Math is Hard

I've been eagerly awaiting my opportunity to say something about Paul Krugman's Brookings paper on trade and inequality but it turns out to be the case that real economics involves a lot of math I can't follow. My best understanding is that his conclusion is that it's . . . complicated. Trade with China in the 21st century may be a much bigger driver of inequality than earlier studies done in an earlier period indicated, but then again it may not be.

I suppose the key question continues to be: Do we have inequality-reducing policy options that will not have negative impacts on economic growth? I believe that we do, and that we should exercise those options before we exercise the option of trying to curtail Chinese imports (making sure that imported Chinese goods are adequately safe is, I think, another matter).

Comments

"I suppose the key question continues to be: Do we have inequality-reducing policy options that will not have negative impacts on economic growth?"

Yup. That policy option is called universal healthcare, which as implemented by the Edwards/Clinton plan would be the largest income redistribution plan since Social Security.

Posted by Petey | March 4, 2008 9:10 AM

I guess I'm not totally sure what you mean by "negative impacts on economic growth". It matters a lot if you mean by this "grow at a slower rater than we might otherwise", "not grow at all" or "go backwards". The last, obviously, should be avoided. But it's not at all obvious that the first gives us very strong reason to not want to reduce inequality and even the second can, in some limited circumstances and for some time, be okay if the improvements in inequality are large and important enough, or so I'd think. Obviously the details are important and can't be worked out in a blog post, let alone a comment, but it does seem clear to me that growth _as such_ should not be such a dominant value that improvements in equality are only okay when they are neutral as to the rate of growth.

Posted by Matt (not the famous one) | March 4, 2008 9:14 AM

For those who haven't read the paper, it is important to emphasize that Krugman (and his co-author) emphasize the importance of (a) the use of often old data ever since the debates of the 1990s and the lack of some data they feel are really needed, and (b) breaking down the very simplistic models of "international trade" into the ways in which the same corporations divide up the labor & production process between nations.

For example, they discuss how in electronics production for the same product, certain high skill but low labor tasks can be retained in the U.S., a relatively high wage country, while sending more labor intensive tasks to a low wage country.

And they discuss the great shifts in the types of products which make up "imports" from low wage nations, going to higher level products more rapidly than anticipated by many, but still being complicated by the points above about how the same companies divide up production & labor in a multinational form.

In the end they conclude that it is difficult to say very clearly what effects modern trade and labor / production shifting patterns have on wages.

Posted by El Cid | March 4, 2008 9:14 AM

I'm good on the math so far (I'm about 12 pages into his paper), but the holes in my econ background are making it hard for me to be sure I understand. Stolper-Samuelson? All I know about it is what Krugman mentions in his paper.

Anyway, I plan to soldier on through and get what I can out of it, but I doubt I'll have any penetrating insights to share when I'm done.

Sometimes being knowledgeable in a field really IS a prerequisite to being part of a particular conversation.

Posted by low-tech cyclist | March 4, 2008 9:30 AM

Again, people like Matt has always lied about these things before. I have to assume he's lying now.

He may very well think he's right. At this point, he was educated in an elite institution that stamped on his mind the idea that policies that benefit the elite must benefit the whole. It's the same problem you always get with intellectuals. They convince themselves that their educations put them above self interest, and that the policies they advocate are advocated entirely because they are scientifically proven. In reality, they are just rationalizing and justifying their own crass self-interest.

Posted by Soullite | March 4, 2008 9:35 AM

Healthcare isn't enough. People need opportunity. Having a poor underclass that never has the ability to climb the socio-economic ladder is evil. It is still evil if you give the poor universal healthcare and retirement benefits. That doesn't make it any less evil. In the end, you're still preserving your own social positions at the expensive of others. That will never change no matter what you do to try and allay your consciences.

Posted by Soullite | March 4, 2008 9:38 AM

"Healthcare isn't enough. People need opportunity."

No doubt. After universal healthcare in enacted, we should next move to a universal program to pay for college education, both for college-age young folks, as well as for older folks who need retraining.

But let's start with universal healthcare first. The free trade agreements of the 90's have increased income inequality, and the Edwards/Clinton universal healthcare plan will make a not-insignificant dent in correcting the inequality.

Let's learn to crawl before we start running. Universal healthcare will help redistribute the national gains from expanded trade in a very real way. And we can accomplish that in the next Congress.

Posted by Petey | March 4, 2008 9:54 AM

And, of course, even better than the Edwards/Clinton plan from a straight up redistribution point of view would be single payer health care. Get rid of the profit-motivated insurance middleman trying to deny everyone's claims. Even more efficiently funnel money from those who need it least to those who need it most. And guarantee universal access, with no need for mandates/punishments.

If we're going to push for redistribution-oriented social insurance programs (which I think we should), why not push for the best option out there?

Posted by Mercutio42 | March 4, 2008 10:07 AM

Fortunately, we have the capacity as individuals to think about several things at once, no matter how much someone tells us that right now our objectively pro-Democrat duty is to think about nothing other than Hillary Clinton's health care plan and getting her elected. It's probably also why Clinton and Obama themselves focused on speaking about trade and related job-creation topics for a while these past few weeks.

Posted by El Cid | March 4, 2008 10:09 AM

Wow... two re-used post titles within a week? First it was "Are You Experienced?" and now it's "Math is Hard."

Posted by A Yalie | March 4, 2008 10:10 AM

Soullite - I'm struggling to see what in MY's fairly anodyne comments caused you to take such umbrage. I mean, if we can reduce inequality, not harm economic growth, and still trade with China (thus extending opportunities to millions of striving Chinese), wouldn't that be great ?

What part of that sentiment sent you over the edge, and why ?

Posted by boonie | March 4, 2008 10:15 AM

"If we're going to push for redistribution-oriented social insurance programs (which I think we should), why not push for the best option out there?"

Ugh. Someone ought to write a FAQ.

Because the Edwards/Clinton plan is achievable in the next Congress and single-payer is not.

Because the Edwards/Clinton plan doesn't require the 85% of Americans currently with healthcare coverage to be forced to immediately change their situation, which would bring about significant political obstacles.

Because the Edwards/Clinton plan allows for an organic transition to single-payer, if that's what most Americans end up wanting.

Because from the examples of the universal healthcare plans in other industrialized countries, there is no evidence that single-payer works any better than single-payer.

-----

Single-payer sounds wonderful in the abstract, but I'd rather end up with a French-style system than a British or Canadian system, to tell you the truth, though my preference here is a weak one.

If single-payer were just as politically achievable as the Edwards/Clinton plan, I'd be open to considering it. But it's not, for a pretty wide variety of reasons.

Getting to universal healthcare in the short-term will help save and improve a large number of lives, will help allow for further reforms of the healthcare system, will pave the ground for further expansion of governmental programs, and will - as stated above - act as the largest income redistribution plan since Social Security.

Posted by Petey | March 4, 2008 10:20 AM

"Healthcare isn't enough. People need opportunity."

What Petey said, but also don't forget that healthcare increases opportunity as well, to the extent that it removes a large source of risk. It's true that this won't solve every problem for people on the bottom rungs, but it won't hurt either. The entrepreneurship argument might not apply so strongly, but certainly the money that would have gone to a hospital bill could now pay for community college, say.

I'd also add some kind of universal daycare to the list of new-new deal programs.

Posted by jack lecou | March 4, 2008 10:20 AM

Petey addresses the fact that universal healthcare would effect a massive income redistribution. Probably correct. But of course he ignores that part of Matthew's sentence in which Matthew is looking for options that "will not have negative impacts on economic growth".

And it seems to me the universal healthcare plan certainly would negatively affect economic growth. Massive government intervention in the market usually does.

Posted by Al | March 4, 2008 10:39 AM

the largest income redistribution plan since Social Security

You'd think years of retarded internet debating would make me inured to this sort of crap, but this incarnation of Petey is really pissing me off.

a) Please explain what makes Obama's plan different from this super "Edwards/Clinton" plan, in particular please quantify the redistributive effects of the three plans so that I can see what your bold new pronouncement is based on.
b) Explain why super Democrat Hillary Clinton is attacking Obama for wanting to raise taxes on the upper middle class.
c) Explain why after years of talking about how the Democrats can build a viable electoral coalition, you now consider any electoral support from beyond the "true base" of the party illegitimate.

The combination of stupid, dishonest, and inconsistent is really breathtaking. Al, Fred, Chris Ford, etc. at least get one of those things right.

Posted by Barbar | March 4, 2008 10:42 AM

Ha! I totally called it on math being hard on the last thread, when Matt only proposed the thought sarcastically in reference to the Simpsons.

Posted by aleks | March 4, 2008 10:45 AM

Massive government intervention in the market usually does.

This is useless as a guiding principle. Sometimes government intervention negatively affects growth, sometimes it positively does. Depends on the intervention. There are a great many "massive interventions" that we'd certainly be a worse off without.

Healthcare might well be one of them. There is, for example, evidence that shifting the risk burden from individuals in this way will lead to positive benefits such as increased entrepreneurship, more efficient labor markets (it's easier to switch jobs), etc. Some actual evidence that it'd be detrimental to growth would be welcome.

Posted by jack lecou | March 4, 2008 10:51 AM

"And it seems to me the universal healthcare plan certainly would negatively affect economic growth. Massive government intervention in the market usually does."

You ought to re-read your Adam Smith, Al.

Having private security forces instead of a government run public police force wouldn't help economic growth. It would hurt economic growth.

The government intervention in the markets in the form of the SEC helps economic growth.

And having all Americans able to seek medical care when they are sick similarly would end up helping economic growth. And that's not even getting into the fact that bringing everyone into the system will allow for future rationalizations and reforms of the healthcare system to allow it to function more efficiently.

You may be opposed to universal healthcare and Social Security, Al, but most pro-market folks understand that the markets work best when the government takes care of its sphere of influence.

And, of course, there are moral factors involved here as well...

Posted by Petey | March 4, 2008 10:53 AM

"There is, for example, evidence that shifting the risk burden from individuals in this way will lead to positive benefits such as increased entrepreneurship, more efficient labor markets (it's easier to switch jobs), etc."

Yup.

The case for universal healthcare really is a no-brainer. It brings about increases of life, liberty, and the pursuit of happiness. What more can you ask for from government action?

Posted by Petey | March 4, 2008 10:57 AM

Oh lookie here, Petey has a hard time answering basic questions, but he is able to strongly support universal health care.

Nader '08!

Posted by Barbar | March 4, 2008 11:11 AM

There is next to no math in that paper. Just one equation: that in a world with 2 products -- one that requires a lot of skilled labour and one that requires little -- the difference in prices of the 2 goods is equal to the difference in skilled-labour content of the goods times the difference in skilled-unskilled wages.

That's it. The rest is pictures. And words.

So read the goddam paper before commenting.

Posted by Paper-reader | March 4, 2008 11:46 AM

You don't make a convincing case that health care is like national security in whether government intervention would be a drag on the economy. Heck, you don't even make a case that governmenal provision of national security is better than private enterprise in re economic growth. But, be that as it may, my only point is that you were only looking at one side of the equation - you've got to present evidence for both sides.

(BTW - I'm not against universal health care; I'm against a massive increase in spending on health care. If you passed a constitutional amendment that spending on health care would not exceed X% of GDP, I'd sign on to universal health care in a New York minute.)

Posted by Al | March 4, 2008 11:56 AM

It's not so much that math is hard, but that trade theory is hard. It's all general equilibrium and the incidence of trade effects is very counterintuitive and confusing.

Posted by mq | March 4, 2008 12:16 PM

"I'm not against universal health care; I'm against a massive increase in spending on health care. "

Then you really ought to support the Edwards/Clinton plan.

Rationalizing the system will only come once everybody is under the umbrella. There is no accountability in the current system, which is part of the reason why it's so wasteful.

Posted by Petey | March 4, 2008 12:25 PM

I must be late to the party... why is reducing inequality (however dubiously measured) a valid policy objective?

Posted by Noah Yetter | March 4, 2008 12:26 PM

I must be late to the party... why is reducing inequality (however dubiously measured) a valid policy objective?

If you are questioning that here, you're probably at the wrong party altogether.

Posted by Al | March 4, 2008 12:44 PM

Then you really ought to support the Edwards/Clinton plan.

Rationalizing the system will only come once everybody is under the umbrella. There is no accountability in the current system, which is part of the reason why it's so wasteful.

That's fine - give me my Constitutional Amendment and I'll support the Edwards/Clinton plan. But as it is, spending on health care will just increase indefinately under Edwards/Clinton even faster than it is increasing now.

Posted by Al | March 4, 2008 12:58 PM

"If you are questioning that here, you're probably at the wrong party altogether."

Indeed. Brazil is a cautionary tale, not a model to be emulated.

Posted by Petey | March 4, 2008 1:01 PM

"But as it is, spending on health care will just increase indefinately under Edwards/Clinton even faster than it is increasing now."

FWIW, if I thought that were true, I'd far less enthusiastic about supporting the Edwards/Clinton plan. I feel pretty confident that it's not true.

I don't think it's a coincidence that the one industrialized society without UHC also spends dramatically more on healthcare as a portion of GDP than the industrialized societies with UHC. (And, of course, we don't get better health outcomes for our dramatically higher spending under the current system, even if we exclude the uninsured in our measurements...)

Posted by Petey | March 4, 2008 1:13 PM

I had the funny experience of taking to a high-energy physics P.Hd. about math in economics.

He had been reading a finance textbook, because he had come to the conclusion that the Danish labor market for high-energy physics Phds was pretty damn bad and had decided to try to get a job doing modelling for financial institutions. What struck him was not "math is hard" but "why the hell is the math so damn simple?", stuff like: "why do you assume that functions are continous?" ect.

I guess the hardness of math is relative

Posted by Tomas | March 4, 2008 2:27 PM

econ math would be simple to a physicist, especially the neoclassical stuff.

Posted by mq | March 4, 2008 3:59 PM

Man, that is the *least* math I've ever seen in an econ paper.

Posted by Ryan | March 4, 2008 11:12 PM