Sunday, March 23, 2014

Greg Mankiw Makes The Case Against Obamacare And Increasing the Minimum Wage

Mankiw reminds us that the science of economics is similar to that of medicine when it was a more primitive practice.  Some of their policy recommendations may have unintended consequences and any policy changes that they recommend will favor some over others.  Consequently, it is difficult to determine a course of action that maximizes social welfare.  He makes his point by pointing out some of the problems of using utility theory to evaluate the best course of action.  He suggests that economists who advocate policy changes should be more humble about the consequences of their policy advice.

Mankiw has selected two policy issues that should leavened with a dose of humility.  The Affordable Care Act and proposals to increase the minimum wage may have unintended consequences and they may favor some over others.  Therefore, given the primitive nature of our science, we might be better off if we avoided making "radical" changes.  Conservatism may be the best course of action.

Curiously, Mankiw selected two policy changes promoted by Democrats that should be reconsidered because of unintended consequences that he described.  He has been less humble about policies advocated by his favorite political party.  When he was in the Bush Administration he defended the outsourcing of jobs by arguing that outsourcing jobs was similar to importing products.  Therefore, both are examples of free trade which increases social welfare.  He has also used economic theory to defend the rapid increase in the compensation of CEO's.  Our incomes are determined by the marginal product of our labor.  Therefore, the rapid rise in CEO compensation is justified by an increase in their productivity.  Apparently, we live in a meritocracy and it would be foolish to advocate "radical" changes designed to reduce inequality based upon merit.

We have seen "radical" changes in policy advocated by Mankiw's favorite political party.  I do not recall any cautions, and calls for humility, when the Bush Administration made substantial changes in tax policy, or when Bush tried to transform Social Security into a private system.  Mankiw seems to be very selective about the application of humility by economists when they advice politicians.  

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