Monday, February 16, 2015

Deep thoughts on second-order effects

Paul Krugman recently challenged readers to name "an example of a prominent Republican politician proposing anything that would reduce after-tax-and-transfer inequality," with the crucial caveat that
"Bank shots don’t count — saying that slashing food stamps will help the poor by making them less dependent, or that cutting capital gains taxes will bring the confidence fairy to everyone’s door, don’t qualify."
In response comes the most absurd line of criticism imaginable - from a libertarian, predictably - who has damned the very question with his profound insight that in a complex economy there are these things called indirect effects. Why doesn't Paul Krugman know this? Don:
"This rejection of the relevance or importance of indirect effects speaks volumes about Krugman’s own current mindset and that of his target audience and his admirers.  This mindset is fundamentally anti-economics.  It’s a mindset that directs undue attention to what Frederic Bastiat called 'the seen' and away from that which is unseen."
The objection here is simple, and deserves to be put simply: Don thinks other people are disregarding indirect effects. He has noticed that a second domino can knock down the third; stunningly, he thinks that other people are not acknowledging this. He thinks this is a point in dispute that warrants multiple paragraphs of exposition and tangential digressions on Bastiat. Don believes that he understands the argument at hand, and his idea of moving "deeper" is to address a mystery with which liberalism has not grappled: whether a thing can cause another thing.

If we want to be rigorous about this, we can argue that the hallmark policy tool of the Keynesian - countercyclical economics - is the definition of a bank shot. Or that Krugman's signature innovations in new economic geography came by identifying the second-order effects of the home market effect.

But isn't this killing a fly with a sledgehammer? Isn't it enough to point out that of course Krugman - like every human in the known universe - recognizes the "the relevance or importance of indirect effects"? What is odd here is not that Krugman excluded them with a caveat - what's odd is the bizarre notion that he therefore thinks second-order consequences unimportant.
"Put differently, it’s the mindset of a child who believes that intentions are results, and who – because he or she cannot yet trace out consequences beyond the first and most immediate ones – assumes that the consequences of any action are limited to those consequences that are visible and that occur first."
Don is right: direct consequences are often easier to verify than indirect consequences. This, of course, is the obvious rationale for Krugman's caveat. We could wade into the infinitely complex world of policy prescriptions that mobilize Nth-order effects, but the controversy would then become proportionally complex. Here, Krugman is just limiting his scope of inquiry to facilitate a conversation that remains rigorous yet accessible to productive scrutiny.

This is the sort of criticism that says much more about the critic than his target. Don thinks he has discovered a "deeper" concern that is beyond the reach of his opponent - when it is in fact a point that Krugman not only takes for granted, but relies upon directly in his most significant and well-known positions. He has not, that is to say, even successfully identified the premises on which he and Krugman disagree. We could generously say that Don is wrong, but this is really just another one of those hilarious instances where a libertarian is not even wrong.