24 December 2013

Welcome Marginal Revolutionaries.

Tyler Cohen has kindly highlighted a comment of mine made to a post of his entitled "Is Christmas Efficient?"  at the Marginal Revolution blog on the subject of the economic reasons for Christmas spending sprees.  There is criticism in the comments about the extent to which summer vacation and Ramadan are truly rooted in agricultural reality.  But, I'll take this opportunity to grandstand on another issue.

Economics as a discipline generally claims as part of the "official line" to not have normative goals, and instead to simply discuss how certain economic conditions or public policies translate into certain results.  But, in practice, economists tend to focus on how to optimize a couple of key metrics: "efficiency" and "productivity".

The existence of decades of sophisticated macroeconomic theory, however, has illustrated that notwithstanding all of our economic knowledge, periodic, severe business cycles are more or less unavoidable.  Indeed, recessions are pretty much the worst hardship in the daily of ordinary people in modern developed countries.

While ending business cycles seems to be an unattainable goal, making them more tolerable is another story.  There are many things that one can do, as a matter of economic policy, to make the economy more robust, albeit often at the cost of modest reductions in efficiency or productivity.

For example, removing tax code preferences for debt over equity, and insisting as a regulatory matter on larger bank reserves, will tend to reduce average earnings per share for stockholders in good times, but will also make it more likely that firms will survive economic downturns and places less pressure on firms to lay off workers during recessions.

These examples certainly aren't exhaustive.  But, the core issue is that there are lots of examples of low hanging fruit where policy measures could make our economy more robust that don't receive the attention that they deserve because they don't measure up by productivity and efficiency metrics.  Harm reduction in the face of recessions which economists would have to admit that they can't prevent isn't sexy, but it is a worthwhile endeavor.

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