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Time of India
17-05-2025
- Health
- Time of India
Impossibility of a theory of externalities
If the same analytical 'tool', when placed in the hands of different people, tells us two radically different things, such as that lockdowns are good and that they are bad, it means we are not dealing with science but with quackery. As I have shown earlier, ethics and epidemiological models fall in that category. In this piece, I show that the standard theory of externalities in economics falls in the same camp. For long, like any other student of economics, I thought of externalities as an inefficiency, a market failure, that might require government intervention. But when I tried to frame my review of public health in the context of externalities, I arrived at a dead end. My empirical analysis had conclusively shown that quarantine fails in almost all cases even as it causes great harm. But many economists supported quarantine on the basis of the externalities theory. In 2020, Thomas Firey at the Cato Institute wrote: 'Given the seriousness of the Covid-19 negative externality, legally mandating masks and distancing is appropriate'. In 2020 also, Guillaume Vandenbroucke at the St. Louis Federal Reserve justified an 'early social-distancing mandate' by citing the lack of 'internalisation' of negative externalities. Hideo Hayakawa, a Japanese economist wrote in 2021 that 'there is a powerful economic case to be made for government intervention, including full or partial lockdowns'. Just by mentioning the term 'negative externality', lockdowns can apparently be justified. Likewise, while my empirical analysis had conclusively rejected vaccine mandates, many economists support them based on the theory of externalities. Arguing that those who don't take a vaccine are 'free riding' on the positive externality created by those who take a vaccine, Nobel prize winner Joseph Stiglitz justified vaccine mandates in 1988. He never bothered to check if anyone was actually free riding or whether there were other reasons why someone might choose not to take a vaccine. Dr Jay Bhattacharya's 2014 health economics textbook argued that 'many governments have adopted an alternative Coasian solution in which property rights are reassigned: people do not have the right to stay unvaccinated'. In law, property is either physical or intellectual; humans are not anyone's property, so such an 'assignment' is intrinsically unlawful. In 2020, Nobel prize winning economist Paul Romer wrote that 'this [negative externalities] is one problem economists know how to solve'. His solution to the covid issue: mass testing. But empirical evidence shows that mass testing fails at multiple levels and causes much harm. Fortunately, in 2011 I had an extensive email discussion about externalities with one of the world's greatest economists, Harold Demsetz. In his 2011 paper: 'The Problem of Social Cost: What Problem?' he had destroyed the roots of the theory of externalities: 'The literature of externality problems, from Pigou to Coase, makes it seem as if they are associated with inefficiencies, but they are not'. Not only are Pigouvian 'externalities' not inefficient, the so-called Coase theorem is trivially true even as the idea that positive transaction costs lead to inefficiency is wrong. I'm writing a book (available freely online) on externalities which goes into details, but in this piece I will summarise why a theory of externalities is impossible. And why, therefore, we must abandon this Quixotian enterprise and focus on empiricism to determine any external effects and their 'solution'. 1. The concept is undefinable, possibly ideological It is important to start by noting that the theory of externalities is not a theory of external effects. It is a theory of the failure of markets to (allegedly) allocate resources efficiently because of unpriced external effects. No one is questioning the existence of subjectively felt or observed external effects. The dispute is purely with those who claim that (a) external effects are inefficient, and that (b) Arthur Pigou's remedies (tax or subsidy) can allocate resources optimally. Pigou was the source of the idea of inefficient 'externalities'. In the 1932 fourth edition of his 1920 book, Economics of Welfare, he wrote about costs and benefits that 'are thrown upon people not directly concerned … All such effects must be included—some of them will be positive, others negative elements —in reckoning up the social net product'. This definition has turned out to be impossible to understand. After intensive doctoral studies under Amartya Sen, Andreas Papandreou wrote in his 1998 book, Externality and Institutions that: 'Given the importance of externality in economic theory … it is surprising how hazy a concept it has remained. …[N]o precise and agreed-upon meaning of the term seems yet to have emerged.' After over 250 pages of dense analysis, Papandreou concluded: 'there cannot be a unique good characterization of externality' and that '[a]ttempts to characterize externality [have] stumbled over attempts to find a good criterion demarcating 'external' from 'internal''. If there's no clear definition, we obviously can't proceed in a scientific or logical way. Instead, as Carl J. Dahlman wrote in 1979: 'This is not science; it is metaphysics: value judgments and political goals … enter into the determination of whether externalities occur in our world'. 2. Impossibility of measurement Every moment we face trade-offs and associated opportunity costs. If we know that traffic will be congested between 8 am and 9 am, we can start for work at 7 am (and thus save 10 minutes of driving time) but that means we will need to reduce our sleep by an hour. Instead, we might decide that the inconvenience of 10 minutes spent in peak traffic is less than the loss of an hour's sleep. The point being that all costs are subjective: only we ourselves know what's best for us, and we signal this through our choices. What about air pollution? 'We' may think there is air pollution in our city but who are 'we'? Are 'we' a new migrant from a village, looking for a job, or are 'we' a wealthy, fashionable economics professor who lives in a posh locality but finds the air 'unbreathable'? All external effects are subjective – a matter of perception. Many costs become visible to external observers when we interact with the price system, but with external effects, there is no such interaction. The concept of 'social marginal product', which Arthur Pigou wrote about, is about the sum of all such individual subjective valuations of external costs or benefits across an entire society. How can we possibly measure this? All we can observe (in the case of the air pollution example) is new migrants moving into polluted cities and abandoning their clean villages. As newcomers, they are signalling that the net external effect of polluting factories is positive due to jobs and opportunities for their children, and overall agglomeration effects that offset pollution. The Chernobyl nuclear meltdown did impose a negative social cost, with people fleeing; but for most air pollution, the net external effect is indeterminate. Does that mean there is no air pollution? This is an intensely local and empirical question, linked with affordability. The externalities theory can tell us nothing about it. Typically, only a rich society that has gone through a phase of heavy air pollution while it was poor, will be capable of abating pollution without significantly reducing overall output. There are no costless Pigouvian solutions. Facebook Twitter Linkedin Email Disclaimer Views expressed above are the author's own.
Axios
22-04-2025
- Axios
Louisiana among deadliest states for highway fatalities, data shows
Louisiana has one of the country's highest annual rates of highway fatalities, according to federal data. Why it matters: April is Distracted Driving Awareness Month, where advocacy groups hope to bring attention to a leading cause of crashes — cellphone use. The big picture: Louisiana averaged about 20 highway fatalities per 100,000 residents in 2022, according to the Bureau of Transportation Statistics and the St. Louis Federal Reserve. That's much higher than the national average of 13. Other Southern states — Alabama, Arkansas and Tennessee — also ranked among the deadliest. By the numbers: In 2023, 811 people were killed in crashes, and 22% of those crashes involved inattention or a distraction, the Louisiana Highway Safety Commission says. New Orleans keeps a dashboard of local crash data. Zoom in: Louisiana has laws banning texting for all drivers and requiring hands-free cellphone usage in school zones, the commission says. Another law bans cellphone usage (unless hands-free) for drivers holding a learner's or intermediate license. Gov. Jeff Landry and insurance commissioner Tim Temple are backing another bill this legislative session that would increase cellphone restrictions while driving, WRKF reports. Zoom out: Around 3,300 people died nationwide in crashes attributed to distracted driving in 2022, while another 289,000 were injured, according to the latest available National Highway Traffic Safety Administration data. More than 62,000 crashes involved distracted cellphone usage in 2022 alone, the NHTSA says. These stats likely underestimate the problem because crash data often relies on drivers self-reporting their distractions to law enforcement, National Safety Council executive VP of safety leadership and advocacy Mark Chung tells Axios. The big picture: U.S. traffic deaths per 100,000 people peaked in the 1930s and total deaths peaked in 1972, then gradually declined thanks to vehicle improvements, better infrastructure and public safety campaigns. But the rate of crash deaths started rising again about a decade ago, spiking during the COVID-19 pandemic. 2022 was still in the late pandemic era, and it's unclear whether things have changed since then. Flashback:"How much longer will a civilized nation endure such mass mayhem?" the NSC asked in 1955 after 602 Americans died on roadways over a single Christmas weekend. It took 13 more years for seatbelts to be required in all new vehicles — and the NSC now wants similar action to curb distracted driving. Nearly all U.S. states ban texting while driving, per the Governors Highway Safety Association, though their enforcement rules differ.
Yahoo
15-04-2025
- Business
- Yahoo
What soaring uncertainty means for the U.S. economy
President Donald Trump's tariff agenda has thrown the financial world for a loop for much of the past month. The on-again, off-again trade escalation with other nations — most notably China — has upended markets with investors fleeing U.S. stocks in search of more stable ground. And as experts and business leaders say the lack of clarity around the tariffs is every bit a challenge as the levies themselves, data shows economic uncertainty is the highest it has been in years. Economists have a way of quantifying economic chaos, as multiple measures show just how uncertain the market and the economy in general are. One measure, the Economic Policy Uncertainty index from researchers at Stanford and Northwestern universities, uses an analysis of news reports, tax code data and economic forecast disagreement. According to the EPU index, uncertainty spiked in March to levels last seen during the Covid pandemic. Kevin L. Kliesen, an economist at the St. Louis Federal Reserve, noted that the change in uncertainty from last spring to this spring is the sharpest such increase in almost 40 years. 'It's a historically unprecedented increase,' Kliesen said. The instability makes it harder for companies and consumers alike to make decisions, and it can be a scene-setter for recessions. 'Firms will delay investment in response to higher uncertainty,' Kliesen said. 'Consumers facing higher uncertainty about job prospects, they might cut back on spending.' Menzie Chinn, a professor of public affairs and economics at the University of Wisconsin, said, 'People are maximally confused.' To show how uncertainty plays out, Chinn gave an example of potential homebuyers: Lowering interest rates might entice them, but worries about a big drop in home prices over the next year — the kind that might arise from a recession — might scare them away. 'It's better news, but washed out by this bad uncertainty,' Chinn said. The uncertainty extends into the bond market: Government bonds are being sold more than they're being bought — even as stocks sour, flouting historical trends. Traditionally seen as a safe harbor, bonds tend to be purchased by investors when markets are on edge. That's not the case today, with 10-year Treasury yields surging above 4.5%. As overall stability is eroding, any news — even if it's inaccurate or positive — has the potential to send things haywire. U.S. stocks soared briefly on April 7 when an errant headline on X said Trump was considering a pause, only to sink when the White House said the claim was false. And while the market took off after Trump dialed down most tariffs Thursday, stocks faltered the next day. Prominent business leaders have warned about the uncertainty in recent weeks, with both JPMorgan Chase CEO Jamie Dimon and BlackRock CEO Larry Fink saying the lack of clarity is pushing the economy closer to recession. 'We have the strongest economy in the world. It would be good not to add to the uncertainty out there,' Dimon said Wednesday on Fox Business, adding that a recession is now a 'likely outcome.' This article was originally published on
NBC News
27-01-2025
- Business
- NBC News
Net worth of millennials has quadrupled: Why some call it 'phantom wealth'
Millennials have come a long way since their days of being called lazy or entitled. Despite reaching key milestones later than their parents once did, they are now wealthier than previous generations were at their age. 'Younger families in the U.S. made remarkable gains,' according to an analysis of 2022 data by the St. Louis Federal Reserve. Collectively, millennials are now worth about $15.95 trillion, up from $3.94 trillion five years earlier, according to Federal Reserve data. Still, very few millennials would consider themselves wealthy. The disconnect between being rich on paper and feeling well off has been referred to as 'phantom wealth.' For example, gains in the value of a home or a retirement plan can feel like phantom wealth because they are illiquid and have no bearing on day-to-day cash flow. Boosted by a strong jobs market and rising wages, many in this age group have purchased homes and benefited from soaring home values. To that point, the St. Louis Fed report found between 2019 and 2022, home prices jumped 44%. Largely driven by real estate gains, the 'median wealth of these younger people more than quadrupled' during this three-year period, the report said. However, homeownership does not offer the same sort of safety cushion other investments do, noted Michael Liersch, head of advice and planning at Wells Fargo. 'Unless you are willing to downsize, you are really not going to monetize the increase in that asset,' said Liersch, especially in the case of a primary residence. 'Millennials, in particular, haven't been able to use that wealth.' Millennials have 'phantom wealth' 'Phantom wealth is a nonsensical term: assets either exist or they don't,' said Brett House, an economics professor at Columbia Business School. However, there is a very real phenomenon at work. As it turns out, 'millennials experienced a sharp swing in their relative standing,' the St. Louis Fed report found. The median wealth of older millennials, between the ages of 36 and 45, was 37% above expectations. The wealth of younger millennials and older Gen Zers, or those aged 26 to 35, exceeded expectations by 39%. Compared with other generations, millennials are also more likely to say that their income went up over the last few months and that they expect their earnings potential to increase again in the year ahead, according to another report by TransUnion. But even as households became wealthier, inflation and instability have left more people in the bucket of so-called HENRYs — 'high earners, not rich yet,' House said. And 'the 'HENRY' phenomenon isn't limited to millennials or Gen Z,' he added. 'It's harder for every generation to feel financially comfortable when the management of so much risk related to employment, healthcare, retirement pensions, insurance, and other components of economic well-being has been shifted to individuals during a period of rapidly rising prices,' House said. 'There is so much more to achieve' Many millennials also say it's harder today to make it on their own than it was for their parents when they were starting out. They have higher student loan balances, bigger mortgages and car payments, and more expensive child care costs, explained Sophia Bera Daigle, founder and CEO of Gen Y Planning, a financial planning firm for millennials. 'Cash flow has been tight,' she said. That makes it more difficult to set extra money aside or make long-term plans, said Bera Daigle, a certified financial planner and a member of CNBC's Advisor Council. 'While they are making significant progress on reaching some financial goals, it still feels like there is so much more to achieve.' However, feeling financially secure is often less about how much money you have and more about the ability to spend less than you make, experts say. In part, higher prices have fostered the feeling of being overextended, according to CFP Kamila Elliott, co-founder and CEO of Collective Wealth Partners. Elliott, who is also on CNBC's FA Council, said clients often ask 'Where is my money going?' 'If you feel like a lot of fixed expenses are going up, it may mean you need to cut back on the fun things,' she advised, such as eating out or taking a vacation. 'It's going to take a little bit of an offset to have more money at the end of the month,' Elliott said.
