Saturday, February 5, 2011

Distribution and Allocation

On the off chance that this blog attracts readers who haven't read a lot about economics before, I thought I'd try, at least once a day, to do a post about the terms I'll be using on the blog.

Two big ones that sometimes confuse people (even those pretty well versed in economics) are the concepts of Distribution vs. Allocation.

Though I don't generally recommend that people get information about economics from wikipedia (there is a huge amount of false or misleading information on wikipedia economics pages) the wikipedia entries on Distribution(economics) and Allocation of Resources do a decent job of explaining what these concepts mean.

If you want the Short version, allocation has to do with economic inputs (production), while distribution has to do with economics outputs (consumption.)

Take yourself, for example. If you are like most people, your input into the economic system primarily takes the form of your labor (if you work full time, that's about 2000 hours of labor per year). The price system directs you (though it does not force you) towards jobs that pay more.

Meanwhile, you use the pay you get from your inputs to purchase economic outputs like food, clothes and shelter - that's the distribution side.

In this way the price system ensures that the outputs you extract from the economic system are similar to your inputs. Not exactly the same, though... but that's a discussion for a future post.

Losing the Tevatron

Warren Mosler noted earlier in the week one of the recent casualties of US budget cutting - the Tevatron collider in Illinois is being shut down due to a lack of funding.

If the project is being shut down because it's not a good idea (the article notes that there's a superior collider operating in Geneva), then while it's sad for the physicists that work on the project it's actually a good thing in the long run - the government shouldn't fund projects that aren't a good idea, and those physicists should be working on something else.

If, as I suspect, the project is being shut because of a perceived need to "trim the fat" and stop spending so much money... that's foolish, counterproductive, and wrong. We'll pay for it in the form of less innovation, worse physics programs, and ultimately lower living standards.

All because of a quaint fear that the US government can run out of dollars. Sad.

Social Security and Medicare - A Question of Distribution and Allocation

Over at Matthew Yglesias' place I've gotten into a lot of really good discussions with various commentators about economics and politics. I still read and comment there, but recently I've gotten the feeling I'd like to have a smaller pond of people so that we could get into a more involved discussion. The idea is that I'll take quotes from comments and use them to create further posts, creating a moderated front-page discussion without actually having to curtail the freedom of people to post what they want on the comment threads.

I don't know whether I'll be able to attract the folks I'm after (primarily thinking of DMonteith, studentee, Stephen Eldridge, and my MMT brethren like beowulf et al, but all are welcome) or whether this will just continue to be a sandbox for me to flesh out my ideas. But I thought I'd start with an issue that comes up a lot in both progressive and conservative circles - Social Security, Medicare, and "entitlements" generally.

The problem with Social Security and Medicare is often described as one of pure finance. We are spending X number of dollars on old people; thus we need to take X number of dollars away from young people. Sounds intuitive enough, but if you're reading this blog you probably already know that at the federal level it doesn't work that way.

In actuality the problem of Social Security is almost entirely one of distribution - that is, we have decided that it's within the authority of the federal government to set some minimum level of consumption for retired people that's (mostly) independent of their past or current production. When the population is older, we'll have to spend more resources meeting this standard, but there's no reason to believe this will create a problem. Old people don't actually consume that many resources (with an exception that we'll get to in a minute) so it would take a REALLY large population of elderly people to outstrip our ability to easily produce the consumer goods we need. The current dire-looking projections don't come anywhere close to that - the economy can easily meet the needs of a very large retired population.

The problem, as always, is not primarily with this distributive question. We can answer the question "what standard of living should old people be entitled to?" create a program to pay for it, and then we can provide the goods and services through the private market. Our system is very, very good at that - that's the reason that while communism prides itself on egalitarianism, the lot of the poor and working classes in a big, rich capitalist country is generally better than what they would get living in a big, rich communist country.

There is a real problem, though - old people do consume a very large share of one type of resource. That resource is medical care. As it happens, the price system does not do a good job of allocating medical resources - shortages, runaway costs, and low (even negative) marginal utility are the norm in our medical system*.

Thus our aging population will put even more strain on this system which is already under a lot of pressure. That's not good! But it's not primarily a finance problem. The problem is that our medical system doesn't work properly, and the inefficiency this failure creates is going to increase as our population gets older. You can't fix that with tax policy - you have to fix the medical system.

* You'll notice I never use the term "health care" if I can avoid it. I don't like the term as I think the concept of "health" encompasses a lot of things that don't really have much to do with the medical system. For my purposes the medical system is the system we use to deliver doctor's services to the public. It doesn't include other types of health-related consumption and production.