Thursday, July 11, 2019

With the Efficiency Trope Exposed as a Fraud, Can We Say Anything Objective About Economic Analysis?

by Neil H. Buchanan

[Note to readers: My latest Verdict column, "Constitutional Democracy, Trust, and Self-Restraint: The Destructive Consequences of Republicans’ Opportunism," is available now.  My column below returns to a very different topic.]

On some level, I suspect that almost everyone hopes to find objective, uncontroversial bases on which to build their arguments.  Beginning a discussion with a phrase like "I think we can at least all agree that ..." might sometimes be a manipulative and dishonest rhetorical move (designed to make an opponent look unreasonable if she objects), but it can also reflect a desire not to have everything be a matter of opinion or conflicting moral principles.

The post-World War II modernization of the academic field of economics was in large part driven by this hope.  The dominant personalities in the field, especially Paul Samuelson, had seen grand ideology deployed in horrifying ways by Nazis in Germany and Stalinists in the Soviet Union, a natural response to which was to try to turn high-stakes fields like economics into technical inquiries that appear to be immune to the ravings of madmen and monsters.

That is an admirable motivation, but as subsequent history has shown, at best the effort to dress up economics as a science has not stopped it from being turned into an excuse to ignore the plight of billions of people.  Rather than saying that some twisted version of what Marx wrote justifies openly murdering millions of one's citizens, modern economic orthodoxy is an elaborate superstructure that allows rich people to extract more and more from the non-rich and then to blame the victims for their plight.  This is unquestionably better than the alternatives that Samuelson has witnessed, but it is by no means morally neutral.

In a series of columns last month (here, here, here, and here), I criticized the concept of economic "efficiency" from various angles.  The scare quotes are necessary to emphasize that this supposedly neutral concept is ultimately a shell game that allows any minimally clever economist to claim that what he (yes, economics is still one of the most gender-unbalanced academic fields) likes is efficient and what he dislikes is inefficient.

But is that not an overstatement?  Surely, there must be some objective and neutral statements that one can make about economic policy questions that could rightly be preceded by, "I think we can at least all agree that ... ," right?  Sadly, no.

In my field of specialization, tax policy, both the economists and the lawyers tend to rely on a three-part scheme to describe how policy questions can be analyzed: efficiency, equity, and administrability.  The idea is that we can look at whether a tax proposal is efficient (whether the policy will cause net social utility to go up or down), equitable (whether it is fair), and administrable (whether it can be carried out by people with minimal compliance burdens).

Setting up this Holy Trinity, as I call it, necessarily disparages equity, where economists will typically say something like, "Equity's for the philosophers and politicians to argue about," or with mock humility, "Gosh, that's above my pay grade."  Efficiency and administrability, on the other hand, are presented as hard-nosed questions that can seemingly be addressed objectively and dispassionately.

Further, the Holy Trinity framework sets up the classic "efficiency-equity trade-off" to make it appear that being soft-hearted is "costly," so that at best attempts to achieve anything other than "market outcomes" will reduce the overall size of the pie.  You can have your precious increase in equity if you must, sneer those economists, but you're just making us all poorer overall and wasting resources to boot.

Suppose that one accepts the reality (summarized in the first two of my recent columns, here and here) that efficiency is infinitely manipulable.  Is there not still a residual category that can be truly objective?  That is, even if the Holy Trinity is properly understood such that its first two elements are not "efficiency and equity" but "inequity-by-design and equity" -- or, because the word equity can be used descriptively to cover any conception of fairness -- "equity and equity," can we at least say that the non-theoretical aspects of life are objectively measurable and open to dispassionate assessment?

For decades, that idea (or hope) was taught in undergraduate economics courses through the famous metaphor of "Okun's leaky bucket."  Arthur Okun, a liberal economist at the Brookings Institution, vividly demonstrated the administrability idea by asking us to picture a redistributive policy as a bucket of water that is drawn from one pool and carried to another.  Along the way, however, water sloshes over the edges and seeps through cracks and holes in the bucket.  Those are the administrative costs that necessarily accompany every do-gooder's policy.

To be clear, Okun used this metaphor for two good purposes: first, to remind people not to be purely wasteful in a purely bureaucratic way (requiring two-step application processes where one would suffice), and second, to set up the argument for liberals that some equitable outcomes are "worth it," even if they generate some waste.

Happily, many liberal policies have been justified in just this way.  Thousands of economists have braced themselves and conceded the administrative costs of equitable policies because the benefits are deemed to exceed those costs.  Okun's approach, therefore, is not a death sentence for progressive egalitarianism.

Even so, it becomes clear that administrability is not truly a third element of the Holy Trinity, because it is merely a subspecies of efficiency.  Both standard efficiency analysis and administrability concerns are, after all, directed at the idea that we are using resources in a way that "makes no sense," that is, that we are imposing costs on ourselves that we could avoid but have chosen to take on in an expensive effort to defeat the dictates of the Invisible Hand (which efficiently mediates costs and benefits).

But because administrability is a subspecies of efficiency, and in turn efficiency is merely an equity argument tarted up as objective science, then administrability is similarly a pose and not an objective fact.  The Holy Trinity then becomes "equity, equity, and equity" where the first and last are usually conservative arguments and the middle is reserved for liberal arguments.  And -- and this is truly important -- only that middle argument is called equity, reinforcing the supposedly mushy soft-heartedness of liberals' prescriptions.

Even so, is there not something to the administrability argument that is objective?  To use the example that I mentioned in passing above, why would we bless a two-part application process where one step would suffice?  The answer is in the word "suffice," where we can hide all of our equitable principles by leaving unstated what we care about.

We have, after all, plenty of multi-step processes for both private and public programs.  What is "extreme vetting" if not deliberately duplicative administration?  (Sorry, but even a column like this one cannot avoid invoking Donald Trump at some point.)  When we say that something is administratively wasteful, we are merely saying that it uses resources in a way that we think is not worth it.

Surely, however, that might still be somehow an objective inquiry.  We build slack into systems when we think that we can measure error rates, or when we want to allow the system to continue to function when one part of the system breaks down, or whatever.  In each case, however, we are not measuring morally freighted things.  We are measuring and comparing objective costs and benefits.

That is admittedly a tempting formulation, and when we all agree on the unspoken assumptions, it works nicely.  Still, it breaks down when we disagree about what matters and what can be ignored.  One of my nephews spent a great deal of time in China during his college years, and he once told me that being there involved an incredible amount of wasted time and money expended in gift-exchange rituals.  His frustration is reflected in the occasional article by an economist trying to explain why Christmas in the U.S. is or is not efficient.

What could we say about a two-step application process, where one step would seem to suffice (for example, where the second step does nothing to catch errors)?  Perhaps the second step is a social ritual, where the applicant is told in a solemn ceremony that she is now one of the anointed.  Perhaps the person who performs the second step is deemed worthy of respect or is being given these duties in order to keep her out of poverty.

Just as I argued that we can call policies both efficient or inefficient, depending on what one wants to measure, we can call such "duplications" wasteful by disparaging the importance of social rituals or by calling the second-level bureaucrat a recipient of welfare or we can say that those duplications are valuable precisely because people believe that they are valuable.  Ticket sales to a crappy Adam Sandler movie count in Gross Domestic Product because people decided that the movie is "valuable," not because it is objectively good.  If efficiency on the demand side is about willingness to pay, then it is about willingness to pay.

I am not saying that one cannot spin a perfectly good story about the wasteful two-step application process.  I am saying, however, that one can just as easily spin a no-less-defensible story about the valuable and essential two-step application process.  Our willingness to buy one argument over the other ultimately depends on our hidden values.

To return to an example that I described in one of my recent columns, it turns out that the U.S. military academies cost much more per unit of output (officers, measured in both years before retirement and effectiveness of service, such as promotions) than non-academy officers' training schools.  We can thus call the academies inefficient in either sense -- costs exceed benefits (economic inefficiency) or wasted administrative resources.  But, as the academies' defenders insist, we can instead call them efficient in the many senses that those defenders value: historical continuity, morale building, or whatever.

I use that example because I am personally unmoved by the defenses of the supposed necessity of the academies, which is exactly the point.  I happen to put low value on things that others think are essential.  I can try to gain an unfair rhetorical advantage by calling other people out for being "in favor of waste," but that does not make me right.

In the end, Samuelson's hope that we can drain morals and philosophy out of our policy discussions was an understandable goal.  But continuing to pretend that the efficiency/equity/administrability Holy Trinity is anything other than moral choices in different garb is to continue to allow conservatives to pretend to be the defenders of objective virtue.  In the end, we have to work through our moral choices, and no one has a presumptively superior starting point in those debates.

4 comments:

Shag from Brookline said...

And because of the Evangelicals' full acceptance of Trump as leader of the Republican Party, we may not be able to fall back on the original Holy Trinity for spiritual guidance.

Greg said...

Doesn't your argument (at least some of them) for the unnecessary second application step amount to what is generally called the broken window fallacy?

Now, I would make a counter-argument that the 3 trade-offs, instead of being equity, equity, equity, are perhaps actually efficiency, efficiency, efficiency.

This is based on the assumption that equity is really an efficiency argument disguised as something else.

In general, I view equity as an efficiency argument for a number of reasons:

1.) Rich people feel good when giving money to others, which is an increase in utility. This is how equity tends to be described.
2.) Middle-class people derive economic stability from programs that protect the poor, since the middle-class live in fear of becoming poor themselves. Thus, utility can also be increased for the middle class when income is distributed to the poor.
3.) The utility derived from giving a dollar to the poor person is greater than the utility lost by taking that dollar from the rich person. Thus, simply moving a dollar from a rich person to a poor person increases the utility that society as a whole derives from that dollar, minus any administrative expenses involved in transferring that dollar.
4.) There will be a number of secondary economic effects from transferring that dollar, which I believe (but would need more expertise to show) will likely further benefit giving that dollar to the poor person (who will spend it) rather than the rich person (who will save it.) This is like the broken window fallacy but different, because it doesn't start with the net utility loss of breaking the window.

Has any serious economist tried to come up with a useful way of converting money into utility, rather than using money as a proxy for utility? It seems like I have seen social science analysis of point 3 that could be used to generate an economic model that converts income and wealth into a net utility value and could be used to analyze a variety of policy choices based on their likely economic outcomes.

Shag from Brookline said...

Perhaps there could be factored in the rich people fear of becoming - drum roll - middle class.

Greg said...

Actually, thinking about point 3, it's actually possible that the fallacy of the broken window as simplistically formulated is actually wrong, and the broken window scenario actually can be more efficient than doing nothing. That doesn't mean it's as efficient as not breaking the window and giving the money to the poor anyway.

Consider the following somewhat tongue-in-cheek example:
If I take 10 of Jay Leno's cars, give 9 of them to families that need a car and destroy one of them, I may have increased net societal utility.
But, that solution isn't as efficient as it could be, because I could have given the 10th car to a 10th needy family, and thus had an even greater net utility.

My problem with the unnecessary second application is that it feels a whole lot more like destroying the 10th car (decreasing efficiency), rather than redistributing the other 9 (increasing efficiency.)