Blogs : STAGE ONE THINKING AND POLITICAL ECONOMICS
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Thomas Sowell, my economic mentor in absentia, received his undergraduate training in economics from Harvard University. As a student he learned a vital lesson in one-stage thinking from his professor, Arthur Smithies.
The lesson went like this. Professor Smithies asked Sowell what policy he favored on a particular issue. Sowell argued with emotion in favor of Proposal A.
Professor Smithies pressed the point. “If adopted, then what will happen?” Somewhat taken back, Sowell began to unravel subsequent economic consequences he had not thought of initially. One point led to another as Smithies plied his same question over again. Slowly, Sowell began to understand that his emotional attachment to the original proposal blinded him to the economic reverberations the results of which far offset his wished-for goals of the original policy. I learned about stage one thinking, in turn, from Dr. Sowell and it made all the difference. In a dynamic and fluid economy, later stages of thinking reveal new ramifications of policies.
New York City and California taxation policies illustrate the classic example of the failure to think beyond stage one. Stage one: Laying heavy taxes on “greedy” corporations seemed a good thing to do politically. Stage two: Corporations knuckled under, but began looking for relief beyond the city and state. At first they relocated their headquarters and senior staff. Stage three: As the corporations grew they positioned their newly developed operations outside the reach of onerous taxes and regulations. Stage four: As more corporations began to desert New York and California, the tax base eroded. Politicians ended up killing the economic goose that laid the golden egg.
A few other examples fulfilling this scenario include Halliburton’s headquarters relocating to Dubai, Ford Motor Company opening major new plants in Mexico and Boeing’s relocating headquarters away from Seattle.
Applied economics differs from pure economics in that applied economics is thoroughly tempered by political decisions. Economic principles don’t change. They are, however, overridden by political imperatives such as a politician’s chief objective of getting re-elected.
Politicians are not the only factors in the equation. The general public plays a role and behaves quite differently when faced with making political versus economic decisions. Few voters invest the same time or attention in deciding for whom to vote as they do sorting through the subtleties of buying a house or a car. The reason is that a personal vote has little immediate impact on a person’s life while a personal economic decision has an immediate as well as long term impact on their well-being. People may decide to vote for one candidate or another, but they must decide how much of any given product to purchase.
The difference between political versus economic decision-making highlights the quantity and quality of thinking invested in these two kinds of judgment. Typically, political decisions are not thought through beyond the immediate consequences. For politicians, there is no incentive to weigh the consequences of political decision-making and every incentive to avoid having voters think through to the potential ill effects of decisions. Consequences are usually delayed beyond the next election, and often beyond the politician’s retirement.
Political decisions are couched in terms of what voters hope might happen. Economic decisions are couched in terms of incentives and constraints established by laws and policies in pursuit of goals. Politicians create hope in voters when they establish gun control laws, drug prevention programs and anti-global warming initiatives. In retrospect, it is certainly an open question as to whether gun control laws control guns, drug prevention laws prevent drug use and abuse and whether mankind might prevent global warming. The goals are admirable but the consequences and incentives may be very costly or highly inconvenient or both. In time, the unintended consequences of laws and policies become manifest. Focusing less in terms of goals and more in terms of incentives and consequences give clues as to the chain of events that will result from ill-conceived laws and policies. In this light the world looks much different.
A $700 billion bailout is the most recent example of stage one thinking. The current financial fiasco is proclaimed by politicians but not necessarily concurred in by many economists. Congress urgently seeks to "fix" the "crisis" they set in motion years ago with the Community Reinvestment Act (Google it!). Amazingly, the enactment of the bailout takes place with few, if any, congressional hearings.
Is anyone thinking beyond stage one?
Dennis M. Patrick can be contacted at P. O. Box 337, Stanley, ND 58784 or bnt@midstatetel.com.
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