Monday, November 5, 2018

Pindyck on Two Kinds of Discount Rates

I recently finished Tyler Cowen's new book Stubborn Attachments. I enjoyed it and I appreciated the message. The book is mostly about how important economic growth is. As societies get wealthier, other problems tend to solve themselves. Richer populations tend to demand cleaner environments, lower rates of crime, and solutions to other social problems. Expanded wealth gives these populations the means to tackle these problems. So, the thinking goes, if we can keep our eye on the growth ball, other problems simply dissolve. Given the logic of compounding growth, it becomes extremely important over long timelines to maximize the rate of growth. Adding a mere 1% to the rate of economic growth means the economy will be 2.5x larger in 100 years. If we care about future generations, it seems like this should be a serious consideration.

It reminded me of a topic that was discussed in this episode of Econtalk with Robert Pindyck. About 10 minutes in, there is a discussion of what interest rate should be used to discount the future. A thousand dollars today is worth more than a thousand dollars a year from now, or ten years from now, or 100 years from now. So if we're talking about solving problems today versus passing those problems on to our children or grandchildren, we need to think about how we compare costs today versus costs in the future.

In a distinction I have never heard made anywhere else (and I've read quite a lot on economics), Pindyck makes a distinction between two kinds of interest rates: a utility discount and a financial discount. The "utility" discount is the "I'd rather have it now" effect. Given pleasure today or pleasure 100 years from now, I'd rather have it now. If you want someone to forego pleasure they could have today and instead take it decades from now, you'll have to compensate them (even assuming it's the same quantity of "pleasure", however you'd measure that, and even assuming there is a 100% guarantee they'll get it later). Some people argue, I think reasonably enough, that this discount rate should be zero. There's no moral reason that we should prefer ourselves to other people, whether they live in another country or another century. As Russ Roberts puts it in the podcast, their blood is just as red as mine.

The other component of the interest rate is the financial discount rate. This rate should not be set to zero, even if we care for future generations just as much as we care for ourselves. The reason isn't too hard to understand. A future generation values $1,000 in cash the same as $1,000 worth of climate abatement (by definition). We should pass to them whichever option is cheaper. Resources we spend today on climate abatement (or environmental cleanup or violence reduction) are resources we can't pass on to our grandchildren. A meager-sounding 3% interest rate causes savings to grow by a factor of 19 in 100 years. At 4% it's a factor of 50. At 5% it's a factor of 130. This is a big deal. Trying to solve a future generation's problem incurs a serious opportunity cost.

(I'm not sure whether to use the market rate of return here or the rate of economic growth. I can stow away money today in financial assets today and it might grow at a stellar 7%, which means growing by a factor of 870 in 100 years. But maybe social investments are different from financial investments. The social rate of return might be smaller than the private rate of return. Foregone consumption today may only compound at 2% or 3%, something more like the rate of economic growth. These are very different propositions: "Society as a whole foregoes consumption on $1,000 worth of economic resources so that future generations can use those resources." versus "I personally set aside $1,000 in an investment account to make my great-great-grandchildren filthy rich." Society's investment in the future probably grows more slowly than my personal investment. But if future generations have better technology and better institutions, the resources we bequeath to them will be used more efficiently. So the foregone $1,000 of consumption today compounds at something like the economic growth rate.)

Pindyck claims that when economists say that "the rate of discounting should be zero" they are only talking about the utility discount rate, not the financial discount rate. I think he may be giving a little too much credit to his fellow policy analysts, some of whom aren't quite so nuanced, some of whom fail to communicate this point clearly. But I take his point.

I kept expecting Stubborn Attachments to make this point explicitly. The book spends a lot of time discussing the "utility discount" (though not using Pindyck's terminology). It basically lands on: we shouldn't discount the future at all. We should treat the interests of future generations as equivalent to the interests of people living today. Maybe I missed it, or maybe it's so implicit to the books message that it didn't need to be said, but I had this expectation that Cowen would spell out the two kinds of discount rates and explain why only one is relevant for calculating costs or benefits to future generations. This comes out clearly in the Pindyck and Roberts discussion. They say that if we can grow the economy in a way such that future generations enjoy the fruits of that growth, those future generations would like us to do that. Anything else we'd like to give them has to be traded off against the economic growth we could otherwise bequeath to them.

There's another reason not to use a discount rate of zero, even if we care dearly about future generations. Existential risk. To take an extreme example, if there were a 1% chance each year of a civilization-ending asteroid strike or nuclear war or super-volcano, then it would make very little sense to care much about climate-related harms that take 100 years to manifest. Giving next century's generation, say, $1 trillion worth of climate change abatement isn't very useful if they only have a 37% chance of enjoying it (0.99 raised to the power 100). Even supposing that climate change itself is an existential risk, it may need to be traded off against other existential risks. Maybe shutting down fossil fuels slows the economic rate of growth such that future societies aren't prosperous enough to build an asteroid defense system or space travel. Maybe the wrong emissions reduction policy costs us a century of economic growth, which is the margin between being able to solve some other existential risk and not being able to do so. Like any other set of costs, existential risks need to be traded off against each other. There's no simple answer here, and there's everything at stake. It's a hard problem. But I think Cowen's "maximize growth" principle in Stubborn Attachments is a good place to start.

______________________________________________________

Listen to the Econtalk episode, all the way to the end. It's kind of funny. Russ Roberts is something of a luke-warmer, and Pindyck is the "warmist" in this discussion (that's not to say an alarmist). Roberts brings up the worst-case-scenario for global warming, and Pindyck has to cool him back down. Roberts discusses the possibility of civilization ending and human extinction. Pindyck responds with:

I think you are going a little overboard. There's the worst case scenario; and there's the worst worst-case scenario. And I think you're on the worst, worst, worst case scenario. I don't think that--when we talked about a 5% chance or even a 1% chance, I don't think it's that bad. I think we're looking at something catastrophic, but not that terrible. It would be something that would impose pretty big costs on the world economy, maybe reduce the effective capital stock by 10% or even 20%. That's pretty bad.
A 10-20% reduction in the capital stock would be pretty terrible. It's a bland way of stating things; maybe "reduction in the capital stock" is a euphemism for building falling down or random cities falling into the ocean. But it makes me think some of the worst scare-stories over global warming are oversold.

Wednesday, October 31, 2018

What To Share?


I’m interested in the problem of trying to influence public opinion. I’d like to marshal the best arguments using the most credible data sources and convince a listener that Policy A is better than Policy B. Where to start?

A fundamental constraint here is that human attention is limited. Nobody is going to read your 7,000 page piece on, say, optimal healthcare policy unless they are already sympathetic to the conclusion. The argument that’s actually long enough to convince someone and address all of their objections is so long that it will never be read. But try to be any shorter and you risk leaving someone with the impression that they have an unanswered objection. Maybe you did have an answer, but you made an editorial decision to exclude it, along with several dozen other answers, because they made the length of your piece too long and the prose too clunky. Someone has to have the patience to read your original piece and also engage you with their objections. Few people have such a dedication to free inquiry. And even if they did, why would they read your piece over the thousands of others they come across in their news-feed?

Suppose you adopt a policy of sharing persuasive links on social media. What is the optimal sharing behavior? Share too much, and you come across as an impulsive loud-mouth who can’t keep is finger off the “Share” button. Share too little, and you miss the opportunity to spread good ideas to reasonable people. There are a lot of people potentially reading your social media feeds. Some are unreachable. They’ll block or unfollow you if you share arguments they don’t approve of, no matter how thoughtfully you do it. Or they’ll comment with the same bilge every time without apparently learning from these exchanges. (I’ve seen both behaviors.) It doesn’t matter that you have a good argument, all that matters is that you’re “one of those wrong-thinking people”.

So what about the more reasonable ones, the ones who are capable of changing their minds? Sharing too promiscuously ruins your credibility. I’ve had this reaction to people who share too often. After the dozenth political post in a single day, it just starts looking like your brain-stem is connected to your itchy “Share-button” finger without any mediation from the thinking parts of your brain.  But how often is too often? Once a day? Once a week? Is it more credible if you add some of your own commentary when you link to something, showing that you’ve thought about it and thought through the obvious objections? Should you hold back, knowing that even thoughtful readers will only have time to read, say, one long-ish article or blog post every day? Is even that asking too much? There's a "Don't shoot until you see the whites of their eyes" aspect to this question. There is an optimization problem here, but I don't even know where to start. 

I’m not quite ready to give up on social media as a platform for reasonable political discussion. Some blogs have managed to curate an excellent community of commenters. Steven Landsburg’s blog The Big Questions, Scott Alexander’s blog Slate Star Codex, and Less Wrong are the best examples of this. I think this is possible on other more personalized kinds of social media (Twitter, Facebook), but it’s difficult. After all, you’re dealing with what is possibly the scarcest resource of all: human attention. That’s definitely something you don’t want to waste.

Tuesday, October 30, 2018

You Shouldn’t Have To Do the Thing That Totally Solves the Problem!

A meme I saw on Facebook recently really struck me as odd. Something to the tune of "You shouldn't have to go to Go Fund Me to pay your medical bills." It was some kind of cheap rhetorical argument for universal healthcare or something like that.

My reaction was: Doesn't that kind of work? When someone gets sick, isn't there an outpouring of community support? Whenever someone at my workplace got seriously ill, there was some kind of benefit event for them, presumably to offset the costs of medical care and loss of income for the family. I've seen several fliers on bulletin boards over the years for people who had some kind of sudden medical problem (cancer and ALS to name two examples regarding people I know personally).

Maybe someone can argue that the money from these benefits isn't enough. The sick person gets some random amount, which may or may not be enough to cover their expenses, which may in fact be totally uncorrelated with their actual expenses. Same deal with a Go Fund Me campaign, the argument goes. I don't think that's right. I think someone with a more severe illness elicits a stronger outpouring of community support. Charitable supply rises to meet the demand.

Maybe, or maybe not. But what struck me about the meme was the dismissal of a private solution to an unmet need. The assumption behind the meme is that government provided healthcare is a moral necessity. If the government solution isn't adequate and people are meeting their needs via other means, it implies that the government solution just didn't go far enough.

Suppose Go Fund Me solves the problem, and everyone who needs expensive medicine can basically raise the funds they need. Maybe some people need to scrimp a little and opt for their second or third best option rather than their first. They might not get treatment from the very best doctor at the very best hospital. (That's a problem under any system, though. Even the most thoroughly socialized medical system can't send every patient in the nation to the single best doctor.) But that's probably better than making an open-ended promise to give everyone 100% of the medicine they ask for and paying for it out of general tax revenues.

I wrote about this topic a while ago, but to reiterate there are many private means of getting healthcare to people who "can't afford" it. (Charity, price discrimination in favor of the poor, tax write-offs by hospitals and clinics for the free care given.) You're free to think those solutions are inadequate for some reason, but it's silly to observe a solution to a problem, actually working in the real world, and declare that "nobody should have to" do the thing that's actually fixing the problem.

Wednesday, October 10, 2018

Inevitable Government and Unnecessary Government

I remember having a discussion with someone about the ideal rules for society. The argument they made went something like this: rules should be simple, obvious, and easy to remember. Do you want to be governed by the Bill of Rights? Or the Code of Hammurabi? (Or did he say "the Ten Commandments?")

Unfortunately, it's not that easy. Libertarians (like me) sometimes fantasize about dismantling the state, tearing down the edifice of the police and regulatory state, and clearing out the underbrush of countless laws and regulation that stifle human activity. We'd be left with a few simple, easily enforceable rules, the thinking goes. If you buy the libertarian worldview, that all sounds great. Until you remember that the Code of Hammurabi was not a set of edicts. It wasn't a series of commands invented by a king acting arbitrarily on his own whim. It was the codification of the already existing laws of that society. Disputes arise in any society, and someone somehow has to adjudicate those disputes. Thus a common law arises. The obvious, simple rules emerge from this process. "Don't kill anyone, or we'll come after you. Don't steal, or we'll come after you." But what exactly is the punishment for these offenses? It can't be totally arbitrary, where one murderer gets tortured to death and the next murderer pays a fine of ten camels to the victims family and goes on with his life. We have to adjudicate these disputes with some kind of consistency, which looks an awful lot like legislation.

And where is the cut-off between theft and fraud and not-even-a-crime? If I own a golden urn and you steal my urn, that's obviously theft. If I pay you 50 shekels for a golden urn and you don't make with the urn, then it's pretty clear you've defrauded me. But what if we have different expectations that we both think are reasonable? To me, of course a golden urn has the following dimensions, and is solid gold straight through. To you, of course a golden urn has these different dimensions, and can be hollow between the interior and exterior walls, or the interior can be made of some other metal and coated in gold. Whose expectation of what "a golden urn" means are correct here? Have you defrauded me? Am I being unreasonable? The obvious solution is to specify in the contract exactly what I mean by "golden urn." But all the interesting problems occur when the specifications of the contract aren't clear, which happens all the time. The urn-buyer and the urn-maker might have to go before a judge or some other moderator, who decides that some prevailing cultural expectation about the size of an urn is this, and the price paid for the urn implies such-and-such a proportion of gold versus other metals.

Simple rules my butt! The rules of society might include obscure and arcane rules about urn-making, house-building, food safety, marriage, divorce, child-care, tithing, parking-your-boat-on-the-fucking-street, and all sorts of things that obstruct our commercial and personal intercourse. This edifice of stifling regulation can emerge organically from case law, just as surely as it can from an over-zealous legislature. Sure, we can try to get around the case law by specifying contractually "This piece of case law does not apply. Transacting parties both agree to this stipulation!" But if someone (some company) tries to do this too much, perhaps an unsatisfied customer can argue that "Nobody reads all that garbage, and besides this provision is totally unreasonable." And perhaps a sympathetic judge can invalidate that part of the contract.

So how much government is inevitable and how much of it is unnecessary? I have opinions about this, but I'm not terribly sure of anything. I think some regulations are clearly invented, created by pure fiat, and would not exist in a free marketplace. I'm thinking in particular about ridiculous regulations in California that force companies to warn consumers about non-existent risks. But what about food safety? Surely you are defrauding me if I think I'm buying food but you deliberately poison me. Surely you're also defrauding me if you sell me food but poison me by failing to exercise the due standard of care (failed to refrigerate, or failed to keep pests out of the food during storage). But what is "the due standard of care"? If it's a "standard" of care, that sounds a lot like a regulation, even if it's one implied by common law rather than being imposed by a legislature. What if you sell a food with known dangers? Like sushi, or raw milk, or something that's fermented? You can always sell it with the disclaimer, "Eat this at your own risk," but there is still some reasonable expectation that you made the food as safely as you could. There could still be grounds for suing if the preparer of food didn't exercise due caution. What is the "non-standard standard" of care?

What about drug policy? I think that a free-market, anarcho-capitalist society would not have drug prohibition. A large proportion of society would certainly disapprove of drug use, but it would not be worth the costs and inconveniences to try to stop it. But, oh, there are issues. There would still be some people getting so high they become belligerent and hard to control. (I think this is a massively overblown problem, but no doubt it happens.) Some cities are littered with dirty, discarded syringes, which is a public health hazard. Intoxicated driving would presumably still be a problem. And some people will be so intoxicated and consumed by their habit that they fail to care for their children. As I've argued before, these problems can be targeted with laws and rules that specifically target the problem behavior but don't target drug use in general. But it's possible that some kind of mild prohibition emerges, even without being imposed by a legislature. I don't have a crystal ball that lets me peer into the world as it would be under anarcho-capitalism, but if I did I wouldn't be too surprised to find something that disappoints my drug-policy-libertarianism.

What about minimum wage and other labor regulations? Would there be some kind of judicially imposed expectation about what to pay someone? Or that a low hourly wage somehow implies other perks and accommodations?

I think it's a facile brand of libertarianism that says we'd have almost none of these stifling rules if the government disappeared (or shrank to a minimalist night-watchman state). It's possible that this brand of libertarianism actually requires government, a government that actively identifies and eliminates annoying "regulations" imposed by the common law. None of this is to defend or justify the existing system of government or the massive regulatory/welfare/police state. I think that's a horrible system that bends to easily to the whims of the 51%. Most days, I'm still an anarcho-capitalist. I still think the world would be far less horrible if the government shrank or disappeared. I think we'd have far more opportunities to escape the tyranny of shitty, simple-minded populism. But I sometimes imagine looking into that crystal ball, and in that fantasy I am always bracing myself for disappointment.

I'm trying to explore and identify the limits of my libertarianism. These are the thoughts that bother me, because I don't have good answers for anything. I'm not the only one in this space, either. There are many thoughtful libertarians exploring this question. I remember David Friedman raising the question, "Is an anarcho-capitalist society even libertarian?" As in, does every community impose stifling restrictions on it's people? Does anarcho-capitalism create the kinds of societies that libertarians approve of or not? Read The Machinery of Freedom for a decent treatment of this. (Alex Tabarrok makes a similar argument in a post that I can't find at the moment.)

I don't know what spurred this post. I'm re-reading Albion's Seed, which discusses colonial America and the four dominant British cultures that colonized it. This was a small-government world, with most disputes being resolved within the community. This world still had incredibly restrictive rules and horrifying criminal punishment for minor offenses. And it was enforced not by an over-reaching outside government, but within the community. Neighbors flogging neighbors, sometimes over superstitious offenses. In one story, a merchant gets corporal punishment for...making too much profit! This punishment, once again, is imposed by a small community, not by a runaway regulatory state. (Paging Deirdre McCloskey. I sometimes wonder if that passage is what sparked her recent work on economic history.)  It's a good reminder of just how bad things can be.

The Academic Debate on LoJack - an Actuary Weighs In

LoJack is an anti-theft device for vehicles. Sort of. It emits a radio signal so that a stolen car can be recovered. So it's not so much a theft deterrent as it is a stolen vehicle recovery device. That is, unless you prominently advertise that "This vehicle is protected by LoJack," in which case LoJack protects your car but potentially just causes car thieves to steal a different car.

There was an interesting academic debate on the effectiveness of LoJack on deterring theft. Steven Levitt and Ian Ayers argued that LoJack is a positive externality. It does not provide a specific deterrence against car theft. That is, the thief doesn't know you have LoJack, so having it doesn't effect whether your car gets stolen. But it does provide a general deterrence. That is, if 10% of vehicles in any given city have LoJack, that makes it a lot riskier to be a car thief. It becomes far more likely that your stolen car will lead the police to a "chop shop" and shut down a car theft operation. In this sense, there is potentially a market failure. As a car owner, you'd like, say, 10 or 20% of cars to have LoJack. This would provide a herd immunity of the sort that vaccination provides to populations against spreading viruses. At some level of saturation, LoJack will dramatically reduce car thefts. But everyone has the incentive to shirk. Why bother with the expense of a LoJack when it doesn't protect my car from theft? I could just install the Club (a device that locks the steering wheel). But, like I said above, this just diverts the car thief to another car. Having 10-20% of vehicles using the Club might not reduce total vehicle thefts at all. Likewise, installing LoJack and advertising the fact might not have any effect on total thefts. It just diverts thieves to cars that don't have LoJack. Ideally, you have a lot of cars that 1) have LoJack and 2) don't advertise that they have LoJack. That's a hard sell. You're paying for theft deterrence that goes almost completely to someone else. ("But your stolen car gets recovered!" you might object. Which is true, but your car might have been badly damaged or even "chopped" by the chop shop by the time the police recover it.)

John Lott argued that all this is nonsense in his book Freedomnomics. He starts by basically laying out the positive externality case in the paragraph above.
LoJack would seem to have an overall societal benefit - since criminals won't know which cars are protected, even cars without LoJack should benefit. But, as the argument goes, this creates a problem: you don't install the device on your car, but hope that other car owners will. That way, if auto thieves don't know which cars are protected, you benefit from the overall drop in car thefts stemming from the presence of LoJack on some cars, while only other car owners bear the cost of installing the device. So in the end, no one installs it, because everyone hopes that everyone else will do it.
 So far, so good. So what's the problem with the argument? Lott argues that the "externality" is actually internalized if a single company advertises that all its cars carry LoJack. For example, Porsches could install LoJack as a standard feature, and car thieves will from then on avoid stealing Porsches. He writes, "Rather than having too little of an incentive to install LoJacks, any single company would have too much incentive to do so." True enough, but I think this misses the point about positive externalities. Thieves will avoid Porches, but turn to other brands to steal.

(That's not to take anything away from John Lott. I admire him for making this often-overlooked argument: a single large company or community, acting privately and without the hand of government, can solve a so-called "externality problem". They can "internalize the externality", so to speak. I happen to think that the Porsche example is a bad illustration of this, because it preserves the problem of sending the thieves to victimize other car owners.)

Next he turns to an insurance discounting argument. This is my bread and butter. It's what I do for a living, so my ears perked up when I heard this argument. He points out that there is never a discount for LoJack except in states that mandate such a discount. He quotes an insurance agent stating that such a discount is silly. LoJack doesn't actually reduce the cost of insuring the car, because by the time it's recovered the car is likely to be damaged ("wrecked" in the agent's language). It's a fair point, but I want to make a more quantitative argument.

Say it costs about $1,000 to insure a single car for one year. That's roughly the average insurance premium in many states. About $200 of this premium will be your Bodily Injury coverage (if you are liable for injuring a person/persons), another $200 your Property Damage coverage (if you are liable for damaging property with your car), another $300 for first-party Collision coverage (covers damage to your auto if you get into an accident, and usually when you are the liable party), and maybe $100 of it is "Other Than Collision" aka "Comprehensive" coverage. (That's $800 so far, the rest is lower-dollar coverages: uninsured and under-insured motorist, medical payments, personal injury protection, and various coverage endorsements and features.) Thefts are covered by the "Other Than Collision" coverage, but this coverage covers other things, too. Animal strikes, fires, weather (flooding and hail in particular), and glass repair. Theft represents only fraction of the "Other Than Collision" coverage (say, 10 or 20%, and of course this depends on where you live), which in turn represents maybe 10% of your insurance premium. Let's say it's twenty percent of ten percent of your insurance premium, or 2% of your total premium. An anti-theft device that completely eliminated this risk would warrant a discount of 2%, or $20 out of a $1,000 annual premium. More realistically, an anti-theft device lowers but doesn't eliminate the risk. Say we come up with an incredibly effective anti-theft device that cuts the cost of theft in half. That's a 1% discount, or ten bucks on your thousand-dollar auto premium. If you make monthly payments on your insurance premium, you won't notice the less-than-a-dollar-a-month benefit of installing an anti-theft device. And your insurer might not waste the effort to price this discount. Feel free to redo this exercise with different numbers, but you are likely to get a small answer, whatever you do. The upshot: looking to insurers to estimate the social value of LoJack is barking up the wrong tree.

Lott mentions that car thefts cost $8.4 billion worth of social harm a year (in 2002 anyway), implying that there's a large treasure to be had if only someone could solve the problem of vehicle thefts. Okay, but there were 235 million automobiles in the US fleet in 2002. So the cost per car per year comes to about $36. One needs to ask, is this a problem worth solving? It may be large in aggregate, but so small to each individual that prevention is more costly than living with the problem. LoJack might be useful only in a few communities with out-of-control car theft problems, and the externality argument might be correct for those special cases. The rest of us might just live with the problem, small as it is.

Contra Lott and contra Levitt and Ayers, LoJack could be extremely effective at deterring theft but still not be worth implementing, either as a government policy or as a corporate policy. LoJack has a one-time cost of $700-$1,000 (by a quick Google search). Say that's $35 to $50 per year over a 20-year usable life of a vehicle (I'm being sloppy about depreciation and discounting here). It's a toss up, but probably not worth the cost except in very high-risk areas. If only 10% or 20% of vehicles need to install LoJack to achieve the "herd immunity", it looks a lot better.

(Why doesn't this $36 number match my $20 (2% of a $1,000 annual premium) in the prior paragraph? Possibly because more expensive cars are more likely to be stolen. And the way it appears in Freedomnomics, "$8.4 billion worth of cars were stolen in 2002", it makes it look like this is the total value of cars stolen. Presumably some of these were recovered, and some damaged vehicles were salvaged (repaired or sold for scrap) so the 8.4 billion is an upper-bound of the cost to society or to insurers.)

Gundam Wing - Crude Humor

This will be another attempt at a humorous post that will ruin my credibility when I try to write more serious posts. Warning: crude, potentially offensive, immature humor below the fold.


Friday, October 5, 2018

The Rhetoric of Joseph Stiglitz

I recently listened to this excellent debate between Joseph Stiglitz and William Easterly. Hearing Stiglitz speak reminded me of his earlier interview with Russ Roberts on Econtalk. There are some themes to Stiglitz's message that I find troubling or bizarre, so I wanted to point them out. Also, see this criticism of Stiglitz by Gene Epstein, who moderates the Easterly debate.

Rules of the Game

In the Easterly debate, Stiglitz uses the expression "rules of the game".  I remembered him using the same phrase in the Econtalk interview. There's nothing wrong with the term in and of itself, but the way Stiglitz uses it is somewhat disturbing. Here's what he says in the Econtalk interview:
What is inevitable though is that government is going to set the rules of the game. And what disturbs me, is, as a result of our politics, that the rules of the game are being set in ways that indirectly distort our economy and create inequality. Our bankruptcy law is an example. Financial deregulation is an example. So the new economy can go without rules of the game--and you have to have rules of the game--the question is: What are those rules of the game? And how are those rules of the game chosen?
I don't have the transcript for the Easterly debate, but as I recall he makes a similar point there. He makes it seem like the government can just lay down the underlying substrate on which society runs. Or maybe there's a better metaphor here? Perhaps government simply sets the underlying source code and can tweak it if an initial attempt gets something wrong. Or maybe the government lays down the tracks that we all run on, and it can simply re-route the tracks if something doesn't look right.

I find this all very creepy. It's facile of him to make restructuring society sound so easy. The "rules of the game" he talks about, that's what we call "the law". People sometimes break laws. If you want laws to be followed, you have to enforce them.  Rules don't simply sit out in the ether, passively directing our behavior. Rules have to be actively enforced by various sanctions, which ultimately means you must be willing to use violence against people who resist being sanctioned. The law can change, for sure. People who are not pleased with the existing order can lobby for some kind of change. A judicial ruling or an act of the legislature can redefine the rules of the game. But this doesn't mean a new rule simply emerges and compels us to obey as if by magic.

What specifically does it mean to change the rules? Stiglitz describes changing "the rules of the game" to target income inequality (which in my opinion is a made up problem, but it's one of Stiglitz's hobby-horses). He specifically mentions bankruptcy law and financial regulations. Now, I seriously doubt we'd see meaningfully different levels of inequality under a very different bankruptcy or regulatory regime. He's probably hinting at tax policy. As in, change the "rules" so that the government takes more from some people and gives more to others. Maybe that's a defensible policy, but couching it in euphemism seems evasive. Also, and maybe this is just me, but the definite article in "the rules of the game" makes it sound like it's something we all agreed to.

Some stark examples my help me explain my problem with Stiglitz's language. Don't like abortion? Let's change the rules of the game to say you can't get one. Don't like drugs? Change the rules of the game to say you can't manufacture, sell, buy, or consume them. Don't like guns? Simple, change the rules of the game to say you can't own them. Don't like gay marriage or gay sex? Change the rules of the game to say you can't have these things. If I simply said, "Let's change the rules of the game so that these things don't happen anymore!", opponents of these policies could fairly accuse me of glossing over all the horrible things that real-world governments do to people to actually enforce these laws. They could fairly point me to back-alley abortions, responsible gun-owners sentences to multi-decade prison terms for crossing the wrong border, police units that targeted and infiltrated the gay community when homosexuality was illegal, and people or entire neighborhoods destroyed by the war on drugs. By all means, let's have those policy arguments. But let's not gloss over the potential harm by implying we're just tweaking some simple rules. Stiglitz isn't just having us re-word a legal clause here and there. He's talking about the government's power to tax and regulate businesses. That entails fining or imprisoning business owners who don't comply. We should be honest about that, and describe it in clear, honest language. 

Freedom and Abridging Freedom Are Symmetrical? 

Stiglitz comes off very badly in the Easterly debate in a part where he derides freedom. He makes a "Your freedom to swing your fist ends where the other man's nose begins" kind of argument. Specifically, he mentions gun control and says something along the lines of (paraphrasing, not quoting): Your right to own a gun conflicts with my right to not be shot. This is in the context of a debate about whether free markets or government programs are most responsible for alleviating poverty. So clearly he's not picking out some extreme edge case, where one person's unobstructed freedom actually interferes with someone else's freedom. Taken in context, he's making a general case for government intervention in markets.

Easterly picks up on this and, I think appropriately, pushes back. He says something to the effect that we should have broad freedoms to interact in the marketplace. If two people wish to transact, and third party busy-bodies object to the transaction, the third party objection should carry little or no weight. Your desire to shut down my business is not equivalent to my desire and my customers' desire (our mutual desire) to transact. This is a good moral principle, but given the context of the debate I think Easterly was also saying that there are practical considerations. As in, too many arbitrary rules with too low a threshold for rule-setting means less economic growth. If third parties can object to what would otherwise be voluntary transactions, and their objections are considered equivalent to the transacting parties' desire to transact, this stifles innovation. New businesses can't form, because they can't overcome the objections of, for example, existing competitors or nosy paternalists.

There's plenty more to find fault with (like Stiglitz's cluelessness about China and his flubbing of some historical details, which Easterly corrects him on). The Gene Epstein piece linked to at the top does a better job than I could.