Preferences for the unusual | One of the book’s most insightful chapters is titled “The Indifference Principle.” Landsburg states the principle as follows: Unless you’re unusual in some way, nothing can ever make you happier than the next best alternative. You might prefer living in San Francisco to living in Lincoln, Neb., for example, but if everyone shared your preference, people in Lincoln would move to San Francisco. When would the movement stop? When the higher demand for housing in San Francisco has raised housing prices there and the lower demand in Lincoln has dropped prices there—to the point where the two places are equally attractive. The fact that many people in San Francisco are not indifferent but prefer San Francisco to Lincoln is not evidence against Landsburg’s thesis; it simply means that not everyone is the same. He notes that most of us are unusual in many ways and points out an important implication of basic economics: “The greatest gains in life come in the areas where we’re most unusual.” So if you love San Francisco, chances are that you’re not the marginal person who is indifferent between San Francisco and Lincoln, and you get big benefits from living in San Francisco. In short, unusual preferences pay off.
So, notes Landsburg, do unusual talents. Tim Lincecum of the San Francisco Giants makes a lot of money—not because he’s a good pitcher, but because he is (or was, when he signed his contract) so much better than almost anybody else.
Landsburg uses this Indifference Principle to show that requiring a barber to obtain an expensive license doesn’t hurt barbers but does hurt those who want haircuts. By the same token, police crackdowns on drug dealers don’t hurt drug dealers but do hurt drug users.
Who, asks Landsburg, can avoid the consequences of the Indifference Principle? Only the owner of a good in fixed supply. An increased demand for actors cannot benefit actors, he notes, because it brings new entrants into the profession. But an increased demand for Ben Stiller will benefit Ben Stiller because there’s only one of him. He is a fixed resource. Landsburg shows a strong implication for public policy: If the EPA is successful in reducing pollution, residents of the less-polluted area don’t gain in their role as residents. They gain only to the extent that they owned land in the less-polluted area before pollution was reduced.
Moreover, reasons Landsburg, if there are no owners, there are no gains. He gives an example in which the government of the fictional town of Springfield spends $10 million to build an aquarium and decides to let everyone visit the aquarium for free. So people line up to get in. How long do they wait in line? Until the value of their time in line makes them indifferent about going to the aquarium. Thus they get no “consumer surplus” from the aquarium: the expenditure is pure waste. How would you make it less wasteful? By letting someone own it.
Deadweight loss | Landsburg lays out beautifully why economists think taxes are bad. It’s not because the government takes money from person A and gives it to person B. As economists, we can’t say whether that’s good or bad. But what economists do bring to the discussion is the concept of deadweight loss—that is, a loss to the taxed person that’s not a gain to anyone else. Taxes cause deadweight loss by motivating taxpayers to avoid the tax. So the deadweight cost of taxation, paradoxically, comes about because of people’s efforts to avoid taxation.
And here’s where I can extend Landsburg’s thinking in a way that I think he would approve of. This next thought is not original to me but came from Jim Black, a smart undergrad I taught at Santa Clara University over 30 years ago. Black, who is now a successful lawyer in San Francisco, pointed out that the big objection to taxes is how the government spends the taxes. If, he explained, the government took $10,000 in taxes from you and spent it exactly the way you would have spent it, and if collection costs were zero, taxes wouldn’t matter. Also, you wouldn’t try to avoid them. So the big deadweight loss from taxes is spending.
Correcting conventional thinking | Virtually all economists are in favor of free trade. One of the main reasons is that it allows people to buy things of a given quality at a lower price. Landsburg makes this point well with a true story. When George H.W. Bush relaxed import restrictions on Japanese trucks, Bill Clinton complained that the United States got nothing in return. Bush answered that what he had gotten was the Japanese government to open its market to U.S. goods. Landsburg’s comment: “Apparently both failed to notice that what Americans gain when they buy Japanese pickup trucks is: Japanese pickup trucks.”
Elizabeth Kolbert, in a 2010 New Yorker essay, claimed that income doesn’t matter for happiness. She pointed to surveys showing that despite rising incomes, the average level of self-reported happiness is the same now as it was in the much poorer 1950s. She approvingly quoted former Harvard president Derek Bok’s question: “[W]hat is the point of working such long hours and risking environmental disaster in order to keep on doubling and redoubling our Gross Domestic Product?” Landsburg lays all this out and then points out that since 1965, the average American has gained, besides more income, “about six hours a week of leisure.” If happiness hasn’t increased, he asks impishly, “why aren’t Bok and Kolbert asking why we bother to come home from the office” and take vacations? He then goes on to point out a common-sense reason why the surveys would show constant happiness: People who are asked how happy they are will tend to answer a different question. They will tend to answer based on whether they are happier than normal or happier than their friends. He drives home his point by noting that American men today are about two inches taller than American men 100 years ago. But in response to the question, “Are you tall?” a 5 ft., 9 in. American man would probably have answered yes a century ago and would probably answer no today.
Chances are that you, like me, are not a smoker. Landsburg shows that if we’re buying life insurance, we gain from the fact that others smoke. Why? Because insurance companies want to price for our risk and have limited information about how much risky behavior we engage in. One activity positively correlated with risky behavior is smoking. Smokers self-select into the high-risk category by smoking, and we non-smokers select into the low-risk category by not smoking. Similarly, he argues, if there are no laws requiring motorcyclists to wear helmets, those who use them are probably lower-risk than those who don’t. So if the government requires helmets, that law distorts the information that insurance companies get on you: they don’t know if you’re the kind of person who would voluntarily use helmets or the kind who does so only because of the law. For that reason, concludes Landsburg, a helmet law could actually raise insurance rates for those who would wear them anyway.
There has been a lot of controversy in recent years over whether and by how much Americans’ real income has increased over the last few decades. The usual method for finding the answer has been to measure median inflation-adjusted household income, which, notes Landsburg, rose only 5.3 percent between 1996 and 2005. But, he notes, a crucial problem with that measure is that household size has fallen. He explains that correcting the data for changes in household size shows that the increase in real income over those years was a whopping 24.4 percent.
Garbled green thinking | Possibly my favorite part of the book is the chapter “Why I Am Not an Environmentalist.” There’s much good, passionate reasoning in that one chapter. He tells how his daughter was subjected to shoddy propaganda in preschool. The recurring mantra at the ceremony to celebrate her graduation from preschool—that such a celebration was even held is itself a worrisome sign—was “With privilege comes responsibility” for the earth’s resources. Landsburg’s biting response: “Thomas Jefferson thought that life on this planet was more an inalienable right than a privilege, but then he had never been to preschool.”
He goes after many of the environmentalists’ claims, pointing out important inconsistencies. Consider the choice between building a parking lot and leaving the land as wilderness. Environmentalists argue that the decision to pave is irrevocable. Landsburg grants that point but points out that the decision not to pave is also irrevocable in an important way: people’s opportunity to park there today, if the parking lot isn’t built, is lost. “The ability to park in a more distant future,” he notes, “might be a quite inadequate substitute for that lost opportunity.”
Moreover, notes Landsburg, if environmentalists were as concerned about saving resources for future generations as they claim to be, more of them should oppose taxes on capital income and the Social Security system, both of which “encourage overconsumption in the present.”
A criticism | In a chapter titled “Choosing Sides in the Drug War,” Landsburg offers a beautiful critique of a November 1990 article in The Atlantic by Richard J. Dennis, who opposes the drug war. I’m virtually positive that Landsburg opposes the drug war also, but he also opposes bad arguments. Dennis has many such arguments and Landsburg does a good job of taking them apart.
Unfortunately, Landsburg adds his own bad argument: he incorrectly evaluates the benefit of lower drug prices that would result from legalizing currently illegal drugs. Landsburg believes there would be no net benefit from lower prices on the amount of drugs that people are already using. He analogizes lower drug prices to a lowering of the price of pizza and concludes that the amount consumers gain from the lower price on the number of pizzas they would have bought at the high price is just offset by the amount that pizza producers would lose. But that ignores why legalization of drugs would cause their prices to fall. It’s because legalization reduces the risk of dealing in drugs, and therefore drug dealers would no longer be compensated for that risk. Landsburg’s Indifference Principle should have led him to that conclusion. So the gain to consumers of a lower price has no offsetting loss to producers and is a pure gain to society.
Still, to make only one mistake in a 316-page book is an impressive achievement.
