Naked Economics Wheelan, Charles (books to read for 13 year olds TXT) 📖

with the patient, who will interject his or her own views on quality of life versus longevity, willingness to experience discomfort, family situation, etc.—all perfectly legitimate considerations that have nothing to do with medicine or science. Yet making that decision still requires excellent medical advice.

In that vein of thought, we can present a framework for thinking about the role of the government in the economy.

Government has the potential to enhance the productive capacity of the economy and make us much better off as a result. Government creates and sustains the legal framework that makes markets possible; it raises our utility by providing public goods that we are unable to purchase for ourselves; it fixes the rough edges of capitalism by correcting externalities, particularly in the environmental realm. Thus, the notion that smaller government is always better government is simply wrong.

That said, reasonable people can agree with everything above and still disagree over whether the U.S. government should be bigger or smaller. It is one thing to believe, in theory, that government has the capacity to spend resources in ways that will make us better off; it is another to believe that the fallible politicians who make up Congress are going to choose to spend money that way. Is a German-Russian museum in Lawrence Welk’s birthplace of Strasburg, North Dakota, really a public good? Congress allocated $500,000 for the museum in 1990 (and then withdrew it in 1991 when there was a public outcry). How about a $100 million appropriation to search for extraterrestrial life? Searching for ET meets the definition of a public good, since it would be impractical for each of us to mount his or her own individual search for life in outer space. Still, I suspect that many Americans would prefer to see their money spent elsewhere.

If I were to poll one hundred economists, nearly every one of them would tell me that significantly improving primary and secondary education in this country would lead to large economic gains. But the same group would be divided over whether or not we should spend more money on public education. Why? Because they would disagree sharply over whether pouring more money into the existing system would improve student outcomes.

Some government activity shrinks the size of the pie but still may be socially desirable. Transferring money from the rich to the poor is technically “inefficient” in the sense that sending a check for $1 to a poor family may cost the economy $1.25 when the deadweight costs of taxation are taken into account. The relatively high taxation necessary to support a strong social safety net falls most heavily on those with productive assets, including human capital, making countries like France a good place to be a child born into a poor family and a bad place to be an Internet entrepreneur (which in turn makes it a bad place to be a high-tech worker). Overall, policies that guarantee some pie for everybody will slow the growth of the pie itself. Per capita income in the United States is higher than per capita income in France; the United States also has a higher proportion of children living in poverty.

Having said all that, reasonable people can disagree over the appropriate level of social spending. First, they may have different preferences about how much wealth they are willing to trade off for more equality. The United States is a richer but more unequal place than most of Europe. Second, the notion of a simple trade-off between wealth and equality oversimplifies the dilemma of helping the most disadvantaged. Economists who care deeply about the poorest Americans may disagree over whether the poor would be helped more by expensive government programs, such as universal health care, or by lower taxes that would encourage economic growth and put more low-income Americans to work at higher wages.

Last, some government involvement in the economy is purely destructive. Heavy-handed government can be like a millstone around the neck of a market economy. Good intentions can lead to government programs and regulations whose benefits are grossly outweighed by their costs. Bad intentions can lead to all kinds of laws that serve special interests or corrupt politicians. This is especially true in the developing world, where much good could be done just by getting government out of areas of the economy where it does not belong. As Jerry Jordan, former president and CEO of the Federal Reserve Bank of Cleveland, has noted, “What separates the economic ‘haves’ from the ‘have-nots’ is whether the role of an economy’s institutions—particularly its public institutions—is to facilitate production or to confiscate it.”17

In short, government is like a surgeon’s scalpel: It is an intrusive tool that can be used for good or for ill. Wielded carefully and judiciously, it will facilitate the body’s remarkable ability to heal itself. In the wrong hands, or wielded overzealously with even the best of intentions, it can cause great harm.

CHAPTER 5

Economics of Information:

McDonald’s didn’t create a better hamburger

When Bill Clinton ran for president in 1992, he floated the idea of Hope Scholarships. The Clinton plan (based on an earlier experiment at Yale) was seemingly elegant: Students could borrow money for college and then repay the loans after graduation with a percentage of their annual income rather than the usual fixed payments of principal plus interest. Graduates who went on to become investment bankers would owe more in student loans than graduates who counseled disadvantaged teens in poor neighborhoods, which was exactly the point. The plan was designed to address the concern that students graduating with large debts are forced to do well rather than do good. After all, it is hard to become a teacher or a social worker after graduating with $75,000 in student loans.

In theory, the program would finance itself. Administrators could determine the average postgraduation salary for eligible students and then calculate the percentage of income they would have to pay in order for the program to recoup its