Sunday, February 27, 2011

Seeing what is missing

The chair of Michigan's theater and drama department has an unfortunate editorial in today in which she illustrates the (very) common problem of being able to see the direct effects of a policy but not the indirect effects.

Yes, Michigan's film subsidies lead to more employment in the film industry in Michigan. That is the direct effect. They also have at least two indirect effects. First, they reduce employment in the film industry in other states (and countries too, but let's not even go there). Now, in most policy discussions the welfare of individuals outside the US border is set to zero; in the case of the film subsidy, the geographic limits of our concern with others are apparently narrower, and coincide with the state boundaries of Michigan. Why should people inside those boundaries matter more for policy than those outside it?

More directly, the policy costs money, and that money comes from taxes. Those taxes have effects too. They raise the price of other types of economic activity in the state and thereby reduce the amount of those activities. They also distort behavior - income taxes, for example, decrease the relative price of leisure - and reduce welfare through that channel as well. Where are these other effects in Prof. Lindsay's editorial? They are invisible. Part of the value of learning economics is learning to see these indirect effects and to take account of them when advocating policies and making decisions.

For sure, It is hard to oppose policies that transfer money from others to us. Our self-interest rebels. I love theater and movies and give generously to support both in Ann Arbor. It is hard to argue against transfers that prop up my preferred leisure time activities.

But the film subsidies are not good policy. That shadowy and somewhat conspiratorial "other motive" that Prof. Lindsay refers to at the end of her piece is just economic efficiency, nothing more.

No comments: