Politics Today and Marginal Analysis in Economics

Those of you who took a course in economics remember the idea that to establish any optimal decision, it usually took the intersection of marginal this or marginal that. 

Probably the most famous of these marginal analyses relates marginal cost to marginal revenue. When MR=MC, we know the firm is producing the output that yields the maximal amount of profits. If MR>MC, then you know you can make greater profits by producing more. If MR<MC, then producing another unit would raise cost more than revenue so you would not produce more.

We have marginal equalities that guide just about all important economic questions –among them are how much to produce, how many workers to hire, how much to pay workers, and where to set your price.

So when we hear so much commotion these days about government spending and taxation, it might be good to remember that most of what we know in economics is all about marginals. The word marginal means “at the edge of something”. Or in terms of most economic applications, it means a small change from a given starting value. 

When we talk about marginal cost we ask, how much will costs change if we produce one more unit of output? We don’t say, how much will costs change if we go from producing 1 car to producing 10,000 cars….or a million cars? Or if we are producing 16 million cars today then we might ask, how much will total costs change if we produce 17 million cars?

Marginals are about small changes for good reasons. It is much easier to think of a small change in output as having known and quantifiable cost changes associated with it. A small change in output probably means more or less the same factory space, with the same utility costs, with same property taxes, and so on. Yes, a small output change might require more worker hours but the relationship between a small change in output and the change in employment ought to be well known.  Contrast that to someone who says, let’s increase output from 1 million cars to 100 million cars. Wow. Estimating the costs of a large change like that could be a lot more complicated and uncertain.

The above is why I am getting nervous about the coming election. Many of the viable candidates on the Democratic side are making a case for non-marginal change. They want big changes. And who can blame them? We have big and enduring problems, and these might require major policy changes. I am not saying that it is wrong to want to make large changes. What worries me, instead, is the confidence that these politicians seem to have about how these large changes will benefit us and how much they will cost. I don’t care if one takes the side of the Ds or the Rs in this context of billions and trillions of dollars. The trouble is believing any of them when they start throwing around trillions of dollars like Jack Daniels mini-bottles on an Alaska Air flight.

One source of these estimates is a group called the Committee for a Responsible Federal Budget http://www.crfb.org/blogs/would-medicare-all-require-middle-class-tax-hike .

With respect to Medicare for All, they estimate a bill of about $27 to $35 trillion dollars. That’s a lot of JD. That amount for one program is equal to 100% of GDP and is larger than the national debt. I don’t know how we can be sure of that amount as we switch millions of people out of their own insurance policies and into the government program. In fact, since private premiums would go down, it is unclear how much more we will pay. Of course, I don’t know how anyone could estimate how much more healthcare we will consume when the price for so many people will go down.

The candidates, of course, have very different opinions about who should pay for this program. One candidate thinks the rich will pay the full amount. Do the rich really have an extra $30 trillion just hanging around? Other candidates think the middle class will have to pay a bit of the price tag. They have not told us how much they would pay. 

Maybe they don’t really know!!!! Private estimates are all over the place. One source saying that tax burdens will double for millions of us. Another says the vast majority of workers will pay less for healthcare. Your politics might have you leaning one way or another. But be honest – these folks are pulling this out of their butts. I’d suggest a colonoscopy.

I won’t belabor the point by adding to this discussion all the other programs being debated on the campaign trail including free education ($2.4 trillion), a write-off of past educational loans ($1.6 trillion), the Green New Deal ($93 trillion) … and free JD. While there is much debate about who exactly would pay for this (rich, middle class, military budget reductions), the truth is that if any of these numbers for spending are even close, it is going to be a very major hit on the country.

The point remains. With extremes running the political process how can we believe any of this? Large changes have got to be tough to swallow regardless of these estimates. Why can’t we go back to marginal changes? Is the risk of causing incredible havoc really something we want to face? Why can’t we just go back to the smaller changes of a marginal analysis? Maybe that is too boring?