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Harold Winter is professor of economics at Ohio University.

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TRADE-OFFS

THE UNIVERSITY OF CHICAGO PRESS

Contents

Preface to the Second Edition.........................................ixPreface to the First Edition: Welcome to My World.....................xiiiAcknowledgments.......................................................xvii1 Approaching Social Issues...........................................12 A Valuable Life (to Some Extent)....................................93 Do You Want to Trade?...............................................214 What's Yours Is Mine................................................435 Eat, Drink, Smoke, and Be Unhappy...................................636 Stop Bothering Me...................................................1037 Behave Yourself.....................................................1298 There Are No Solutions..............................................161Index.................................................................171

Chapter One

In analyzing social issues, I was trained as an economist not to make moral judgments about right and wrong but to try to identify the trade-offs—that is, the costs and benefits—of whatever issue is at hand. I have seen many of my students struggle with this approach, not just in terms of performing well on their exams but in accepting it as a legitimate way to think about public policy. To introduce them to the economic way of thinking, I present an approach to resolving social issues that has three steps:

Step 1: Identify the theoretical trade-offs of the issue in question. This is the costs and benefits step, a concept that is very familiar to every economist. Regardless of the issue, there are always trade-offs to consider. Furthermore, for any policy solution proposed, there will be those in favor of it as well as those against it (and keep in mind, choosing one solution means foregoing another). If everyone could agree on the resolution of a social issue, it wouldn't be much of an issue in the first place. Economists have a way of identifying costs and benefits that few others would ever consider, largely due to our ability to detach ourselves from many of the personal concerns that can complicate policy analysis. We can argue in favor of drug abuse, obesity, theft , and even death. We can argue against safer products, pollution control, and drugs that improve the quality of life for individuals who have contracted HIV. In sum, economists are a lot of fun to talk to at parties.

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 idea of the relative magnitude of the trade-offs you identified in step 1. To justify your solution, it generally will be useful to argue that the benefits of your solution outweigh the costs. How you want to measure the trade-offs is an important issue. You may just have a sincere gut feeling about the value of your solution, or you may want to pull out the serious statistical tools to support your claim. Either way, step 2 can be a difficult stage for several reasons.

First, empirical analysis requires data, which can come from several sources, such as surveys, observable market information, or controlled experiments. Unfortunately, data collection is oft en difficult to do, and as a result, data are oft en measured inaccurately. Second, the real world is a big and messy place to study. A lot of data that ideally would be needed to accurately measure trade-offs simply may not be available. Third, there are many different statistical methods that can be used to measure the same trade-offs. Advances in computer technology and statistical soft ware have made it possible for almost anyone with a computer to do sophisticated empirical work, so you oft en get to see many different approaches to the same problem. Finally, not only can the empirical approaches differ in statistical techniques but also in empirical design. What data are most relevant? If there are alternative ways to measure the same variable, which measure should be used?

Fortunately, there are procedures that deal with many of these problems, and the best empirical work deals openly with these shortcomings. What I believe is most important for empirical work is to allow others to be able to verify the integrity of your data, and to be able to replicate your results. But this may not always be possible if there are proprietary rights that make the sharing of data impossible. Still, being able to examine the robustness of the results of any particular study is important in determining the value of that study. It is oft en the case that you can have a group of economists who are in complete agreement over step 1 but in complete disagreement over step 2. I should point out, however, that disagreement over step 2 in no way diminishes the value of economic reasoning. There are legitimate and passionate disagreements in how to measure trade-offs, but this simply is an unavoidable consequence of the nature of empirical work. Any academic discipline that attempts to apply empirical analysis to policy issues will have to confront these same problems.

Step 3: Recommend (or implement) social policy based on the first two steps. This may be the most exciting step if you are passionate about public policy. While there are some economists who are in the position to actually implement social policy, the bulk of public policy economic research is meant to imply, or recommend, policy solutions. Many economists keep their research largely to themselves and to a small group of scholars who are interested in the same issues. But some economists step out into the public arena and make their positions clear. The fun begins not only when other economists are right out there bumping heads with them, but when scholars and analysts from all walks of life are also thrown into the mix. Step 3 is where you get to flex your muscles and find out if anyone who is in a position to make policy decisions actually cares about what you have to say. This step is definitely the loudest of the three steps.

Taken together, I believe that these three steps present a reasonably coherent approach to public policy analysis: identify trade-offs, measure trade-offs, and recommend policy. These steps on their own, however, are still incomplete. They have no policy relevance until a policy objective can be identified.

OBJECTIVELY SPEAKING

As outlined above, many of the academic debates over public policy occur due to the difficulties associated with step 2, the empirical measurement of trade-offs. But there are also difficulties in pursuing the other two steps. 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. In a perfect world, it would be nice to identify every conceivable cost and benefit associated with a policy solution, no matter how far-reaching the trade-offs may run. In practice, however, and even in theory, only the most relevant trade-offs are usually considered. And this, in turn, oft en depends on what policy objective is being considered.

If you are going to recommend or implement public policy, you need to have a policy objective. For example, let's assume that we can accurately and unambiguously...