in Economics

Economics and Politics: Ignorance is bliss
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First, a little back story. I began studying Economics during the 2008 election season. I regularly found myself debating some economic idea or another, and wanted to understand the subject better so I could evaluate my intuition and form more-educated opinions. I began reading books and blogs, following economists on Twitter, and studying for my MBA.

Rather than becoming more comfortable with the subject, I’ve become frustrated and regret taking the red pill.

I could probably write thousands of words on this 1, but here’s a quicker way for me to express this frustration:

The surprising part isn’t that the policy ended up being bad, but that President Obama ever believed it could possibly be good. Politicians promote bad policies all the time. But this one is such an obviously-bad policy that it gives me pause – it’s literally an Econ 101 mistake whose awfulness is self-evident. I usually suspect politicians understand that the policies they push aren’t optimal for everyone, but they support those policies anyway because they benefit their constituents; they don’t really think the policy will be good for everyone, but maybe it won’t be bad for everyone, and their constituents will benefit, so it’s ok.

But in this case – the Chinese-tire tariff – I think it’s obvious that President Obama thought this policy would be great for America. He bragged about it in a recent speech. So the problem doesn’t seem to have been his intentions, but his understanding of very basic economics. The problem wasn’t with his spin of the policy, but that the policy was simply an awful policy with a bad economic outcome for Americans.

If the President’s intuition is this bad on basic economics, how much worse is he at predicting the economic effects of routing federal dollars to specific areas research? Fiscal policy? Labor policy?

Nancy Pelosi, when promoting Obamacare, said overhauling healthcare would provide “lower cost, improved quality” healthcare“, and it might… or it might not. The issue for me is that I don’t believe the President understands basic economics well enough to do a real analysis of the possible effects of such complicated policies. If he couldn’t predict that a tariff on Chinese tires would cause prices to rise for Americans – a prediction most first-year, Econ 101 undergrads would’ve made – then how could he possibly predict the economic impact of capping profit margins for health insurance companies (only a few of the 2,000 pages in the ACA) on healthcare costs?

Footnotes

  1. After all, I wrote like 7,500 words on quantifying and evaluating our own movie expectations
  2. This isn’t Senator Obama from 2006 or something, so there’s no hoping, “Well, that was then, but now he has a whole team of economic advisors so I’m sure he wouldn’t make similar mistakes today.” If anything we can assume that President Obama’s economic analysis abilities were worse when the ACA was passed since that happened quite a while before the tire fiasco.
  3. Lest you think I’m blowing this out of proportion, consider this: If a bad Econ 101 mistake qua U.S. tire industry intervention cost Americans a billion dollars in a $15Bn industry, how much damage could poor economic analysis cause in a $1.75 trillion industry?
  4. It’s also important to note that this billion-dollar loss isn’t strictly money evaporating or something. It’s social deadweight loss that accumulates as rents to the U.S. tire industry from U.S. consumers, likely regressively.

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