• Cocktail and Dinner Party Economics
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  • Dinner Party Economics

Rogoff and Reinhart

Some people have contacted me about my assertion that high debt to GDP ratios can become a drag on growth. I realize the controversy around Rogoff and Reinhart and did not reference their numbers. Here is another paper outlining the concern.   “The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area.”  If you happen to have Dinner Party Economics see page 181 for a more fulsome discussion.

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Right in the Margins

When sorting out the costs and benefits of a project it is important to think about marginal costs and marginal benefits. For example, the comments I made in the Globe and Mail about oil pipelines is very contingent on the fact that some oil currently goes to ocean tankers by train. This fact changes the analysis of benefits because we must include, as part of the benefits of a pipeline, the decrease in emissions and increased safety of not using trains.  Furthermore, oil companies would save transportation costs on trains and gain capacity which are benefits. On the cost side, we need to know the infrastructure costs of constructing or retrofitting pipelines which seems obvious but also the environmental and safety issues due to a pipeline. The pipeline decision is not pipelines or nothing but rather pipelines or trains. You need the right margin to get to the right answer.    

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Priceless: I think not

“Economics shapes our everyday lives,” he says, “but the notion of value in the economic domain doesn’t come close to defining what is really valuable in life: things like love, family, career.”  What does the economic system value? Profit. Russon acknowledges that the economic set-up we have is essential in our society. “We need banks, we need money, we need to participate in the marketplace,” Russon says. “However, although economics is important, it must be subordinate. It can’t be in charge. When the marketplace sets the terms for our lives, we’re in trouble.”           John Russon I just can’t help myself.  When I read this piece on the University of Guelph’s homepage (my university), I just had to respond somehow.  It is clear to me that Russon’s thinking about what economics says or doesn’t say is muddled. 1)  Economics is fundamentally about people.  It is the study of how people behave given a world of scarcity.  One of the assumptions we find useful is that businesses try to maximize profits.  It turns out to be a pretty good assumption about how they really behave which helps us make predictions.  But businesses (or firms as we like to call them) are only half the story.  The other half  of the market are the households who are made up of families who love each other and face the world with their value system.  They supply inputs such as labour (which makes for a career) and savings (which banks turn into loans) into the market place. Households also buy the goods and services that firms produce.  People  do not think about profits per se but about their happiness (or utility–which is a concept developed by a philosopher by the way).  Ultimately, everything goes back to households who care about being happy.  It turns out that when their stock portfolio or savings (at the bank) makes positive returns due to profits made by firms who borrowed the money, it makes them happy.  When companies make profits and pay their workers, it makes them happy. When people use money instead of barter to pay bills or buy things, it saves so much time that it makes them happy.  Institutional market-less poverty is truly miserable as the Great Leap Forward showed us. 2) All economists acknowledge that markets can fail.  In the case of the environment, it is precisely because it lies outside the market system that it is failing.  The environment has what we call externalities associated with it.  Thus the market does not capture all of the costs associated with firm activities.  We acknowledge that this is a problem which requires a solution.   But not all solutions are created equal.  We would argue that the best ones work inside the market to get the right results.  For example carbon taxes are one solution to the problem and one that many economists think works better than environmental regulations.  However, either solution imposes a cost on the firm when they pollute.  They can no longer treat the environment as if were free.  After all free is really a price.  At the other extreme when a price becomes infinite (which is what I assume priceless means in this case) then there should be no activity at all.  No heat in our homes, no food on our tables, and no clothes on our backs because consumption of each of these degrade the environment to some degree.  Not a happy place for households. 3)  Ipso facto  we need prices somewhere between zero and infinite to help households make good choices. In econ-speak we say that people maximize utility (which contain their preferences) subject to constraints, constraints that create prices.  For example when my children were young I worked and with my income I bought things like toys because it made me happy because of the pleasure it gave my children.  I didn’t buy every toy available because I was on a budget.  I chose things like books and Lego rather than items with batteries because I thought these toys were educational and I hate noise.  Clearly, I entered the market-place a person with love, family and a career and found what I was looking for. The important stuff.            

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