Thursday, August 05, 2010

The Limits of Policy Analysis Analysis

An open letter to Ms Megan McArdle
Gee whiz, Megan. You provide a fair illustration of Herzberg's Two-Factor (Hygiene and Motivation) Theory, but an abysmal one for tying it to any ‘substitute effect’ economic argument. Using the same example, please expand on the product-output side of the story (productivity gains that allow the higher pay in the first place) and how that ripples out into the macro view of economics and the world. What you describe as the ‘substitution effect’ I think can be more accurately described as recognition of ‘opportunity costs’. The distinction is important, because not only does one decide their leisure is more valuable, but tax considerations progressively reduce the net value of the labor that is performed.

Perhaps the biggest point passed by is the recognition that a ‘rising tide lifts all boats’. If I am making more money because of the demand for my employer’s product, unless all profits (company and personal) are parked in a non-interest bearing location, those monies are added to the amount of money circulating and available for other products, the production and sale of which all generate revenue for many 'someones'.

To summarize, your attempt to find fault with supply side economics in this case is a clear "swing and a miss".

P.S. I would have commented at the source, but I don't need to sign up for any more 'services' or 'feeds'. I would have e-mailed you, but it wasn't readily apparent what your address was at the link.

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