Friday, June 28, 2019

A textbook on the supposed cause of the 2008 recession

While surveying the textbooks to see how much content they devote to behavioural economics, I was surprised by a claim in the new text by William Baumol, Allan Blinder and John Solow – Microeconomics: Principles and Policy (2020). Like most texts, this one has a brief discussion (pages 91-93) of behavioural economics. Its importance for microeconomic behaviour is dismissed, but they do claim that irrational behaviour in stock markets can have a large effect on the overall economy. The example they give is truly bizarre:

"… irrational behavior can have an enormous effect on the economy. Returning to our stock market example, when investors rush to sell their stocks simply because they see that others are selling, the result may be an abrupt and prolonged decline in stock market prices. This irrational selling behavior can trigger the process that drives the economy into recession. The Great Recession of 2007–2009 is only one of many historical examples of recessions that have been triggered by stock market investors who irrationally followed the behavior of other investors (i.e., herd behavior)." (P. 93, my emphasis).

Apparently the bursting of the housing bubble in the United States and the cascading effect that it had on financial institutions, culminating in the collapse of Lehman Brothers on September 15, 2008 was no cause for alarm. 

Friday, June 7, 2019

The textbooks on workplace health and safety

While working on the new edition of the Anti-Textbook, I am reviewing the contents of 10 textbooks: nine long-established American ones and a Canadian one, Microeconomics by Chris Ragan, the successor to the classic textbook by Richard Lipsey, which I read as a first year student.

An asbestos mine, Quebec, Canada, now finally closed. Asbestos is killing 107,000 people a year according to the World Health Organization and is responsible for half of occupational–related cancers.
While thinking about whether workers are adequately compensated for risks on the job, I recently reviewed what the textbooks had to say about the dangers of the workplace and its regulation. As far as I could tell, by using keyword searches, there was not much said.

By far the most extensive discussion was in the text by Robert Frank and co-authors. It explicitly sets out that there is no place for regulation of workplace health and safety in the standard textbook model. Everyone has perfect information about the risks and wages reflect appropriate "compensating differentials". The idea is at least as old as Adam Smith.

Ignoring the obvious issues, such as employer power and incomplete information, the Frank text tells an idiosyncratic story about how workers will take on too much risk because they are chasing high income jobs (and therefore riskier once) each of them in the hope of increasing his or her relative income. The result is a kind of arms race where no one ends up with higher relative incomes, but people end up bearing too much risk. At least this account does help to drive home the importance to people of relative incomes.

To my surprise, by far the worst treatment was the Canadian text. As far as I can tell, the entire discussion of workplace safety takes place in the context of the costs of government "intervention".

To my surprise, by far the worst treatment was the Canadian text. As far as I can tell, the entire discussion of workplace safety takes place in the context of the costs of government "intervention".

Ragan writes: “Government intervention uses scarce resources.… When government inspectors visited plants to monitor compliance with federally imposed standards of health, industrial safety, or environmental protection, they are imposing costs on the public in the form of their salaries and expenses. ... Regulations dealing with occupational safety and environmental control have all increased the size of non-production payrolls.” (pp.398-399, my emphasis)

He sums up the cost of "government intervention" in the economy this way:

“The direct costs of government intervention are fairly easy to identify, as they almost always involve well-documented expenditures. In 2017, the total expenditures by all levels of government in Canada were $864 billion, just over 40 percent of total national income.”

This is the typical textbook view of government. It is something outside the natural market economy which "intervenes" at a cost "imposed" on the public. No textbook will ever be found saying that "the direct cost of private sector intervention in the economy is 60 percent of national income", although that would make about as much sense as what he has written.