As if I didn’t get my fill of economics during the school year as an Economics student and one of the authors of The Lazy Economist column, in May, I attended an Economics for Journalists conference run by the Fraser Institute.
The Fraser Institute, a Canadian think tank, aims to measure the tangible effects of government policy and runs free education programs designed to simplify economics and public policy.
The session I attended was aimed at journalists, run by three current or past economics professors: Tawni Hunt Ferrarini, Mark Schug, and William Watson. The program covered everything from supply and demand to behavioural economics. Below are the three most interesting things I learned.
Every choice has consequences
If there’s any trend you’ll learn early on in an economics class, it’s that every action has a reaction. If you raise the minimum wage, it’ll impact the unemployment rate (although whether it’ll go up or down isn’t universally agreed upon). Tax a particular good like hamburgers, and people will turn to substitutes, choosing hot dogs or veggie burgers instead. The tricky thing as economists and consumers is that we don’t always know what an action’s consequences will be.
Take the conference’s example of the American yacht tax. Implemented in the 1990s, the 10 per cent tax on yachts was meant to serve as a wealth tax—one which only affected the upper class. The idea was that since only the wealthy can afford to buy yachts, the tax would pull in revenue almost exclusively from this higher-income group. But the policy-makers didn’t realize the tax would have adverse consequences: it ended up hurting low- and middle-income workers, since those who built and sold the boats faced a decrease in demand for their labour, meaning some people lost their jobs.
The lesson is that it’s always important to consider what consequences—intended or not—may occur as the result of a new policy. Even well-intentioned policies can bring about the opposite of what they’re aiming for, especially if we fail to consider all possible outcomes.
Humans are rational—but only sometimes
Economists theorize that humans almost always behave rationally, as we typically weigh the costs and benefits of our decisions before making them. Sometimes our measurements are inaccurate, sometimes our actions have unintended or invisible consequences, but, for the most part, we consider the pros and cons of our choices.
Note the key word “almost”: we almost always behave rationally. This conference illustrated many examples of when we don’t act in our best interest.
We’ll choose to stay in a theatre watching a bad movie because we’ve already paid to see it, even though it’d be smarter to cut our losses and save our time. We value an item we own more than an identical item we don’t. This is called the endowment effect.
Sometimes, we’ll even reject an offer in which we benefit more than we lose, just because we view it as unfair. We experienced this ourselves at the conference. The attendees were divided into two groups: one group had $100 and was tasked with making an offer to split the money with the other group. Although the other group didn’t have any money, they almost always rejected anything less than a 50/50 split—even though $40 would be better than nothing.
Economics and politics don’t always make a happy marriage
Something that’s always stumped me is the idea at the root of most economic discussions relating to Gross Domestic Product (GDP): it’s always good for GDP to be rising, since it represents a rising standard of living. For those who don’t know, GDP is the total value of goods and services produced in a country in a given time.
Even in an affluent country like Canada, there are many people who live below the poverty line. Yet a growing GDP won’t do much to help low-income households if income isn’t distributed more evenly. Simply put, wealthy Canadians don’t need a higher standard of living, but the low-income groups do.
Additionally, permanent growth for all countries is simply unsustainable given that some resources (like fossil fuels) are finite—we can’t get any more once they’re used up. Why, then, do politicians campaign on promises of GDP growth, and make sure to publicize when they achieve these goals?
Well, it turns out good economic policy isn’t always popular with voters. We as voters care about our own interests above all else, and we’d like to see policies that cater to them, such as job creation in a dying industry—even if these policies are unsustainable. The economy as it stands doesn’t simultaneously benefit everyone equally, which means politicians are tasked with finding a middle ground among the push and pull.
Whether you run Canada’s central bank or work a 9-to-5 job, the economy affects you. This conference illustrated the many ways in which it does so in an easily digestible manner.
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