Approaching Social Issues

1. Approaching Social Issues Trade-Offs: An Introduction to Economic Reasoning and Social Issues by Harold Winter

2. The Economic Way of Thinking • Step 1: Identify the theoretical trade-offs of the issue in question. • This is the costs and benefits step • Regardless of the issue, there are always trade-offs to consider. • For any policy solution proposed, there will be proponents and opponents.

3. Ignoring Personal Concerns • Economists can argue in favor of drug abuse, theft, and even death. • Economists can argue against both safer products and pollution control.

4. “I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.”

5. Step 2 • Step 2: If possible, empirically measure the trade-offs to determine if the costs outweigh the benefits, or vice versa. • If you are interested in proposing a policy solution, it helps to have some relative idea of the magnitude of the trade-offs identified in step 1. • How you measure the trade-offs is an important issue.

6. Pitfalls in Step 2 • First, empirical analysis requires data. • Often difficult to collect data that is accurate. • Second, the real world is a big and messy place to study. • Data simply may not be available. • Third, there are many statistical methods that can be used to measure the trade-offs. • Cheap computers means many different approaches. • Finally, empirical approaches can differ in statistical techniques, but also in empirical design. • What data are most relevant?

7. Empirical Work • It must be necessary to replicate your results.

8. Step 3 • Step 3: Recommend (or implement) social policy based on the first two steps. • The bulk of public policy economic research is meant to imply, or recommend, policy solutions. • Some economists step out into the public arena and make their positions clear (e.g., John Lott, Steven Levitt).

9. Objectively Speaking • Many of the academic debates over public policy occur due to the difficulties associated with step 2. • Levitt vs. Lott. Did Roe v. Wade reduce or increase crime in the 1990s. • It’s an empirical question. • Debate is not over the results, but over how those results were achieved (what model, what data, the statistical methods used).

10. Trade-Offs • The other two steps can pose challenges, too. • It is one thing to say that we are going to identify trade-offs, but it is another thing to say exactly which trade-offs we are going to identify. • Only the most relevant trade-offs are usually considered. • This depends on what policy objective is being considered.

11. Social Welfare Maximization • Let’s assume we can identify and accurately measure costs and benefits. • If benefits of the solution outweigh the costs, adopt the solution. • If more than one solution, select the one with the greatest net benefits. • This is often referred to as social welfare (or social wealth) maximization.

12. Example • If our policy goal is to maximize social welfare, we want to identify trade-offs that affect social welfare. • New workplace safety regulation • Benefit: reduce worker injury or death • Cost: resources used to install and maintain the safety feature. • Once benefits and costs have been identified, then measure them.

14. Measuring Trade-Offs • In measuring trade-offs, it is common for economists to place a monetary value on all the relevant costs and benefits. • Example • Costs of installation and maintenance of the safety feature will already be measured in dollars. • On the benefit side, a dollar equivalent can be established for the value of lives saved or injuries avoided.

16. Definition of Social Welfare • Even if there is agreement on the broad objective of maximizing social welfare, policy objectives may differ due to differences in the definition of social welfare. • Economics of crime • Should the benefits that accrue to individuals who commit crime be added to social welfare? • This is opinion as to whether this benefit should be counted. • Policy objectives and definitions of social welfare are subjectively determined.

17. Defining Social Welfare • What should be counted as social welfare? • Economists tend toward inclusiveness in defining social welfare. • Economists are concerned about identifying costs and benefits, but not about who reaps the benefits or incurs the costs. • Efficiency vs. Equity • We will focus on efficiency, with an occasional mention of equity considerations.

18. Winter’s Game Plan • Primary focus will be on step 1. • Identifying trade-offs is the most enjoyable work, because this is where the policy analysis begins. • The least contentious step among economists. • Strong agreement over identifying costs and benefits. • The important debates over empirical work (step 2) is not about the results, but over the data and the statistical techniques used. • Social welfare maximization is the objective policy makers should care about.