Wrong Kind Of Argument Pt 2
May 23, 2011 1 Comment
Follow-up to this post, based on my tried and true theory, When in doubt use a baseball-card analogy:
1. the government decided it would be an intrinsically good thing for everyone to own their own baseball-card collections, so they set up a government agency that would fund and guarantee 80% or more of new baseball-card purchases, tax credits for purchasing them, etc.
2. Baseball cards, not coincidentally, kept being bid up. This is normal economics. People mostly weren’t using their own money to buy them, there was ongoing government incentive to buy them, and there was always someone to sell them to down the road – they seemed like a great investment. So demand was huge.
3. A new baseball-card company sprung up, Private Label™, to try to take advantge of the apparent huge demand for baseball cards. Most Private Label baseball cards weren’t eligible for the government subsidies from #1, but they were still baseball cards, and actually a bit cheaper, so part of their selling point was more-bang-for-your-buck.
4. After a few years of this, the baseball-card bubble collapses, taking the economy down with it. And Private Label cards show the most obvious effect, as they lose 90% or more of their value.
5. The subject naturally comes up: who or what is ‘to blame’ for the bubble? Paul Krugman writes N columns asserting that the government can’t be to blame, because their subsidies and tax credits didn’t apply to Private Label baseball cards. He shows a pie chart demonstrating that the government had a very small piece of the Private Label subsidization market, and exonerates the government of any wrongdoing.
It’s easy to see that this argument is automatically wrong. It’s not that there are incorrect facts in it. It’s just that it’s the wrong kind of approach to use for making the case that Krugman wants to make. Clearly the issue is not ‘who bought the Private Label cards’ or ‘did the government buy Private Label cards’ per se so much as who distorted the market overall. And everything points to the government, and the Krugman pie-chart argument doesn’t show otherwise. Similarly it treats the Private-Label cards as a cause rather than a symptom of the bubble, implying that somehow if only Private Label cards had never been invented, the baseball-card market could have continued to march on its merry way like this indefinitely.
I see such arguments and scratch my head, especially when they come from Nobel-prize-winning economists.