Econ101, Ideological Blinders, and the New Head of CBO

There are troubling indications that Keith Hall lets ideology blind him to basic economics.

Last week, in a post about the employment effect of regulations, I mentioned briefly that the new Director of the Congressional Budget Office, Keith Hall, had endorsed some questionable views on the subject.  A reader pointed me toward an additional writing that has done a lot to escalate my concerns.  There are disturbing signs about both Hall’s ideological bias and  even his grasp of basic economics.

This writing was part of an exchange in the journal Risk Analysis about an excellent book on the regulation/employment issue written by Coglianese,  Finkel,  and Carrigan.  Here are a couple of snippets that reflect Hall’s anti-regulatory bias:

“[R]egulation-related jobs are created much in the same way that a hurricane creates jobs.”

“The important point is that more valuable economic resources—like labor hours in the preregulation world—are being used to produce less in the postregulation world.”

A little harder to distill into a soundbite, but even more disturbing, is the basic argument made in the review, which is that jobs that are lost due to regulation count as costs, but jobs that are created don’t count as countervailing gains.  Here’s a somewhat longer excerpt where Hall and his co-author make this argument:

“Jobs that are lost were created to respond to consumer demands. In this case, workers are only hired if what they are able to produce is valued by consumers more than what the workers are paid, a positive value. But it is always uncertain whether or not jobs that are created to comply with regulations produce value that exceeds what the newly higher workers are paid. The value created is the uncertain benefits of the regulation. . . . .  Becoming involuntarily unemployed is just one of the tragedies of the regulatory enterprise but forcing the American workforce into regulatory employment that has speculative value may be the far larger cost.”

The first thing that’s disturbing here is the rhetoric — regulatory benefits have only “speculative value,” and it is “always uncertain” whether they are worth their costs.  But what’s worse is that it contains a basic economic error.  It’s literally Econ 101 that the market won’t correctly value an activity if there are externalities such as pollution.  (Not to mention other market imperfections like imperfect information, oligopoly, subsidies, etc., but just ignore those for the moment). By considering only the private value of the activity — the value it producers for consumers — but not the externalities, Hall is violating this fundamental economic principle.  If we’re completely uncertain about externalities, then we’re equally uncertain about social value, even if we know the private value of the activity. It’s like an accountant saying that we can be sure a company is extremely profitable when all we know is that it produces a lot of revenue. Confusing the private value of an activity with its social value is exactly like confusing revenues with profits.

In short, Hall’s argument is deeply flawed even if he is right that the value of regulation is completely speculative.  Of course, that’s not true either, and the fact that he thinks so is an indication of the strength of his ideological commitments. There are some other, less obvious problems with his argument, which are explored in the authors’ response to the review. But what’s really disturbing is that his ideology seems to be capable of leading him into basic economic errors. The issues facing CBO can be very politically fraught, and Congress is now requiring macroeconomic forecasts as well as estimates of direct costs.  Given the much more complex economic issues he’ll be grappling with as head of the CBO, all of this is very worrying indeed.

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Reader Comments

One Reply to “Econ101, Ideological Blinders, and the New Head of CBO”

  1. What you describe as basic economics, or Economics 101, is based on a fundamentally flawed view of market economics that has been adopted in order to attack the idea of free markets.

    The idea that a market won’t correctly value an activity if there are “externalities,” and other “market imperfections” you mention are part of an analysis of free markets invented by those who want to rule over markets because they disapprove of market-determined outcomes.

    The idea of “market imperfections” is a straw man invented for the purpose of justifying state intervention with markets. Markets don’t require perfect information in order to be highly effective at allocating goods and services to their highest and best uses. The term “market imperfections” reflects an attitude of moral superiority and condescension towards market actors. Those who criticize market imperfections, always want to correct some of the flaws they see.

    No one person could ever have perfect information, nor can all people acting in a market – that’s the beauty of markets: they allow individuals to buy and sell goods and services based on their own interests and efforts, and in the process to benefit from the sharing of information and talent that produces an unimaginable (to any individual) cornucopia of wonderful things to choose from. The market allows for individuals without perfect information, to make intelligent economic decisions based on the communication of information that does occur through market actions. Free markets respect the freedom, the property, and the choices of market participants. Prices reflect the processing of information that can never be fully analyzed.

    “Market actions” include all human action, not just economic transactions. “Externalities (such as pollution) that are not directly factored into a transaction, are not ignored by market participants. “Externalities” are undoubtedly much better appreciated, and responded to, than is acknowledged by market critics. People don’t like drinking water from sewers or breathing dirty air, and they communicate their dislikes of pollution through market actions, as well as through political action. Those who don’t understand markets, often don’t see that. Polluters are not friends of the community, nor of markets.

    You criticize Keith Hall’s “anti-regulatory bias,” but don’t acknowledge your own anti-market bias. You criticize Hall for stating ““[R]egulation-related jobs are created much in the same way that a hurricane creates jobs.” But what Hall was stating is a fundamental principle exposing an economic fallacy, a fallacy called the “broken window argument.”

    Frédéric Bastiat in his 1850 essay, That Which Is Seen and That Which Is Unseen, explained that destruction (wars, broken windows, etc.), and the money spent to recover from destruction, is not actually a net benefit to society. Opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are typically “unseen” or ignored.

    So the idea that regulations produce jobs, and that is a good thing, is naive in that it ignores the opportunity costs that results from imposition of the regulations.

    It is not possible to compute the costs of regulations, or the benefit. Unintended and unseen and unforeseen consequences will always result. The effort to compute costs and benefits is an exercise in imagination, done for political purposes, and the conclusions drawn will inevitably reflect the bias (or values) of the one doing the computation, whether they are pro-market or pro-regulation.

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Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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