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Shovel-Ready Twins December 22, 2008

My Macroeconomic Theory final had an extra credit question asking us to apply one of the models from the class to the Obama stimulus proposal. I’m something of an econeophyte, but I do remember this coming up in, inter alia, Alan Harvey’s Demand Side Economics podcast (which I listened to mainly to balance EconTalk, which I listen to mainly because Russ Roberts is brilliant).

In addition, I am a twin. Why this is relevant will become clear behind the cut.

The models we studied in class were interesting, of course, but what I really wanted to write in was “This is just make-work bias.” (Make-work bias is a generalized case of the Parable of the Broken Window.) The application of Keynesian public-work theory – that the Obama plan creates jobs to weather the recession, and when the project is done, you have a public good – ignores the question of whether the resources utilized to create the public work are being used as efficiently as they can be.

Imagine how amused I was to read Bryan Caplan’s article, Separating Twins as Economic Illiteracy, which looks at putting twins in different classrooms through the lens of make-work bias. As a twin myself, I was subject to the rule of thumb Caplan discusses. My brother and I were in a small school for kindergarten and first grade, so since there was only one class for each grade, we were stuck together. In second grade we changed schools and were separated; we spent half of third grade separate, half together, and then we were entirely separate until we began class-mixing in seventh grade. Talk about your natural experiments.

Applying the efficiency criticism to Caplan’s twin hypothetical, separation arguments based on encouraging twins to make new friends ignore the benefits of the twins’ relationship. The analogy of the new friends to the public works project is clear – they are facially positives, but they may not be the optimal product of the available resources, and isn’t optimization the goal?