Message To Trump: Be Humble About Public Policy In A Highly Specialized Economy

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"Humility" is a word absent from Arnold Kling's new book, Specialization and Trade: A Re-Introduction to Economics, but it captures the central theme of Kling's public policy advice. In a highly specialized world, knowledge is diffused. Different people have different bits of knowledge. My mechanic knows a lot about timing belts. I know how to find economic data quickly. My wife can tell you more than you want to know about how to sew up an injured eye. Public policy most often is based on simplified version of reality that misses crucial details and is thus prone to failure.

I previously wrote an overview of Specialization and Trade and an explanation of Business In A Highly Specialized Economy. This article applies Kling's viewpoint to public policy.

Some knowledge is the tradesman's knowledge, described above. Other knowledge is personal: I know how much discomfort I am willing to undergo to lessen the risk of a premature death. That discomfort-versus-death calculation is different from person to person. (Observe that some people smoke, some are obese, some drive without seat belts, etc.) Some people love overtime with more take-home pay, others would rather be fishing. Policy makers lack the specificity of knowledge, Kling argues, that is required to make good decisions about other people's lives. Though they may lack knowledge, they also lack humility about their knowledge.

In our highly specialized economy, many different products and services are produced. A critical insight is that producers' incomes are very dependent in one or a few products, but consumers' well being comes from many different products. Whatever you produce, that product or service is critical to your income. But as a consumer, there is seldom one product that consumes all of your attention.

Ethanol, to use one of Kling's examples, is hugely important to corn growers. The program was originally touted as good for the environment but that argument has been abandoned, both by environmentalists as well as by many others. Now the mandate that consumers buy ethanol is supported primarily by ethanol producers. To them, it's a huge issue. To us consumers who pay the cost through higher gasoline prices and reduced mileage, it's a small issue. We don't go to Washington to lobby against it; we don't even write our Congressman. Many others have noted the problem of concentrated benefits and dispersed costs, but Kling does a good job explaining it.

On macroeconomic policy, Kling uses a vivid metaphor, the GDP factory. The economists he scorns (and he himself has a Ph.D. from MIT) aggregate all production into one sum, gross domestic product. Management of the business cycle assumes that all workers are employed at the one GDP factory doing identical work. Kling, in contrast, says, "A job does not consist of producing a fraction of generic output. Instead, a job consists of a small subset of the millions of tasks that are undertaken in a modern economy." He views much of our unemployment as either a matching failure (the right person for the job and the right employer have not yet found one another) or a delay between when economic changes have rendered one job obsolete and when an entrepreneur finds a new opportunity that has invariably happened because of the economic change. Kling argues against the demand management policies, both fiscal and monetary, that have been used in recent years.

The problems of Obamacare - rapidly increasing insurance premiums and reduced options - stem from its creation. It was an engineered solution, rather than an evolved solution. That is, some smart people designed the healthcare system. In contrast, the way that my lunch is provided is an evolved system: over time, profit seeking business people developed ways to deliver to me bread, meat, cheese and lettuce. They allow me make the sandwich myself or have someone else make it, and I can change my preference daily. As the Trump administration figures out how much of Obamacare to keep and what to change, their emphasis should be how the system must change in the future. It must shift resources out of the most expensive methods, and it must shift resources into those services most desired by consumers. The great advantage of market methods is not that they lead to a perfect result, but that they have incentives for the participants to move in the right direction.

I heartily endorse much of what Kling says, though I won't defend all of it. But all of it stimulates thought about what is good policy and what is bad.