I recently read an article in the Washington Times about a classic case of crony statism. The article concerned Coca-Cola's lobbying effort to ensure that soft drinks remain a qualified purchase under the food stamp program. Approximately $4 billion of the annual $80 billion food stamp program goes to buy soft drinks. Since the Democrats are enthused abut the growth rate of food stamps and the Republicans enjoy the support of big business, the irrationality continues.
Of course, soft drinks are not the worst use of food stamps. At the independent grocery store near where I live in downtown D.C., there is an active market to buy and sell food stamps. Apparently some food stamp recipients sell their stamps to get money to buy illegal drugs. Of course, we then arrest them for using drugs. After they have been imprisoned, they cannot get a job and need welfare and food stamps--a great plan. When government attempts to fill the role better served by private, voluntary institutions (in this case, charity), the outcome is never good.

There's one main thing I disagree with in the above: his use of one word that very many people in America misuse. If you want to know which word, read this.

First, the friend who didn't act. He lives in about the only at-all upscale neighborhood in Detroit. In about 2005, people bought a house next to him and drastically overpaid, by his estimate, with a big mortgage from Washington Mutual. After buying, they let it sit. He sensed a scam between the buyer, the seller, and the appraiser. So he called WaMu and told them what he had observed. The person he talked to said, "Do you think we don't know how to run our business?" She had no interest in learning more.

How could he have acted? By buying put options on WaMu stock. He didn't.

In about the same year, another friend, who was a principal in a hedge fund, thought that California real estate was overpriced. If I remember correctly, he told me that 40% of all the value of residential real estate in the United States was in California alone. So he tried to get the other principals in the fund to buy puts on the stocks of banks that were heavily invested in California residential mortgages. He couldn't persuade them. He did research to find which bank or banks were most at risk. He found one: Downey Savings and Loan. So he used his own assets to buy a large number of puts on their stock. He made out. He's the only friend I know who had a substantial amount of wealth and didn't lose net wealth when the crisis hit.

By the way, the friendly heckler at about the 59 second point, who yells out "Economist," is the late Roy A. Childs, Jr..

The lead in to the consumer surplus point starts at about 1:40.

I recommend Nathan's whole talk too. It's one of his best.

When physicians must be licensed and new drugs approved by the Food and Drug Administration (FDA) before they can be marketed, buyers are spared the cost of evaluating goods whose quality most of them would be unable to assess for themselves, except at prohibitive costs. By compelling sellers to obtain certification, government agencies can enable us all to make satisfactory exchanges at lower cost.

The statement assumes there is no demand for information that can be supplied by consumers reports, Angies list, WebMD, and other sources. Also FDA could approve drugs without banning non-approved drugs.

Moreover, it's not just that private organizations could do this certifying. It's better than that. Private sources of information, such as U.S. Pharmacopeia and the Physicians' Desk Reference, already do do this certifying.

Brad D asks:

First, why would a passage like this come from your favorite economics textbook?

The textbook from which this passage is taken is The Economic Way of Thinking, 12th ed., by Paul Heyne, Peter Boettke, and David Prychitko.

Social media is [sic] often recognized narrowly as a way to connect with friends, or to share and read the news. Yesterday it was demonstrated that social media can serve as a medium of mobilization for disaster relief, helping Americans all over the country reach out and help those affected by the tornado in Oklahoma on Monday.

Shortly after the destructive twister tore through the town of Moore outside Oklahoma City , conservative radio personality and talking head Glenn Beck used Twitter to organize a "convoy of hope" to travel to Oklahoma to provide early disaster relief. Within hours, Beck's team had used Twitter to locate trucks and supplies, and they were on their way, arriving in the Moore area bearing food, water, and diapers.

When physicians must be licensed and new drugs approved by the Food and Drug Administration (FDA) before they can be marketed, buyers are spared the cost of evaluating goods whose quality most of them would be unable to assess for themselves, except at prohibitive costs. By compelling sellers to obtain certification, government agencies can enable us all to make satisfactory exchanges at lower cost.

If you know the name of the textbook and the authors, please don't reveal it in the comments section. I will do so in an update.

When I taught it this quarter, I was unable to convince one of the students that congestion is an externality. We had discussed earlier in the course the fact that when you have private property, there is not an externality because the owner takes into account the gains and losses to various people. But I pointed out that the airport is government-owned.

This was not his objection, though. His objection was as follows:

When I show up at the airport, that's a choice on my part. I know that if I show up at a busy time, I will have to wait longer, but I take that into account. So does everyone else who shows up.

My answer was, and is, that, yes, you take into account the amount of time by which you are slowed down, and everyone else takes into account the amount of time by which he or she is slowed down, but no one takes into account the amount of time by which he or she slows others.

That still didn't fly (pun not intended.)

So I gave a numerical example. Let's say there are two people: A and B who arrive at the airport. (It's hard to imagine that two people would create congestion, but if we complicated it with way more people, the essence wouldn't change.) A will lose $10 worth of time by arriving at the airport at a congested time but he values being there at that time, versus the uncongested time, at an additional $15. He also causes B to lose $10 worth of time. Vice versa for B. So A looks at the extra cost he will bear--$10 due to B slowing him down--versus the extra benefit--$15--and decides to arrive at the congested time. B likewise.

Now let's tote up the costs and benefits. The benefits to A and B add up to $30. The costs are $20 each, or $40 total. Why $20 each? Take A. A's cost that he bears is $10--it's imposed on him by B. A's cost that he imposes is $10--it's imposed on B and he doesn't take it into account. They total $20.

This is the first time I've written this down rather than just said it and now I'm feeling implausible. Am I double-counting the $10 that each imposes on the other? I'm getting the uncomfortable feeling that I am. It's funny how writing things down can expose flaws in thinking.

So here's the help I want. First, is my numerical example good or flawed, and why? Second, what's a good way of showing the student that there really is a congestion externality?

An excerpt:

Here are some sample calculations for a wage earner couple with two children living in a state that offers Medicaid to households with incomes at or below 133 percent of the federal poverty level (FPL). Because the law allows 5 percent of income to be "set aside," this is functionally equivalent to offering Medicaid to families with incomes under 138 percent of the federal poverty level. The federal poverty level for a family of four is currently $23,550. Allowing for the income set-asides and multiplying by 1.38, this family would be eligible for Medicaid as long as it doesn't earn more than $32,499.

Now, suppose that the family earns an additional $501. It will now be ineligible for Medicaid. If the employer does not offer affordable coverage, the family will have to turn to a health insurance exchange.

According to the Kaiser Health Reform Subsidy Calculator, the premium cost for family coverage purchased through an exchange will be $1,143 per year (3.46 percent of annual income). Yet, after paying this premium and paying the additional federal income taxes it owes, this family is actually worse off as a result of its higher earnings. (See the table).

One correction, though. The last column in her table, which is the most important column in the piece, is mislabeled. It is not the "Percent Change in Marginal Tax." Rather, it's the marginal tax rate on the additional $501 of income. That's what's shocking. A family can get implicitly taxed 238% on that additional $501.

Ken' talk was on teaching economics and was very well prepared. I don't remember where exactly but there were a couple of points in the talk where I wanted to break into applause. Ken has shared his extensive notes from that lecture with me. Here are a few highlights.

From early in the talk:

I am going to talk about teaching economic by lecture today and I am fully aware that in some circles this marks me as pedagogically outdated. In the School of Education at my university, to lecture to students is to be a so-called "sage on the stage" and this is a pejorative description, as though there is something wrong with being a sage. Our Teaching Resource Center recently offered program called "The Tyranny of the Lecture" by Eric Mazur. I thought I might become depressed if I attended.

As best I understand this criticism of teaching by the lecture method, it has to do with the fact that it is hierarchical; teaching by lecture is based on the assumption that the teacher knows more about the material than the students do. Frankly, I have never doubted that this applies in the teaching of economics.

I did not catch on until well into my teaching career that the best time to evaluate a lecture and decide what needs replacing often is right after the lecture is delivered, and not a year or two later, when one next teaches that topic area. It isn't enjoyable to revise a lecture right on the heels of giving it. But unless the lecture turned out to be brilliant, there is never a better time to identify that lecture's weak spots than just after giving it.

How does one know if a lecture was brilliant, requiring no future revision whatsoever? William Breit once proposed to me a tangible benchmark. A brilliant lecture, one you can file away unrevised, is one where students respond by carrying you out of the lecture hall on their shoulders and parade you around the campus. Most of us probably only have this happen one or two times per year.

If anyone wonders about the quality of his or her lecturing clarity, there is a reliable, albeit sobering test, that can be self-administered. Record three or four of your own lectures and then listen to them. Awkward speech patterns, such as slurred words and interspersed uhhhs between sentences, will be so embarrassingly revealed that a cure usually follows this examination.

More later. When I do the later excerpts, I'll also add one of my own thoughts. Ken didn't say it but I think it was implicit in his talk.

My friend Edward Lopez, who blogs here, linked on Facebook to a great story from the New York Times about an entrepreneur's solution to the challenge of dry-cleaning saris. It's neat and the piece is short.

Then Ed went on to say:

Most economists stop at the first blush, say "market failure," and conclude that governments should subsidize dry cleaners. But entrepreneurs look at "market failure" and see dollar signs. The profit motive is what solves market failures -- not bureaucrats.

First, I agree with him that entrepreneurs often do wondrous things. In doing so, they often solve what many non-economists might see as market failures. But would "most economists" see as market failure the fact that, before this entrepreneur came along, there were no apparent low-cost ways of solving the problem? I don't think so. When I talk to economists who see market failure in many areas, they at least try to make the case that the market failure is one of public goods or externalities. I don't think they would see either in the sari case.

But I'm interested in what you think, especially if you're in one of two categories. First, If you're an economist, what do you think? Before this solution came along, was the market failing? Second, if you follow what economists write, can you give an example where an economist looked at such a situation and claimed market failure? Please "show your work."

A friend who is an avid reader of the New York Times sent me a link last night to a piece by New York Times reporter, and my friend asked for what I think. I started to write him and realized that my thoughts might be of more general interest.

The background is that Justin Gillis, a New York Times reporter on the environment, wrote a piece pointing out that the concentration of carbon dioxide (CO2) in the atmosphere had reached 400 parts per million (ppm) at the Mauna Loa observatory in Hawaii.

Much of the piece is unobjectionable: it's a report by a reporter who finds that some scientists are worried by the increased concentration of CO2. But at key points, Gillis outright misinforms or misleads the reader.

Consider his opening paragraph, which is arguably the most important paragraph of any news story:

The level of the most important heat-trapping gas in the atmosphere, carbon dioxide, has passed a long-feared milestone, scientists reported Friday, reaching a concentration not seen on the earth for millions of years.

Water vapor, the principal molecule that keeps us warm, accounts for almost all (98 percent) of the natural heating of the world.

Climate-change contrarians, who have little scientific credibility but are politically influential in Washington, point out that carbon dioxide represents only a tiny fraction of the air -- as of Thursday's reading, exactly 0.04 percent.

First, they're not just "skeptics" now; they're "contrarians." Hint: don't pay attention to these people; they're just contrary.

Second, in case you didn't get the hint, they have little scientific credibility. So he doesn't seem to feel the need to name them. And the only reason we have to note them is that they're "politically influential."

Third, the most important point these "contrarians" make is that CO2 is only a tiny fraction of the air? One would think so since that's the only argument of the skeptics that Gillis highlights. But the skeptics have made much stronger points. They have, for example, noted that CO2 is not the most important greenhouse gas. They have pointed out that if there is as tight a connection as the believers (I guess that's the opposite of contrarians) believe, then the earth should have warmed in the last 10 years. In fact, the earth has neither warmed nor cooled.
If you want to see, by the way, a hilarious attempt by a global warming believer to deny this fact, see Peter Gleick's article here. Gleick claims that statements that the globe has not warmed are "scurrilous deceptions and falsehoods." Whoa! That's strong stuff. How does he back it up? By pointing to the fact that global warming has been "noted by every climate research institution tracking temperatures, the US National Academy of Sciences (over and over and over), every other national academy of sciences on the planet, and every professional society in the geosciences." But, probably remembering that he is a scientist, Gleick does feel the need to show the actual data. So he does. And what does it show, from 2002 to 2011? That's right. The line is flat. In case you think it's flat, he wants to reassure you that we've really had warming. So he quotes the British Met Office's statement that "we have continued to see a trend of warming, with the decade of 2000-2009 being clearly the warmest in the instrumental record going back to 1850." Of course that doesn't contradict the "no warming in the last decade" claim at all. If a temperature rises and then stays steady for 10 years, then those 10 years will be the warmest decade. If real GDP had grown from 1940 to 2000 (which it did) and then stayed at its 2000 level until 2010 (which, fortunately, it didn't), then the decade of the highest real GDP would have been, you guessed it, the first decade of the 21st century. You can't make this stuff up. Well, actually, I guess you can.

Back to Gillis. Next sentence:

"The CO2 levels in the atmosphere are rather undramatic," a Republican congressman from California, Dana Rohrabacher, said in a Congressional hearing several years ago.

The whole thing is quite good. Check out what the guy at the 2:40 point learned. The late Ayn Rand's term for his thinking is "concrete bound."

The one item on which I part company, not with Nemko but with the interviewer, is his advice to "learn Chinese." Of course, he was probably joking but many people who say that are not joking. When you tote up the number of hours it would take to learn Chinese, opportunity cost rears its ugly head. During that same amount of time, I would bet you could learn a huge about how to use a computer better and how to become rich, and you would still have time left over.

HT to Jeff Hummel.

I could have done without the last line: I think Ms. Darshan-Leitner would have to grant that Hawking has at least a working knowledge of physics, for example. But the rest of her paragraph is on target. The simple fact is that we live in an interconnected world, one in which a good made in country X is rarely made from items produced solely in country X. This is not a new phenomenon. Think back to "I, Pencil," which Leonard Read wrote back in 1958. He identified 6 countries that supplied the raw materials that went into a simple pencil. That interconnectedness, by the way, is, on net, good, not bad. Commerce between countries makes the world more peaceful than otherwise.

I learned about this quote from an excellent article that appeared this morning on antiwar.com. It's by Justin Raimondo. Justin is not known, to put it mildly, for his sympathy for Israel. He argues that it is unjust to punish innocent people for the sins of their governments. He makes a good case. I won't repeat it here: the article is short enough for you to read it yourself. I will highlight one powerful excerpt and point out one disagreement.

The excerpt:

We live in an interconnected world: to actually boycott all Israeli products, or those with significant Israeli components, is well nigh impossible - not to mention unjust. A blanket boycott of all things Israeli fails to make an elementary and crucial distinction between the Israeli government - which is pursuing policies decent people must condemn - and Israelis as individuals, who may or may not agree with the policies of their government.

The same argument against slapping sanctions on Iran also applies to Israel: sanctions only hurt the innocent. The political class - the people responsible for making policy - suffers not at all, nor do sanctions give the Iranian rulers any incentive to change their behavior in the direction we would like to see. Indeed, punitive measures only serve to reinforce a bunker mentality that strengthens the regime's hold on the populace, providing hard-liners with a convenient rationale for their policies: they tell their people "The whole world's against us."

That's my big disagreement. My nit-pick is that it's not true to say that sanctions hurt only the innocent. They hurt the innocent and the guilty. The political class suffers, but not nearly as much as the innocents. I have written on sanctions and embargoes here and here.

HT to Anthony Gregory.

That's true. But what he did discuss in what is probably his best article, "The Use of Knowledge in Society," is why economic freedom is the only way to get much of people's information used. Hayek called this information that is specific to the individual "the knowledge of the particular circumstances of time and place." Modern economists in the Hayekian tradition use the shorthand, "local knowledge."

Hayek contrasted this kind of knowledge with "scientific knowledge." But here's where I would apply Hayek to "out-Hayek" Hayek: scientific knowledge is, itself, largely the product of decentralized activity. We do better at science when the government does not centralize it and does not get to say which leads should be followed and which ones should not.

Which brings me to medical marijuana. In a May 1 article in Wired, "Study: cannabis compound might have use as an HIV drug," Ian Steadman reports on a research article in the Journal of Leukocyte Biology. Here's the lead paragraph:

The chemical compound in cannabis, THC, appears to be able to damage and weaken the most common strain of the HIV virus.

The ultimate centralization is prohibition. Under which system will we get more testing for the possibly-beneficial effects of medical marijuana: one where marijuana is allowed or one where it is prohibited?

HT to Scott Shackford.

Why run an article about this in May rather than, as is traditional, December? Because, as I explain in an editor's note upfront, "people's understanding of that classic affects their thinking all through the year."

In the article Lee highlights the fact that Scrooge was a moral man. He didn't cheat or steal. He worked hard and productively for what he earned.

But after the visits of the three ghosts, Scrooge became magnanimously moral. Lee's last two paragraphs give us the moral of the story for those who want to teach about the wonders of mundane morality:

Most economists understand the importance of magnanimous morality to a good life. However, they approach their teaching by trying to get their students to appreciate the mundane morality of the market in the absence of magnanimous morality. As a result, they face much the same difficulty as when they try to get people to appreciate the first Scrooge. Economists could go a long way toward eliminating this difficulty by recognizing that those whose mundane morality helps them succeed in the marketplace are motivated largely by magnanimous morality--the desire to take care of their families and help their friends, neighbors and close associates, and being willing to make sacrifices to do so. Both moralities are necessary for a life of achievement, of purpose, and of the joy that comes from being able to do more for those we care about and who care for us.

Market behavior really is motivated largely by the same desire that transformed Scrooge on Christmas morning--the desire to help those who mean the most to us--and that motivation, when directed by the mundane morality of markets, results in our also serving the interests of multitudes of people we will never know. By emphasizing that a good economy, like a good life, is best achieved by the mundane morality of markets coupled with recognition of the motivational importance of magnanimous morality, economists would make a case for the morality of markets that has some of the same emotional appeal as does the transformation of Scrooge in A Christmas Carol.