of money that you can try to use to buy health insurance. I’ve described the main problems with this approach already: it transforms a large future government deficit into an even larger future household deficit, and on top of that it shifts risks from the government to individual households. Today I want to look at this from a different angle. 

We created Medicare in the 1960s because retired people did not have another viable way of getting affordable health insurance. Medicare forces workers to pay for retirees’ health insurance, but since workers become retirees someday, it’s in their own interests to do so, assuming the system remains in place.

Forty-five years later, the same factor that is creating the projected Medicare deficit — health care inflation — is also making it even harder for non-working people to get affordable health insurance. On its face, this should make it even more important to preserve the basic structure of Medicare, even if it requires a higher payroll tax: you pay now, but in return you get decent health insurance later. But instead of being concerned with ordinary people — the workers who will need Medicare when they retire — the political class is concerned with the abstraction called the government deficit. Hence its overriding concern is providing cost certainty to the government, even if it means eliminating Medicare’s most important feature — guaranteed insurance.** In addition, the political class seems to think that cutting spending is always better than increasing taxes — even though, to some extent, the two are equivalent.

To put it another way, think about it from the perspective of someone who is working now. She may have a stable job, a good income, and decent health insurance through her employer. But someday she is going to stop working. In a world without Medicare, or one where Medicare has become a voucher system, that means she has to buy insurance on the individual market. And the most important thing about the individual market — more important than the high prices and the lousy policies — is that no one has to sell you a health insurance policy. If you have the wrong medical profile, you could be simply uninsurable. That’s how a free market works.***

This is an enormous source of financial insecurity. If you are forty years old and healthy now, you simply cannot insure yourself against the risk that you will be uninsurably unhealthy when you are sixty-five. And this is not a poverty problem. If you have a major illness, you will not be able to pay for all of your medical care without insurance unless you are truly, deeply rich; being merely affluent or “high net worth” won’t cut it. In other words, the upper-income need Medicare just as much as the poor.

So how much would you pay just for the certainty that, when you turn sixty-five, you will be insurable? How much would you pay on top of that for the certainty that your premiums will not depend on how healthy you are? How much would you pay on top of that to have heavily subsidized premiums when you retire (Part A is paid for by current workers and Part B is subsidized by general revenues)? Right now we pay 2.9 percent of our wage income. I would pay a lot more than that — again, because it protects me from a risk from which I cannot protect myself any other way.

That is the question that matters. I believe that if people were to understand the options, they would rather pay considerably more than 2.9 percent of their wages today to get real Medicare in the future than pay 2.9 percent of their wages today to get a voucher in the future — especially when the voucher is designed to be worth less than they need to buy health insurance, and there is no assurance that they will even be able to find an insurance policy that they can use the voucher on.

In short, Medicare is a great, great thing for participants, by which I mean both workers and retirees. The very factor that threatens its fiscal stability — health care inflation — makes it an even better thing for workers. Because the risk of future health care inflation (and therefore the financial risk of future bad health as well) is so much greater than it was in 1965, we should be willing to pay more to insure ourselves against that risk — especially when we have no other way of insuring ourselves.

I realize that simply raising payroll taxes periodically to compensate for health care inflation is not a complete solution. In the long run, we need to find a way to control health care costs (something, incidentally, that Medicare does better than private insurance companies today). We need more effectiveness research and, more importantly, we need incentives to push providers toward actually applying effectiveness research. (A single payer system could solve this problem, but I’m not holding my breath.) But in the meantime, the insurance component of Medicare — by which I mean not that Medicare is an insurance program, but that Medicare insures you against the risk of not being able to buy insurance — is more valuable than ever.

As Jonathan Oberlander discusses in The Political Life of Medicare, political elites have been primarily concerned with cost control since Medicare’s beginnings, even while the public was willing to pay more for better benefits. Today, the public should be willing to pay more to preserve Medicare’s most important benefit. Someone in Washington should be willing to take up this fight. But who?

* Medicare Part A is paid for by a dedicated 2.9 percent payroll tax. Part B is paid for by beneficiary premiums and by general revenues, but general revenues also grow with GDP, not with health care costs.

** This is not just a Republican position. For example, Alice Rivlin co-signed an earlier version of the Ryan Plan, although she opposes the latest version.

*** Things may not be quite so bad today. The Affordable Care Act (i.e, “ObamaCare”) prohibits medical underwriting and pricing of policies based on health characteristics, and it also provides subsidies for lower-income households to buy insurance. But — the Ryan Plan eliminates the individual mandate and the subsidies, which are the very mechanisms that make insurance affordable for people with modest incomes, such as many seniors.

Update: Here’s another way to put it. Medicare is like an insurance company that sells a unique product. You pay 2.9 percent of wages while you work. In exchange, you get a decent policy that kicks in at age 65 and covers you until you die; during that period, you only have to pay an artificially low premium as well as some cost sharing. No one else sells that policy for any price, nor should you trust any insurer that sells that policy for any price, because the only entity that could reliably deliver on such an open-ended, long-term promise is the government.

Now, Medicare is realizing that it’s not charging enough for that policy. Paul Ryan says that therefore we should scrap the whole thing. Instead, the first question to ask should be whether Medicare can raise prices. Given the fact that there is no even remotely comparable substitute available on the market, how much would you be willing to pay for it? I think most people would pay more than 2.9 percent. That should be the first option on the table.”

According to Baseline Scenario, which got a pre-publish date copy, a new book by Jacob Hacker and Paul Pierson entitled “Winner-Take-All Politics,” gives a badly needed political explanation for America’s current woes.

Beezer, as a wizened veteran of politics, has always posited politics as a main, if not the key, dynamic forming our national economy.  Which by itself need not be a negative.  In a Democracy, if the political structure represents the majority will overall (with Constitutional protections for minority rights), then there’s no reason politics can’t be a strong positive force for the economy and the commonweal.

And as someone old enough to remember times as ancient as the 1950s, Beezer became increasingly uncomfortable during the late 1990s about the political climate.  It had obviously become something other than a forum to discuss the commonweal.  But it was hard to pin down, exactly, what was going on.

The Great Recession revealed what had become different.  America had been captured by Oligopolies.  For all intents and purposes, the public was out of the loop.  Industry after industry had successfully captured Congress, as Oligopolies always attempt to do, in order to stifle competition and control their industry solely for their own, private, benefit.  The sole corporation that was supposed to protect the public from such predation (the Constitutional corporation otherwise known as the Federal Government) not only no longer served that function, it became a major force enabling this predation.

“Winner-Take-All Politics,” explains that the transformation of our political system is possibly the primary underlying cause of our current economic problems.

From Kwak’s review:  ”…their argument is simple: business interests in all sectors organized a takeover of political power that pushed organized labor and other groups protecting middle-class interests to the sidelines and made possible decades of policies that have enriched the super-rich at the expense of everyone else, including the merely affluent. Finance was simply the biggest and most profitable of these sectors–and, we would emphasize, the one best able to hold the government hostage in a financial and economic crisis.”

There are varying opinions about when this process began in earnest, but the book’s authors explain that it was during the 1970s where the transformation of our political system began.  From there forward its been all downhill for public opinions to affect politics.

“Hacker and Pierson, however, point the finger at the 1970s. As they describe in Chapter 4, the Nixon presidency saw the high-water market of the regulatory state; the demise of traditional liberalism occurred during the Carter administration, despite Democratic control of Washington, when highly organized business interests were able to torpedo the Democratic agenda and begin the era of cutting taxes for the rich that apparently has not yet ended today.

Why then? Not, as popular commentary would have it, because public opinion shifted. Hacker and Pierson cite studies showing that public opinion on issues such as inequality has not shifted over the past thirty years; most people still think society is too unequal and that taxes should be used to reduce inequality. What has shifted is that Congressmen are now much more receptive to the opinions of the rich, and there is actually a negative correlation between their positions and the preferences of their poor constituents (p. 111). Citing Martin Gilens, they write, “When well-off people strongly supported a policy change, it had almost three times the chance of becoming law as when they strongly opposed it. When median-income people strongly supported a policy change, it had hardly any greater chance of becoming law than when they strongly opposed it” (p. 112). In other words, it isn’t public opinion, or the median voter, that matters; it’s what the rich want.

That shift occurred in the 1970s because businesses and the super-rich began a process of political organization in the early 1970s that enabled them to pool their wealth and contacts to achieve dominant political influence (described in Chapter 5). To take one of the many statistics they provide, the number of companies with registered lobbyists in Washington grew from 175 in 1971 to nearly 2,500 in 1982 (p. 118). Money pouring into lobbying firms, political campaigns, and ideological think tanks created the organizational muscle that gave the Republicans a formidable institutional advantage by the 1980s. The Democrats have only reduced that advantage in the past two decades by becoming more like Republicans–more business-friendly, more anti-tax, and more dependent on money from the super-rich. And that dependency has severely limited both their ability and their desire to fight back on behalf of the middle class (let alone the poor), which has few defenders in Washington.”

Beezer here.  Must buy this book.  It sounds as if it is a good recounting of the process where Oligopolies are naturally formed and do what they always do–capture government and make it another tool for their suppression of competition.  And the recent Supreme Court decision that corporations were just like real people has put the cherry atop a very toxic cake for America.  Normally this would be a discussion about the problems faced by a developing nation.  Sadly, the book is about the United States. 

Anyone who reads my posts knows a couple things about where I get much of my information.  The first is economics Professor Mark Thoma’s blogsite economist’s view.  It’s a fascinating aggregation of many blogs and it always, always elicits a robust outpouring of commentators, such as Beezer.  The second is that Beezer regularly reads another blogsite called Baseline Scenario.  This is a site written primarily by three authors, the two main ones being Simon Johnson, another economist and former chief economist of the International Monetary Fund (IMF) and James Kwak, a successful software entrepreneur, a former consultant at McKinsey and now a Yale Law School student.  Johnson is also a professor at MIT’s Sloan School of Management.

Johnson and Kwak also co-authored the book ’13 Bankers’ that dealt primarily with the bank system’s role in the current recession.

That said as a long preface, what follows is two posts, one by Thoma at economist’s view, and the other by Kwak at Baseline Scenario.  Thoma writes about the small town he grew up in and Kwak writes about a recent experience he had at Yale Law School–two very different posts. 

But somehow they are related, in Beezer’s view.   The issue is putting an understanding to why they are related.  We’ll leave it up to whomever reads both, as we’ve done, to find what the connection really is, if any.

First, Thoma’s post.

As many of you know I grew up in a small town, it was just a bit under 4,000 people at that time, the same town that my mom was born in. I recently went back there for a high school class reunion (35^th). While I was there, something struck me that I’ve been meaning to write about.

In the town I grew up in, pretty much everyone knows who the best doctor is, the best dentist, the best painter, the best carpenter, and so on. There were sometimes disagreements about exactly who was best, e.g. who had the best restaurant, but we all knew who to choose if you needed something done, something to eat, your house cleaned, lawn mowed, legal work, child care, whatever. The people who didn’t weren’t very good at these kinds of jobs didn’t survive for very long. I can think of three lawyers off the top of my head, and if I needed one, I’d know who to choose, or certainly who to ask (growing up, my next door neighbor was the county clerk, and she could be very helpful in navigating anything related to the courthouse — she saved me once when I was in court for going 95 mph and the judge thought a night in jail would be a good lesson — thanks to her I escaped jail, but I did get the message — losing my license for a month helped with that).

I thought about this again yesterday as I was trying to change dentists. I’ve lost confidence in the one I have, but have no idea who to choose. I asked a few people, and they had recommendations, people mostly say the like who they have, but it was nothing like the kind of comprehensive knowledge I had where I grew up. Same for choosing a painter, a car mechanic, or most anything else. I never really know if I can trust them when the initial choice is made.

In an environment like I grew up in, there is little need for many types of regulation, it is largely redundant. If I still lived there and needed a room added onto my house, I have a friend I grew up with who does that type of work and I would trust him to do it right. Period. And if it wasn’t right, he would make it good. These are people you see frequently around town, or hear about from others, people you grew up with from kindergarten through high school (even college since many of us ended up at Chico). Sure, the doctors and dentists and the like came from outside, but my grandmother was a nurse, one of my mom’s good friend worked for a dentist in town, people played golf with the doctors, dentists, etc. at the local 9-hole course, socialized with them at the Tennis Club — you knew what you needed to know. If someone got sick at your restaurant, it was over for the owner. Word would spread quickly and everyone would know. If you had a good story and a good reputation — being good in grade school and being known as honorable has its rewards — you might survive. The town, person by person, would make it’s call. That call wasn’t always correct, small town rumors, cliquishness and the like are known menaces, but for the most part the town took care of itself. So while it wasn’t always perfect — there are parts of the town I don’t miss at all — it managed well enough.

What I’m wondering is whether this can, at least in part, explain differences in attitudes toward regulation between more conservative rural areas and larger cities that are generally much more liberal. In a larger city, you are much more vulnerable to predatory type behavior, unfair treatment, much more likely to be dealing with strangers you have never seen before and will never see again. That uncertainty, and the experience of being taken advantage of if you aren’t continuously on guard, and sometimes even if you are — maybe a contractor did a lousy job and refuses to fix the flaws or refund money — might lead you to declare “there ought to be a law!,” or that “someone needs to stop this!” You would be much more inclined to think that regulation was needed.

That’s not to say that things are perfect in small towns, they’re not of course, or that exploitation of the weaker by the stronger isn’t present. It is. Farm labor comes to mind. And there is still a role for safety and other types of regulation. But there does seem to be a much stronger sense that people can take care of themselves without the need for a bunch of rules and regulations, and without the need for police looking over your shoulder to make sure that you comply.

And that’s just the town. If you add in all the farmers who live in the vicinity — the reason for the town to exist at all — farmers who are their own bosses and think they ought to be able to do as they please with the land that has often been handed down for generations, it’s easy to see how a “leave us alone to take care of ourselves” attitude comes about.

Just a thought.”

And now Kwak’s post:

“For a class, I read an old (1986) paper by Kahneman, Knetsch, and Thaler on fairness. It’s based on surveys posing various hypothetical situations where businesses can take some action. For example, most people thought that it was OK for a grocer to pass on a wholesale price increase to consumers (Question 7) but not to raise prices because there is a general shortage and the grocer has the only shipment of a certain item (Question 12). In short, people have an intrinsic sense of fairness the authors summarize this way: “The cardinal rule of fairness is surely that one person should not achieve a gain by simply imposing an equivalent loss on another.”

Today in class, the professor posed the first question from the paper:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”

In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.

As the professor said, this is probably because there are a lot of business school students in this class. Business school students are classic Econ 101 robots. They know enough to know that if there is a demand shift, not only is it OK to raise prices, but you should raise prices in order to clear the market. In this case, supply is fixed in the short term, so raising the price won’t increase supply; the Econ 101 argument is that raising the price allocates the shovels to people who will derive more utility from them (because they will pay more), thereby increasing social welfare.

But this rests on a huge assumption: that willingness to pay is the same as utility. Unfortunately, however, this assumption fails in the real world; poor people simply can’t pay as much for snow shovels as rich people, and as a result a price increase will allocate shovels to rich people, not to those who need them the most.* But people who believe Econ 101 only remember the demand and supply curves they saw on the first day of class, so they think firms should raise prices.

I suspect that belief in Econ 101 is not only stronger among business school students (and the businessmen they become) than among ordinary people, but is also stronger today than it was in 1986. The free market ideology teaches not only that businesses can maximize profits by any legal means, but that they have a moral imperative to maximize profits by any legal means, including generating profits by imposing equivalent losses on their counterparties. (Essentially all proprietary trading fulfills this condition.) And three decades of this ideology have probably changed people’s responses to these types of questions.

More fundamentally, the 1986 paper shows that Econ 101 is diametrically opposed to human beings’ intuitive sense of fairness. Yet public policy largely follows the dictates of Econ 101. Is that a good thing?”

Beezer here.  Somewhere there is a nexus here that helps explain the deep conflicts we now see in our political atmosphere.  Small towns as described by Thoma would necessarily be very wary of government regulation because the small town intimacy takes care of what might otherwise require regulation.  They’d be conservative about ‘big government’ in other words.  Forgetting, of course, that small agrarian towns wouldn’t exist today without Agriculture subsidies.

And econ 101 posits that price is the only factor needed to ‘clear a market’ effectively.  Forget that the real world might want to ‘clear’ the market a little less efficiently in order to protect a large portion of its citizens–to protect the commonweal.