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Brooks Wilson's Economics Blog: May 2012

Saturday, May 19, 2012

Bain Capital and Make-work Bias

Mitt Romney claims to have created 100,000 jobs as the head of Bain Capital.  In a new political add, the Obama campaign claims that he destroyed jobs.  The both feed into a common error in voters’ understanding of economics. 

Steven Rattner, who oversaw the auto rescue/bailout for President Obama, recognizes that both campaigns stray from economic reality in focusing on Bain’s role in job creation.

I think the ad is unfair. Mitt Romney made a mistake ever talking about the fact that he created 100,000 jobs. Bain Capital’s responsibility was not to create 100,000 jobs or some other number. It was to create profits for his investors, most of whom were pension funds, endowments and foundations. It did it superbly, acting within the rules and acting very responsibly and was a leading firm. So I do think to pick out an example of somebody who lost their job unfortunately, this is part of capitalism, this is part of life. And I don’t think there’s anything Bain Capital did that they need to be embarrassed about.

Bryan Caplan exquisitely explains this misunderstanding in The Myth of the Rational Voter.

The public often literally believes that labor is better to use than conserve.  Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress, but as a danger.  i call this make-work bias, a tendency to underestimate the economic benefits of conserving labor.  Where noneconomists see the destruction of jogs, economists see the essence of economic growth—the production of more with less. 

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Wednesday, May 16, 2012

Signaling and Tax Reform

Candidates for elected federal office must run a dangerous political gauntlet that can both wound the candidates’ election prospect as well as their ability to govern if elected.  One tradeoff that they must make is between committing their vote on issues and maintaining neutrality to allow negotiating.  Voters know where a candidate stands when they signal their positions but committed votes on too many issues transforms a congressman or senator into an ineffectual ideologue who is unable to cut deals.  Voters may not know where the pragmatist stands but she can engage in the give and take required to pass legislation in divided government.  A great candidate may be able to convey their ideology without committing their vote.  Most elected candidates are a little above average.

Most republican candidates have committed their votes on tax reform by signing the following pledge

I, _______________, pledge to the taxpayers of the _____ district of the state of__________, and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Democrats have left themselves a little more negotiating room on taxes but have less specifically committed to maintaining current levels of entitlements to be funded by increasing taxes on “millionaires and billionaires.”

Voters seem to prefer ideologues but the intransigence it causes does not bode well for the nation’s fiscal well-being. We face a long period of mounting debt caused mostly by deficits in entitlement programs.  Political stalemate preserves the status quo and will eventually bankrupt entitlement programs causing a fiscal crisis similar to what Greece, Italy, and Spain face today. 

Neither Republicans nor Democrats control a 60 seat majority in the Senate after the election.  The other party will be able to block any legislation from either side that could solve the problem. 

I prefer small government to large, but I would rather have a big government like Germany’s than ineffectual government like Greece’s.  My guess is that most Republicans have the same preference.  Similarly, Democrats who insist that the rich fund a more government expenditures should recall that all countries, even the poorest have wealthy elites.  Only a handful lead by the United States have a health middle class.  Our political and economic institutions have not primarily benefited the 1% but the 99%.  As I prefer Germany to Greece, I believe that most Democrats would likewise prefer the smaller safety net of the Eisenhower administration to that of Greece.  Certainly there is room for compromise.   

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