Friday, December 7, 2007

Income Divergence, Preferences, and Externalities

One of the things that always bothered me about Sarkozy - don't get me wrong, I think his economic reforms are a plus - was his declaration that France needed to work more. Always struck me as somewhat wrongheaded.

I mean, there's a real value to leisure. I place a lot of value on it. If you make the assumption, which I think is legitimate, that people of the same nationality have more homogeneous preferences relative to the world population as a whole, this alone implies that in the very long run we should not witness any sort of (beta, I make no claims about sigma) convergence in GDP per capita.

Why this should distress national policymakers, I have little idea. Your citizens are out maximizing their respective utility functions. Placing (more) constraints on this can't be a great idea, can it? I can certainly see an argument for things like "higher GDP translates into more international diplomatic punch/prestige", but I am unsure how much stock I'd put in such things, given how it implies substantial divergence between the positions of decisionmakers and the populace, and such a disagreement should not last in the long run, right? (Voting theory is not my thing, feel free to correct me.) Besides, it may not even be true. Who has more clout, Spain or Russia?

I can see why it would greatly distress global policy wonks. If you subscribe to any theories of learning-by-doing and spillovers, people enjoying wine at 3 on a wednesday afternoon in France is suddenly making the rest of the world worse off. I am unsure if there's a realistic method on how to address this externality - the French probably wouldn't take kindly to being taxed because their preferences are different - or if it even needs to be addressed.

Either way, it seems like there's some space for more literature here.

POSTSCRIPT: Exam season is in full swing. No problems, thank you.

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