Random Thoughts After a Long Hiatus

It has been quite a while since I last posted on this blog. I finally decided to catch up by posting a series of remarks on a number of issues that are of interest to economists and (hopefully) others.

Disparate Impact Analysis

I teach in a university economics department. If you were to attend one of our faculty meetings, you would observe that nobody in the room is a seven-foot Chinese basketball player. Does that mean the faculty in my department discriminated against the seven-foot Chinese basketball players in the world who wanted to be on our staff and attend this meeting? If you were to use a nonsensical theory known as disparate impact analysis, then if seven-foot Chinese basketball players were a politically-protected group, the answer is yes and my university could be charged with discrimination in federal court.

To say the least, disparate impact analysis ignores the scientific method which most of us learned in primary school. The fact that a person has the disease known as AIDS does not imply how the person got that disease. The reason is that medical science has determined that the disease can be contracted in more than one way. Similarly, if one group of individuals makes less money than another group, there are many reasons why this may be so.  One of those reasons could be discrimination but how do we know this to be true? Put differently, there are causal relationships in an economy and there are many random events that can make a group of individuals have the demographic characteristics that they have.

According to the law, we don’t need to know why  a group has a particular set of demographic features because there is no requirement to prove intent to discriminate. Regrettably, the Supreme Court endorsed this vacuous legal standard (here is a link to a discussion of this ruling). A firm cannot know in advance that they are “discriminating” when they make no effort to do so but they must make some effort to rig outcomes to satisfy some vague standard that they think is used by the Justice Department in deciding to prosecute an organization. This uncertainty has been reported to cause one or more banks to stop making home loans.

We often see it said that there is little respect for government. Disparate impact analysis is one reason for this disrespect in my opinion. It amounts to enshrining character assassination in the law allowing the government to “shake-down” a firm for discrimination that clearly has not been proven.

Trade Protection Authority

Recently Congress granted trade protection authority to the President to make it easier for him to negotiate a free trade agreement with a group of countries. This authorization is one that almost all economists would endorse since economists regularly teach introductory economics students that free trade raises incomes and economic welfare in all trading countries. What I find curious about this is why Barack Obama would be in favor of this.

In every other policy question that I can recall, the President has been in favor of government regulation or, equivalently, central planning (see below). So his support for trade protection authority not only is at odds with all other actions that he has advocated that I can recall, but it is explicitly opposed by constituent groups like labor unions that the President tries to satisfy and it was opposed by many Democrats in Congress. Why would he deviate in the trade case but nowhere else? I don’t know but I suppose that we should be grateful for small favors. The President got it right.

Gay Marriage

The gay marriage decision recently made by the Supreme Court is interesting to me because we saw an example of unconstrained policymaking. That is, no justice on the Court has to stand for renewal in any way unlike politicians, the Governors of the Federal Reserve, and others. This should be a frightening thought to all of us. Can you imagine how corrupt and incompetent government would be if there were no need for politicians to stand for reelection? If you don’t believe this, consider the case of two senators sitting on the Senate Banking Committee who got subsidized mortgage loans from Countywide Bank (here is a link to a news article about one of these senators). This corruption caused both senators to step down and not run for reelection.

Note that I am not saying that the Supreme Court is corrupt. I am quite sure that the five justices thought they were acting properly and compassionately. They claimed that there was a right to gay marriage in the Constitution (Can anybody point to that language? I sure would like to read it.). But their decision is utterly baseless. Suppose they decided that there was a constitutional right to polygamy? That decision would be just as baseless as the gay marriage decision as pointed out by one of the dissenting justices. What I think that the gay marriage decision implies is that we need to stop lifetime appointments for judges and appoint them to fixed terms, say of ten years. That way, an evaluation of their record could be done and renewal could be based upon performance.

Are Democrats Socialists?

The short answer is clearly yes. First we might ask what socialism is by definition. It is an economic system where government bureaucrats, not free markets, decide what gets produced and at what prices. The Democrats are the party regularly advocating more government and regulation of the private economy. The Affordable Care Act is a very good example of the sort of policies advocated by Democrats since only the Democrats supported this profoundly misguided law. The law dictates what types of policies may be sold and, through the states, there are attempts to impose price controls. Many other examples can be found, such as advocacy of the Minimum Wage, that support this view of the Democratic Party.

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  1. Joe Zitka
    September 22, 2015 at 11:14 PM

    Prof. Rossana,

    Are Democrats Socialists?
    Is it possible for a proponent of the free market to also believe that the market can fail, thereby accepting intervention. The butcher, baker, farmer and the trader, using either domestic or foreign resources, bring enough food to market to feed nearly everyone in the United States. Certainly, no government agency could do better than the market.

    Asymmetrical or imperfect information and negative externalities, however, could result in market failures. The financial market collapse and pollution are examples of market failures. Healthcare is another. Recently, Turing Pharmaceuticals, a start-up run by a hedge fund manager, purchased the marketing rights for Daraprim from CorePharma. An example of a mutually agreeable transaction facilitated by the market system. The price of Daraprim increased from $13.50/tablet to $750/tablet. Well, at least it provides material to discuss inelastic goods, and the effect on revenue with price increases. I would also add that either the market failed at $13.50 or it failed at $750.

    According to Heritage.org, Singapore, New Zealand Australia, and Switzerland are ranked free. Healthcare in Singapore is primarily the responsibility of the government. In New Zealand and Australia, it is mixed. In Switzerland, it is universal and regulated by the Swiss Federal Law. Examples of “free” markets with varying degrees of government intervention.

    I do not think free markets exist, or at least not “pure capitalism.” There must be some government involvement. The only question is what lines separate pure capitalism, mixed systems and socialism. It seems to be arbitrary.

    http://www.forbes.com/sites/theapothecary/2011/04/29/why-switzerland-has-the-worlds-best-health-care-system/

    http://www.heritage.org/index/ranking

    http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

    Regards,
    Joe Zitka
    WSU alum & former student

    • September 28, 2015 at 7:37 AM

      Thanks for your comment Joe. There is no question that markets have problems dealing with externalities and limited information. But many government interventions have nothing to do with these issues. Is there asymmetric information in agriculture to justify U.S. farm policies? What about ethanol? There is now peer-reviewed evidence that it pollutes more than the production of gasoline. The more reasonable conclusion is that politicians buy votes with many programs. And of course there is government incompetence in dealing with even legitimate problems. To paraphrase a comment made by the late Gary S. Becker, just because an economist invented a story about market failure does not mean the government has any idea of what to do about it. Look at the evidence and judge for yourself.

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