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May 27, 2007

The Myth of the Rational Voter

I'm doing a review of Bryan Caplan's The Myth of the Rational Voter so I'll save the overview until later. But I really rather love the way that, in attempting to refute the central argument, Kevin Drum actually makes the point.

We went to war against Nazi Germany even though Hitler was as good a trading partner as the Weimar Republic. We pass minimum wage laws because our guts tell us that it's wrong to expect an adult in a rich country to work like a dog seven days a week for subsistence wages. And some of us continue to press for national healthcare not simply because it addresses known market failures (though it does), but because we think it's fundamentally wrong to make people beg, plead, and scrape in order to receive decent medical care.

The free market rejects all of these things. But in the voting booth, sometimes the better angels of our natures take wing for a moment and persuade us to try to make ourselves into better people. The free market pushes back, of course, and warns us that we can't always have everything we want. Thankfully, though, it doesn't always win. Rationality is a high virtue, but it's not the only virtue.

Well, "we" as in Americans, went to war with Nazi Germany because Hitler declared war on the US. But leaving that slip aside, minimum wage laws are indeed a perfect example of Caplan's point.

The complaint is that an unadulterated market outcome produces a result that we don't like. Inequality is too great, people are working like dogs for subsistence wages...yes? I'm not misrepresenting the situation? Great, we can indeed solve that by political means. We have any number of options, more education to raise productivity, more union power perhaps to improve bargaining positions, we could, if we wished, via the tax system, simply give those hard working poor more money: we could even, if we worked at it, simply mandate that everyone gets subsistence wages before they even start working. The citizen's basic income approach. We could also increase the minimum wage.

No doubt there are many more policy options but when we try to decide between them we must, of course, be rational about doing so. We want to get the maximum of what we desire with the least bad effects and at the lowest cost. That is a reasonable definition of rationality? The most bang for our buck in trying to solve a perceived problem?

Now, of those different approaches there are two that are widely discussed in economic circles. Giving the working poor more money (otherwise known as the EITC)  and the minimum wage. Which of these alleviates more poverty, reduces inequality the most, at the least cost to the rest of society? Expanding the EITC.

Which does Drum severally propose, support and cheer the introduction of? A higher minimum wage, a less rational answer to our problem.

Caplan's point, that voters are less rational when voting than when being economic agents seems to be bourne out.

I don't know enough about Drum's proposals on national healthcare to know which specific flavour he supports, so this is more general. There are indeed those in the US who are agitating for a reform of the health care system there. Yet some of these people are (note please, some,) pointing at, say, the French system and noting that the OECD rates it as the best in the rich world. Excellent, let's go copy that!

That's entirely rational: we want a better/best health care system, let's copy the better/best one. They then go on to say that the US therefore needs a single payer system (the French system is not single payer), that health insurance needs to be decoupled from employment (the French one is coupled to it), that we no longer require private insurance companies (the French system depends upon them), that health care should be free at the point of use (you pay for it in France...I believe that this is an allegation that Michael Moore makes in his new movie, Sicko), that there should be no co-payments (there are in France) and even that we should have a single provider system (the French system is multiple provider).

Isn't that a reasonable description of someone being irrational in a political context?

Robert Waldman and Mark Thoma both have more on this: no, they don't agree with my view. Quelle surprise.

May 27, 2007 in Books | Permalink

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Comments

"leaving that slip aside..": it's no slip, though, is it? It's the result of routine American indoctrination, I suspect.

Posted by: The Pedant's Apprentice | May 27, 2007 2:41:30 PM

That's why I think democracy is flawed.

One pound of tax, one vote is superior.

Posted by: AntiCitizenOne | May 27, 2007 3:59:00 PM

According to Wikipedia, the current minumum wage in the UK is £5.35 per hour (if aged 22 or over).

If one works a 37.5 hour week, with 4 weeks unpaid annual holiday and 7 days public holiday, that totals £9,349 (or thereabouts).

On such an annual wage, one would pay income tax (in FY2006/07, assuming the single-person's allowance) of £661 and Employee's NIC of £475. On top of this, the employer would pay Employer's NIC of £552.

Thus of a total wage cost of £9,901 to the employer, the government takes £1,688, which is 17%.

The marginal rate at which the government takes (from employer and employee together) is 43.96%.

Why do we tax the lowest paid full-time employment in the land at such an appallingly high rate? This leaves them with £22.50 per day, to cover everything, including the minimum of food, shelter, etc.

Surely, if we taxed them less (say through higher allowances), we would not need the means-dependent handouts that are provided, and all the costs and abuse that goes with that. Furthermore, we could provide a greater motivation for employment and, through a lower marginal rate, personal betterment.

Best regards

Tim adds: Sure. I tend to argue around here that the personal allowance should be the median wage.(16 k or so I think).

Posted by: Nigel Sedgwick | May 27, 2007 5:19:35 PM

I think the personal Income tax allowance should be and 8 turned on it's side.

You should not be a slave of the state.

Posted by: AntiCitizenOne | May 27, 2007 5:40:21 PM

I'll be interested to see your Caplan review.

From reading Caplan's blog at EconLog it seems to me that he completely misunderstands the nature of 'democracy'.

Caplan seems to think democracy entails the assumption that voters know better than scientists on matters of science.

This sets up a straw man version of democracy, which can easily be demolished. So Caplan has little trouble in showing that economists understand economics better than voters. Big deal...

But surely democracy is essentially about replacing governments by periodic vote instead of by (somewhat less frequent) revolutions.

Elections are not about a choice between two or more policies, but a choice between two or more parties (or people) - each of which put forward different 'systems' (eg. different sets of priorities, different philosophies, different methods etc.)

Indeed, I would say that the basic assumption should be that democracy works (on average and in the long run) and towards understanding _why_ it works (something we are not yet very clear about).

So - I think Caplan asks the wrong question about the wrong definition of democracy.

I am surprised that none of the reviewers I've seen seem to have noted this. Maybe you have?

Tim adds: That's not his complaint about democracy. Rather, he's wondering about why democracy seems to produce such stunningly stupid economic policies.
Is it because the "elites" act in their own interest? (standard public choice theory). No, rather, that because of the irrational understanding of economics by the man in the street, they both desire and vote for these silly policies.
However, the same irrational voter is much less irrational when acting as an economic agent. We should thus move certain activities from where people are being irrational (politics) to where they are being rational (markets).

Posted by: Bruce G Charlton | May 27, 2007 5:53:23 PM

Nigel, it gets worse - £9,000 is about the level where the Working Tax Credit for a single earner is roughly equal to the tax/NI suffered by deduction!

Remembering always that the marginal deduction rate for earners on WTC is 37% higher than what you calculated. Roll on the Citizen's Income.

Posted by: Mark Wadsworth | May 27, 2007 6:16:11 PM

It's not an original insight, I know, but I suspect many folks who have little or no acquaintance with formal economics assume that sound principles for running a household or a business must naturally apply without qualification to the management of a national economy.

In other words, they do not understand fallacies of composition (if everyone simultaneously increased personal savings the national economy would become poorer: if everyone tried to change their bank accounts into cash the banking system would head towards collapse) and have only very hazy notions of what economists term "market failure". They cannot readily distinguish between analysis of economic relationships to better understand what is happening and prescriptions to achieve social justice - whatever that is.

A recent thread in Crooked Timber revives a decades-old debate, started by CP Snow, on the Two Cultures and whether an educated person needs to know the second law of thermodynamics. As regular participants in bar-room discussions will know, economics does not labour under any similar handicap. Many folks think they understand economics very well: human nature never changes - controlling the money supply is all that is necessary to control inflation. It's obvious.

Posted by: Bob B | May 28, 2007 12:59:04 AM