Thursday, October 6, 2011

Are Agglomeration Externalities Antithetical to Conservative Ideology?

A fascinating blog post by Felix Salmon yesterday got me thinking about the intersection of economics and politics in a new way.
[T]wo of the biggest and most daunting long-term problems facing the US economy are (1) the fact that Americans aren’t as well educated as their counterparts elsewhere in the world; and (2) the fast-growing obesity epidemic.

Both of these problems are caused, in large part, by America’s very high levels of child poverty.

So if you fix the child-poverty problem, you’ve made a serious dent in both the education problem and the obesity problem.

What’s more, the child-poverty problem really is one of those problems which can be fixed quite easily just by throwing money at it. Give enough money to children in poverty, and they’re not poor any more. Problem solved — at least to a first approximation.


Is there a conservative way of addressing such issues? I don’t think there is — I think that conservatives will simply say that questions of education and nutrition are a matter of individual choice, and that the government should not concern itself with such things. But if we continue down that road, I fear that the unemployable underclass will only continue to grow. And that anger at the powers that be — whether it comes from the Tea Party or from Occupy Wall Street — will only continue to grow along with it.

What Felix is talking about here is essentially an externality problem, what we in economics call agglomeration externalities. The easiest way to explain is to talk about what is perhaps the most common one: education. The idea is that the more educated people there are in a society the more society benefits as a whole. So an individual's education not only benefits themselves but also has an added benefit to the society as a whole.  We call this social returns to education.

Health problems are another potential example: sick people create a drag on both productivity as well as on the health care system which, in turn, creates a drag on the economy.

Assuming these types of externalities exist, they create a role for government to help promote the activities with positive externalities and restrict the activities with negative externalities.  And indeed governments do: we build bike lanes and tax cigarettes for example.

Whether such agglomeration externalities exist is a question that becomes political for these very reasons.  I recently had a editor of a top journal reject a paper for assuming social returns to education.  I had defended the assumption with what I thought was a pretty convincing set of empirical studies, but his conclusion was that the verdict had been decided the other way. I am not sure his judgement was a political one, but perhaps - he was from a certain school that has become synonymous with conservative economics.

But what Salmon makes me wonder is if the very idea of agglomeration externalities is somehow incongruous with the whole individualist philosophy of some conservatives.

I don't really have an answer here, just a question: suppose that for some activity agglomeration externalities are real, positive and large for economic growth - does this mean necessarily that government should be involved with actively promoting the activity?  And if so, does this undermine the idea of individual self-determination in favor of collective action?


Jeff Alworth said...

Well, not to be overly partisan, but conservatives are enormously selective in their impulse toward individual liberty. If the question at hand involves sex or religion, they're not so hot on the idea. If it involves businesses and regulations, they love it.

Conservatives haven't always opposed education initiatives, and while they favor different approaches, they haven't been indifferent to poverty measures, either. I'd say that the degree to which they'd be willing to consider substantive legislation has a lot to do with the letter following the name of the politician proposing it.

BJCefola said...

It's easy to paint this in blue and red but I think reality is more complicated. In particular, what happens if the degree of benefit to society changes with adoption? Is the societal benefit of going from 25% college educated to 50% college educated the same as the benefit of going from 75% to 100%? Similarly with health insurance, does the societal benefit of covering the last 10% equal the benefit of covering the prior 10%?

Arguing that society has no interest in education or health care availability is extreme, but arguing that government policy should be informed by honest cost benefit calculations is not. You can't just say more is better without considering the cost.

ericfruits said...

Maybe we should get an NSF grant to do a longitudinal study of lottery winners. If Salmon is correct, the children (and grandchildren) of lottery winners would be expected to have better education and less obesity.

Any bets on what we'd find?

Patrick Emerson said...

Yes, this is why I went for the hypothetical - Salmon's claim that you throw money at child poverty and voila, is suspect at best. The past 50 years of development economics, for example, shows us that throwing money at something is not as easy as it seems.

Cralis said...

The other issue that I never see addressed is whether "throwing money at poverty" creates a situation where the poor feel no need to advance on their own.

Some of the greatest people in our time have come from poverty. The poor conditions they had drove them to seek something better...and they accomplished that.

The more "social re-distribution" we have the more it seems our country slips into lower and lower standards and levels of education, and the more acceptable it becomes because there is a safety net.

I know it isn't that simple, but I have yet to see a study that proves that this isn't happening, and there is both a personal and political incentive to dissuade this line of thinking because it disables the liberal political machine: we give you more from the government and you vote for us. It is the classic pandering for rents in an infinite loop.

Has anyone considered that part of the reason our country was so great before was because it wasn't easy and the government didn't bail you out personally at every step of your life? Yes, it does come with a cost...

...just like our new social outlook comes with the cost of potentially losing top place in the world.

Cralis said...

Anyone consider that perhaps "throwing money" at the poor will create disincentives to strive for something better?

This is the classic politicking for rents problems in an infinite loop: you give the poor some money from the government and they will vote for you.

Why is it that in our past when there were less social programs, and less safety nets, we were on top in education, work, and results? How many great people attributing their drive for something better to the poor conditions and poverty they had to deal with as a child?

And is it any wonder that now, when we are casting our social nets to catch every man, woman, and child, citizen or not, and ensure that they have a minimum living standard... that we are now losing or in danger of losing our advantage in education, productivity, ingenuity, and more?

I'd like to see a non-biased study by reputable economists tackle these questions. But in the current political climate I doubt it will happen. There are just too many rents at stake.