Several years ago Uncle Sam declared Jones, a man in his mid-40s, to be uniquely entitled to retire immediately at double his real annual income of $100,000 for life. Jones took Uncle Sam up on this offer. Each and every year until Jones enters oblivion Uncle Sam now transfers to him $200,000.
Jones is made materially better off by this deal. Not only does Jones no longer have to toil for his income, but his annual income grew by 100 percent.
But Jones is eventually troubled by his good fortune. “Hmmm,” Jones tells his golfing partner, Jackson, as they drive together to the golf course one sunny morning a few years after Jones began to receive this pension, “the money I get must come from somewhere – and, more importantly, the resources that I annually consume must come from somewhere and could be used otherwise. Yet I now do nothing to add to the stock of resources, goods, and services that my fellow human beings and I consume; I no longer produce anything for others. Each year I simply consume $200,000 worth of stuff that, I worry, other people produce. I wonder if I’m harming other people, given that at no time in my life did I contract with anyone to supply me with such a pension. Uncle Sam just bestowed it upon me, unilaterally. I wonder if the lifetime pension paid to me by Uncle Sam makes other people worse off.”
Jones is lucky that Jackson is an econometrician. “Well, my friend,” says Jackson confidently to Jones, “let’s look at the data. When I get home this afternoon I’ll examine the data. I have access to all the available statistics on the economy – GDP, median household income, average real wages, you name it. I can call up more data sets than you can imagine! And I know all the latest econometric techniques – did I tell you that I have a PhD in economics, with a concentration on econometrics, from MIT? Anyway, I’ll perform something call ‘time-series analysis’ to see if your receipt of the pension caused any changes in the trend of the data over time. If we see no change in the data – say, no fall in the growth of GDP when Uncle Sam started to pay you that 200 grand each year – then we’ll know that your pension causes no one any economic harm. Pretty simple, eh?!”
Jones thanks Jackson, but inquires “Are you sure your method of testing to see if my pension costs anyone anything works? Is it valid?”
Jackson pats Jones patronizingly on the shoulder and replies, “Look, Jones, we’re science-based guys, right? We look at the data – carefully, of course – to tell us what’s what. All we can know is what the data tell us. I’ll let you know tomorrow what the data say.”
Jones is grateful for his good and scientific friend, Jackson.
The next morning Jones’s iPhone rings with the special ringtone that Jones assigned to Jackson. “Hey Jackson. What do the data say?”
Jackson happily informs Jones that, after looking at the data carefully and every which way, Jackson finds no evidence that Jones’s pension reduces anyone else’s economic well-being. “No one loses because of your pension, my friend. Your gain has no discernible effect on GDP, economic-growth rates, household incomes, wages, you name it. I find no evidence in the data that the economy is in any way worsened, even in the slightest, by your receipt of your pension. And because I’m data-driven – because in my scientific modesty I don’t dare speculate on what in the economy might be happening that isn’t detectable in the data – I can only conclude that your pension has no effect on anyone except you! You’re made better off and no one is made worse off.”
Jones is much-relieved that science reveals that Uncle Sam’s practice of annually transferring to him $200,000 imposes no costs on others. “Thanks, Jackson!” Jones tells his friend with sincere gratitude. “Dinner and drinks are on me tonight!”
At that dinner Jackson spent a long time telling Jones about some of his other research, including research on the minimum wage. Jackson explained to Jones that the data reveal that modest increases in the minimum wage cause no discernible job losses – which means that modest increases in the minimum wage, contrary to the dogmatic assertions of unscientific economists, in reality cause no job losses.
“Sounds right to me,” Jones says as he finishes his fourth glass of Montrachet, telling himself that he’s grateful for his scientific friend’s empirical discovery that his (Jones’s) pension costs no one anything.
This piece was originally published at Cafe Hayek.